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Top 3 Methods of Wage Payment | Production | Economics


The following points highlight the top three methods of wage payments. The methods are: 1. Time Rate System 2. Piece Rate System 3. Incentive Wage System.

Method # 1. Time Rate System:

Under this method of wage payment, the workers are paid the wages on the basis of time. In this system of wage payment, the workers are paid the wages on the basis of time as, per hour, per day, per week, per fortnight or per month etc. This system does not consider the production of the employees during this time.

The amount of wages under this system is calculated as under:


Wages = Time spent by the worker × Rate of wages according to time.

Suitability of Time Rate System:

This system of Wage Payment is particularly suitable in the following circumstances:

1. When it is not possible to measure the production in terms of units or in any other terms.


2. When the work is of high standard.

3. When it is not possible to divide the production into units.

4. When the production is of the nature that it requires efficiency more than the speed.

5. When the worker is undertraining.


Merits of Time Rate System:

1. Simplicity:

It is very easy to calculate the amount of wage under this system.

2. Certainty of the Amount of the Remuneration:

This system of wage payment provides certainty of the amount of wage payment to the employee. It develops the feeling of confidence and certainty among them.

3. High Quality of Production:

As this system of wage payment has no concern with quantity of production, quality of production produced by the workers under this system is very high.

4. Proper Utilisation of the Factors of Production:

As this system is not related with speed, the workers perform their work in very confident manner. They make the best Utilisation of the factors of production.


5. Co-Operation between Labour and Capital:

This system of wage payment brings the industrial peace because it satisfies the workers and the industrialists. Thus, it develops harmony and co­operation between labour and capital.

6. Best System for Artistic Work:

This system of wage payment is most suitable for artistic work.


7. Co-Operation and Unity of Workers:

As all the employees doing the work for same nature get the same amount of wages, this system develops the feeling of co-operation and unity among the workers.

8. Suitable for the Health of Workers:

This system of wage payment is suitable from the point of view of health of workers.


Demerits of Time Rate System:

1. Need of Intensive Supervision:

This system requires intensive supervision over workers. It increases the cost of supervision.

2. Lack of Incentive:


This system of wage payment makes equal payment to both the efficient and inefficient workers. Therefore, efficient workers do not get any incentive for more production.

3. Encouragement of Labour Unions:

This system encourages labour unions. Sometimes, these labour unions misuse their powers.

4. Misuse of Time by Workers:

Under this system of wage payment, the workers do not make proper Utilisation by their time.

5. Fall in the Quantity of Production:

Under this system of wage payment, the quantity of production decreases because the workers do not get any incentive for increasing the production.

6. High Cost of Production:

As the production is low and the payment to the worker is more, this system increases the cost of production.

7. It Kills the Efficiency of Workers:

As this system does not make any difference between efficient and inefficient workers, it kills the efficiency of efficient workers.

8. Increase in Cost Per Unit:

This system increases the cost per unit of production. Under this system, the cost per unit of production is uncertain because the quantity of production differs from time to time.

9. Difficult to Measure the Efficiency:

Under this system of wage payment, it is very difficult to measure the efficiency of workers because all the workers of equal status are paid the wages at equal rate.

Method # 2. Piece Rate System:

Under this system of wage payment, the workers are paid the wages on the basis of quantity and quality of work performed by them. Under this system, the rates of wages are determined according to quantity and quality of work and the workers are paid according to these rates.

The amount of wages to be paid to a worker under this system is calculated as under:

Wages = Units of production × Rate per unit.

Suitability of Piece Rate System:

This system of wage payment is very suitable in the following conditions:

1. When the work is of standard nature.

2. When the work can be measured easily.

3. When there is a great need of increase in the production.

Merits of Piece Rate System:

1. Incentive to More Work:

This system encourages the workers to do more and more work because they get their wages according to their work.

2. Proper Utilisation of Machines:

Under this system, the workers use their machines and equipment with proper care because they feel that if their machine is out of order, their work will be held up and their wages will be low.

3. Increase in the Quantity of Production:

The system of wage payment gets more production because all the workers make their best efforts to increase the production.

4. Best Utilisation of Time:

As the workers are paid according to their work, they make the best possible utilisation of their time. They do not want to waste their time.

5. Decrease in the Cost of Production:

This system decreases the cost of production because the maximum production is done by the workers in the minimum time. It decreases the cost per unit of production also.

6. Decrease in the Cost of Supervision and Administration:

This system of wage payment minimises the needs of supervision. It reduces the cost of supervision.

7. Easy and Simple:

This system of wage payment is very easy to understand and very simple to calculate.

8. Improvement in the Standard of Living of Workers:

Workers get more wages because they produce more. It increases their efficiency and productivity. It increases their remuneration also which improves their standard of living.

9. Mobility of Workers:

This system of wage payment increases the mobility of workers because they can change their enterprise easily.

10. Measurement of the Efficiency of the Workers:

This system provides an opportunity to measure the efficiency of the workers. It makes proper distinction between efficient and inefficient working staff of the enterprise.

11. Justified:

This system of wage payment justified also because the workers are paid the wages according to the work performed by them.

12. Helpful in Maintaining Industrial Peace:

This system brings industrial peace also because it satisfies both the workers and the employer.

Demerits of Piece Rate System:

1. Lack of Unity among Workers:

This system lacks the unity and mutual co-operation among workers. They feel themselves competitor to each other.

2. Loss of Workers on the Failure of Machines etc.:

It because of any reason, the machines fail or the power fails, the work of workers is held up and they lose their wages.

3. Misuse of the Factors of Production:

The workers do not pay proper attention towards the factors of production. They only want to increase the speed of production.

4. Adverse Effect on the Health of Workers:

This system motivates the workers to do more and more work. It affects the health of workers adversely.

5. Low Quality of Production:

This system of wage payment does not pay any attention on the quality of production. As a result of it the quality of production falls down.

6. Unsuitable for Artistic Work:

This system is not suitable for artistic work because artistic work cannot be paid only on the basis of quantity of production.

7. Uncertainty of Wages:

As the amount of wages depends upon the quantity of production, the actual amount of wages to be paid is always uncertain. The workers also cannot estimate their remuneration in advance.

Method # 3. Incentive Wage System:

There are two basic systems of wage payment—time rate system and piece rate system. Both the systems have their merits and demerits. No system can be considered suitable for all times and under all circumstances. To maintain the merits of both the systems and to overcome the demerits of these systems, some experts have developed the systems of incentives wage.

These systems are also known as incentive wage systems, progressive wage system and bonus schemes etc. Under these systems, both the time and speed are considered as the basis of wage payment.

These systems provide incentives to the workers to produce more and more maintaining the quality as well. The workers are paid bonus or premium for the additional work. It is important to note that almost all the systems incentive wages provide for minimum guaranteed wages to the workers.

Characteristics of an Ideal Incentive Wage System:

Important characteristics of an Ideal Incentive Wage System are as under:

1. It must be easy to calculate and to understand.

2. The standards of work must be determined on scientific basis.

3. It must establish direct relationship between efforts and remuneration.

4. It must give a guarantee of minimum wage to all the workers.

5. It must be in the interests of both the employers and the employees.

6. It must be flexible but stable.

7. It must be framed in the manner so that it may be used widely for all the activities of the enterprise.

8. It must be helpful in increasing the production as well as productivity.

Advantages of Incentive Wage System:

i. There is increase in the prospect of workers to earn more. As shown by F. Herzberg good salary is one of the hygiene factors in the absence of which people are unhappy and dissatisfied. Wage incentive offers them the prospect of earning more.

ii. The scientific work study which is done before introducing a wage incentive plan brings about improvements in methods, work­flow, and man-machine relationship and so on.

iii. There is effective reduction in the supervision costs Closer supervision of employees becomes unnecessary because workers become more responsible. Rather than the supervisor chasing the workers the workers themselves sometimes chase the supervisor for materials, tools, etc.

iv. Employees promptly expose all such problems before management which retard their earnings. Management becomes more alert in areas such as flow of process materials, adequate spares, etc.

v. Employees are encouraged to become “inventive”. They invent and adopt ways and means to achieve their production targets with lesser exertion and lesser expense of energy. They come forward with new ideas and suggestions.

vi. There is improvement in discipline and industrial relations. Go-slow and similar other techniques are not resorted to by the workers to express their dissatisfaction with management policies and practices. There is increase in workers’ punctuality and decrease in absenteeism.

vii. There develops a feeling of mutual co-operation among the workers as their operations are interdependent and any hold-up at one point may affect the production and earning at other points.

Effects of Incentive Wage System:

Experience has shown that incentive compensation is not an unmixed blessing. It may produce certain ill-effects unless precautionary steps are taken to check them in advance.

These ill-effects are as under:

i. There is tendency among the workers to sacrifice quality for the sake of quantity. This calls for a very strict system of checking and inspection.

ii. In the absence of adequate provisions incentive payment brings about certain rigidity in the operations. This makes it difficult for the management to revise norms and rates following changes in technology, methods, machines, materials etc.

iii. Employees very often ask for compensation whenever production flow is disrupted due to the fault of management.

iv. Unless greater vigilance is exercised there is a danger of workers disregarding safety regulations.

v. Unless a maximum ceiling on incentive earning is fixed some workers tend to overwork and undermine their health.

vi. Jealousies may arise among workers because some are able to earn more than others. In the case of group systems, the fast workers may be dissatisfied with the efforts of the slower members of the group; where heavy work is involved older workers in particular are likely to be criticised for being too slow. One likely effect of this is the splitting up of trade unions.

vii. The introduction of a system by results increases the amount and cost of clerical work since it involves considerably more bookkeeping. This is particularly true when the production is subdivided into many processes.

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