Wage payment system consists of the pay structures and the methods used to motivate and reward work force for their contribution to the goals of the organisation. Various systems of the wage payments have been developed in different industries and in different countries.
All of these systems may, however, be regarded as variants or combinations of different principles of time-rate system, piece-rate system, payment by results system, balance or debt system, and incentive rate system. These systems reflect the basic philosophy of a company and its management.
The various systems and methods of wage payment are:- 1. Time Wage System 2. Piece Wage System 3. Payment by Results (PBR) 4. Balance or Debt Method 5. Incentive Rate System.
Payment of Wages: Systems, Methods and Formula for paying Wages to Employees and Workers
Payment of Wages – 2 Main System of Paying Wages to Employees: Time Wage System and Piece Wage System
There are mainly two system of paying wages to employees viz., Time wage system and Piece wage system which are explained below:
System # 1. Time Wage:
Time wage system is also called day wage system is a system in which wages are paid on the basis of time spent by the worker like per day, week or month instead of output produced or amount of work done. Here presence of employee is more important than performance of employee. The wage rate is determined by negotiation considering prevailing local wage rate or job evaluation.
Merits or Advantages:
(i) Simple and easy – This method is simple and easy to calculate remuneration by both workers and employers as unit of output produced need not be counted and recorded.
(ii) Improves quality of work – This method ensures improved quality of work as there is no pressure on workers to speed-up production and there is every scope for the workers to show their talent and skill.
(iii) Economical – Clerical work in computation of wages is minimum and there is no necessary of keeping records for the units produced and hence it is less expensive.
(iv) It assures fixed remuneration to workers – As remuneration is paid on the basis of time spent rather than unit produced, workers get fixed remuneration for the number of days they have attended irrespective of the amount of work done.
(v) Encourages beginners – It encourages beginner or learner to learn best method of doing work as their earnings are not related to unit produced.
Demerits or Disadvantage:
Time wage system suffers from the following demerits:
(i) No distinction between efficient and inefficient employees – This system does not make any difference between efficient and inefficient employees as efficient and hardworking employees receive the same remuneration at par with inefficient employees.
(ii) This system is a punishment to efficient employees – Efficient and hardworking employees do not get extra remuneration in spite of their extra effort and performance. Therefore, this system does not attract and encourage hardworking and efficient employees.
(iii) No increase in production – Under this system remuneration is paid on the basis of time spent by the workers rather than unit produced and hence there is no pressure to speed up production which in turn may result decrease in production.
(iv) Difficult to calculate labour cost – As remuneration is paid on the basis of time spent and not on the basis of unit produced, calculation of labour cost per unit is difficult.
(v) Low productivity and high supervision cost – As the system does not offer any incentive to efficient and hardworking employees, productivity of labour becomes low unless close supervision is used which in turn increases cost of supervision.
(vi) Difficult to ascertain the merit – As all employees are treated at par, there is no basis for finding the merit of different employees.
(vii) Difficult to fix the basis of promotion – As it is difficult to find out the merit of employees, it is also difficult to fix the basis of promotion. If the employees are promoted on the basis of seniority, it may affect on the morale and efficiency of young and hardworking employees.
Suitability of Time Wage System:
Time wage system is suitable under the following circumstances:
i. Where quality of work is important rather than quantity to be produced. E.g. Jeweler, furniture etc.
ii. Where workers are new, learner or beginner.
iii. Where output cannot be measured in terms of individual unit produced by each employee.
iv. Where machinery and equipment used in the process of production are sophisticated, expensive and need special care.
v. Where employees have little or no control over quantity of output to be produced.
System # 2. Piece Wage:
In this system of wage payment, remuneration is paid to the employees on the basis of unit produced or amount of work done. Unit of output produced or amount of work done is the basis of payment of wages. Therefore, greater is the number of unit produced, higher is the remuneration of employees and vice-versa, hence this method is called payment by result. Under this system efficient and hardworking employees get higher remuneration whereas learner or beginner gets lower amount of remuneration.
Merits or Advantages of Piece Wage System:
(i) Attracts efficient and hardworking employees – As remuneration is paid on the basis of units produced or amount of work done, efficient and hardworking employees work more and show better performance that in turn get higher remuneration.
(ii) Increase in production and productivity – As workers are paid remuneration on the basis of their performance, workers are forced to work more and to show better performance which in turn increase production and may also increase productivity.
(iii) Low cost of production – Increase in productivity and production may result in lower cost of production per unit.
(iv) Simple and easy to calculate wages – As wages are paid directly in proportion to the number of unit produced, calculation of wage or remuneration is easy. Even employees themselves can calculate their remuneration on the basis of unit produced and rate per unit.
(v) Increase in standard of living of employees – Efficient and hardworking employees have opportunity to show their talent and increase their earnings which in turn help them to improve their standard of living.
(vi) Helps in fixing the basis of promotion – Piece wage system helps the management in distinguishing efficient and inefficient employees which help them in giving the promotion to employees.
Demerits or Disadvantages:
Piece wage system suffers from the following drawback:
(i) Effect on quality of output – In the race to earn more wages, workers may work fast and may not give importance to the quality, which may affect on image of the business.
(ii) Variation in the earnings of the workers – Workers earnings depend on their working performance. Higher is the performance, better will the remuneration and vice-versa. In view of variation in earnings workers may feel insecure and dissatisfied.
(iii) Difficult to fix wage rate – Unless scientific basis is made available to fix the wage rate, employers may find it difficult to fix suitable piece rate. Piece rate, if fixed arbitrarily, may be harmful either to employer or to employees.
(iv) Expensive and time consuming – Detailed record of production, involves clerical work. Continuous production requires continuous recording of work for calculation of piece wage which is both expensive and time consuming.
(v) No guarantee of minimum wage – This method does not guarantee minimum wage and hence Trade Union may not accept this method of wage payment.
(vi) Disparity between employees – This method makes difference between efficient and in-efficient workers as efficient workers work more and earn more income as compared to inexperienced and inefficient workers. Therefore, this method may create jealousy among the workers and may spoil the industrial relation also.
Suitability of the Method:
Piece wage system is suitable under the following circumstances:
(i) Where there is an urgency to increase the production and quality is not that much important.
(ii) Where it is possible to measure the units produced by an individual worker separately.
(iii) Where the quality of the output depends on skill and judgment of the employees.
(iv) Where there is regularity in flow of work and interruptions are minimum.
(v) Where method of production is standardized and the job is of a repetitive nature.
Payment of Wages – 2 Systems for Paying Labour Remuneration: Time Wage System and Piece Wage System
There are two systems used for paying labour remuneration and other systems are modifications over these two basic systems. One is time wage system and the other piece wage system.
Under this system of wage payment, wages are paid on the basis of time spent by the marker on job. The unit of time could be day wage, a week, a fortnight or a month. The commonest is daily wage system.
(a) This is the oldest and simplest method which workers understand. This gives them a reuse of economic security as they are everyday paid what they work for.
(b) There is no stress on worker to speed up. He can learn while working. He has to spend more hours at work to learn. He can show his skills and quality of work is kept high.
(c) Workers can end just to the pace of work so that they are not harmed while at work and also they do not wastefully handle material.
(d) This method is well accepted by trade unions because it does not differentiate between efficient and inefficient worker. A sense of equality is created among them.
(e) It is sometimes very difficult to calculate the work done when it is intangible. Here, time wage is more suitable.
(f) It is an objective method where employer can calculate his wage bill in advance.
(a) There is no basis to find the skills, efficiency and merit of employees. This may lead to de-motivating employees.
(b) Since this method is time based and not performance based, there is no incentive in the mind of employees to work hard and improve their performance.
(c) Workers are guaranteed remuneration per day, so they have indifferent attitude towards work and company.
(d) Company cannot calculate labour cost per unit as the total wage bill does not change with the volume of production.
(1) Where mental work is required more or where units of output are non-measureable.
(2) Where machines and tools required are very sophisticated and expensive, and work is of highly varied nature also performance standards cannot be established.
(3) Where delays in work are frequent and output is uncertain and irregular.
(4) Where the quantity of work is very important e.g. artistic furniture carving, jewellery designing, mould making, etc.
In this system, remuneration is paid on the amount of work done or output of the worker. Worker is paid wages directly in proportion to his output.
(a) The relation between work and reward provides incentive to employees to be more productive.
(b) Employees are motivated to earn more for their standard of living improvement. It is fair to work hard and earn the butter. The ones who are work shirkers are penalized.
(c) Management can distinguish between good and bad performers and can lay off the bad ones if need be.
(d) Cost per unit can be easily calculated as the wage bill varies with direct proportion to the output.
(e) Since the production is high, the costs are lowered down as the consumers get the benefit of it.
(f) Workers maximize the productivity for their own returns and so close supervision is not required.
(a) Employers find it difficult to maintain it when employees start producing huge quantities for their own benefits.
(b) Earnings of employees are not stable. Sometimes they are efficient and do more pieces whereas at other times they may not be as healthy and energetic and may earn less.
(c) Excessive work may cost the employees their health.
(d) This method is not suitable for very artistic and creative kind of jobs.
(e) There could be conflict between high producers and low producers.
(f) Excessive work may cost quality.
In this method, close supervision is a must. Close supervision costs the company dearly.
Piece wage system suits in the following cases:
(a) When the output produced depends only on the skill of the employees.
(b) When goods produced are standardized.
(c) Where quality and workmanship are not very important.
(d) When large production is required and the product is standardized.
Payment of Wages – Top 5 Methods: Time-Rate System, Piece Rate System, Payment by Results (PBR), Balance or Debt Method and Incentive Rate System
Wage payment system or methods consists of the pay structures and the methods used to motivate and reward work force for their contribution to the goals of the organisation. Various systems of the wage payments have been developed in different industries and in different countries.
All of these systems may, however, be regarded as variants or combinations of different principles of time-rate system, piece-rate system, payment by results system, balance or debt system, and incentive rate system. These systems reflect the basic philosophy of a company and its management.
Method # 1. Time-Rate:
Time-rate system is the oldest and the most common method of fixing wages. It refers to the payment of a pre-determined rate for normal time of work and relates to a time limit such as an hour, day, week or month. Broadly speaking, under this system, the basic rate for a job is fixed by negotiation, by reference to local rates, or by job evaluation and only varies with time, never with output or performance.
This method is generally common for clerical, supervisory and managerial personnel. The characteristic of this method is that the production of a worker is not taken into consideration in fixing the wages. An employee is paid at the settled rate as soon as the time contracted for is spent.
The minimum wage rate, the need-based minimum wage, for fair wage or the living wage fixed by the government or the wage board or through collective bargaining mechanism, are on time-rate principles.
The merits of the time-rate system are:
(a) It is a simple and convenient method, for the amount earned by worker can be easily calculated;
(b) As all workmen employed for doing a particular kind of work receive the same wages, ill-will and jealousy among them are avoided;
(c) As there is no time limit for the execution of a job, workmen are not in a hurry to finish it and this may mean that they will pay required attention to the quality of their work;
(d) It provides a regular and steady income to the workers which enables them to adjust their budget accordingly;
(e) Due to the slow and steady pace of the worker, there is no rough handling of machinery, which is a distinct advantage for the employer; and
(f) It is the only system that can be used profitably where the output per worker is not measurable, or where the job involves professional, technical or administrative skills.
The main drawbacks of this system are:
(a) It does not take into account the fact that men are of different abilities and that if all persons are paid equally, better workmen will have no incentive to work hard;
(b) As there is no specific demand on the worker to complete a piece of work within a given period of time, there is also the possibility of systematic evasion of work; and
(c) This system sometimes compels a person to take up a job for which he has neither the liking nor ability.
Method # 2. Piece Rate:
The piece rate system is the earliest and the simplest of all the bonus plans. It is usually implemented as a production incentive scheme, where the objective is to encourage a specific group of workers to fulfill a certain target set by the company. Piece rate bonus plans are based on the physical output of the individual employee. As the output increases, the employee will also expect an increase in his salary.
Individual incentive schemes such as the piece rate should be used when employees have to work independently without the need to coordinate their activities with other workers, where a high level of individual skill is required and where there are good measures of individual performance.
When applied to an individual or a group consisting of a small number of individuals, the piece rate system is a form of payment in which visible performance is immediately rewarded through an increase in the monthly wages.
Generally speaking, the piece rate has lost its attraction round the world. Such system forces the employee to focus his attention to the increase of the production volume without similar attention paid to quality. The practice of the piece rate system has also resulted in an increase of industrial accidents and a deterioration of employee’s health.
Furthermore, employees are likely to oppose changes in the product, technology or tools used for the production process because it means that they have to spend time to learn the new method, thus causing a loss in their income. It is precisely due to these disadvantages that some companies have attempted to establish hybrids of the piece rate system.
Piece rate can be converted into time rate by fixing an output norm. For the adoption of piece-rate as a method of remuneration, the following job characteristics must exist – (a) the work is standardised, repetitive, and easily measurable; (b) the work is not continually changing; and (c) considerations of quality are predominant.
The system may include a guaranteed minimum wage, thus assuring the worker that whatever his output may be, his hourly or daily earnings will not fall below a specified amount.
Method # 3. Payment by Results (PBR):
There are many different systems of wage payment under which the worker’s earnings are related directly to some measurement of the work done either by himself or by the group or working unit to which he belongs. Such systems, known as payment by results, can be classified in four main groups such as- (i) in the same proportion as output; (ii) proportionately less that output; (iii) proportionately more than output; or (iv) in proportions which differ at different levels of output.
Payment by results is a payment system under which money rewards vary with the measured changes in performance according to predetermined rules. The PBR system relates the pay or a part of the pay received by the worker to a number of items he produces or the time he takes to do a certain amount of work.
Under this system, the worker is paid a wage which bears some fairly direct and continuous relation to his output or performance, or to the average output of the group of workers to which he belongs. Under this plan, the worker working in a given condition and with the given machinery, is paid exactly in proportion to his physical output.
Under PBR, the workers’ pay during a given period is directly related to the levels of measured performance. The essential difference between PBR and time rate system is how performance is related to reward. The basic alternative to PBR is time payment. The PBR system varies with the variation in individual and group performance at the plant or enterprise as a whole.
The most common scheme of payment by results which is purely individual in character is what is called straight piece work. A worker’s earning can be calculated on the basis of the number of pieces produced and the rate per piece. This means payment of a uniform price per unit of production, and it is most appropriate where production is repetitive in character and can easily be divided into similar units.
There is also the differential piece work system where the wage cost per unit is adjusted in relation to output. Under this scheme, two piece rates may be fixed – one considerably higher than the going time wage for the job and the other somewhat lower than the time wage. The lower rate is paid when the workers fail to achieve the standard level of performance.
The main idea behind establishing two differential piece rates has been to reward high production and to discourage low production. This system has been used mainly by firms with heavy non-labour costs. The main problem in applying this system is the difficulty of setting the standard and the amount of difference between the two piece rates. Further, it may lead to excessive speeding by some workers, who then get much higher earnings than others.
The PBR may be introduced with certain safeguards such as:
(a) Quality of output is to be controlled through strict supervision;
(b) Wastage of material is to be prevented;
(c) Health of the worker is to be protected;
(d) Supply of raw materials, maintenance of plant and efficiency of management are to be assured;
(e) Workers are to be guaranteed job security or continued employment; and
(f) Work-load is to be fixed by impartial aspects.
Rates once fixed should not be cut by management without justification. The design of an appropriate PBR scheme involves basically three different types of decisions. The first concerns the safeguards and the procedures to be incorporated in the scheme to make it acceptable and effective; the second concerns the amount of bonus, or incentive potential that the scheme should provide; and the third concerns the precise way in which increased productivity should be shared between the worker and the employer.
When a system of payment by results is applied in a particular undertaking the interest of employers and workers may be seriously affected. The employees, in a desire to raise their earnings, may attempt to increase their output to a level at which quality is adversely affected. Such deterioration of quality is, of course, not in the interest of the employers nor of the workers.
The safeguards needed to ensure the equitable operation of any system of payment by results include- (1) safeguards relating to the introduction of the system, (2) safeguards relating to the operation of the system.
Systems of payment by results are to be applied in an equitable and reasonable manner. The health and safety of the workers may suffer if the task is set too high. Again, inequities may result if some workers are able to earn considerably more than their colleagues. Further, workers may be tempted to neglect security regulations while on piece work.
When such a system is applied the interest of both employers and employees require to be protected by suitable provisions in collective agreements. Unless a system of payment by results in applied equitably from both the management’s and the workers’ points of view, good industrial relations will be difficult to secure or maintain.
Distrust between management and workers and friction among the workers themselves may prevent the system from functioning properly, may lead to wasteful strikes, or may even force the complete abandonment of the system.
The PBR has many advantages:
(a) It pays the workmen according to their efficiency as reflected in the amount of work turned out by them;
(b) It involves less supervision as the workers are not likely to while away their time;
(c) Being interested in the continuity of his work, a workman is likely to take greater care in the maintenance of the machine.
The demerits of this system are:
(a) A piece rate worker in his anxiety to produce more may neglect the quality of output;
(b) He may, in his desire to earn more, may work so hard as to impair his health, unmindful of the fact that this would ultimately reduce his earning power;
(c) Under this system, the worker’s earning may suffer because of causes beyond his control, such as inadequate supply of raw materials, failure of machinery, lack of demand in the market for the goods produced;
(d) Trade unions are often opposed to this system as they are of the opinion that such a system encourages rivalry among workers and endangers their solidarity in labour disputes.
The success of any system of payment by results depends in a large measure on the way in which it is introduced and applied. First, the requirement for the success of a system of payment by results is that it should be developed and applied with the agreement of the workers concerned and in an atmosphere of good industrial relations.
Second, wherever possible the methods to be followed in the introduction and application of systems of payment by results should be settled by collective bargaining between the employers and workers concerned.
Method # 4. Balance or Debt Method:
This is a combination of time and piece rate. The worker is guaranteed an hourly or a day rate with an alternative piece rate. If the earnings of a worker calculated at the piece rate exceeds the amount which he would have earned if paid on the time basis, he gets credit for the balance, namely, the excess piece rate earnings over the time rate earnings.
If the piece rate earnings are equal to his time rate earnings, the question of excess payment does not arise. Where piece rate earnings are less than time rate earnings, he is paid on the basis of the time rate; but the excess paid is carried forward as a debt against him to be recovered from any future balance of piece work earnings over time work earnings. This system pre-supposes the fixation of time and piece rates on a scientific basis. The obvious merit of this system is that an efficient worker gets an opportunity to improve his earning.
Method # 5. Incentive Rate:
Incentive Rates can be used more effectively in a production situation where output is measurable in homogeneous units, where product specifications do not change frequently, and where worker’s effort can directly influence output. Incentives are difficult to employ where output is fixed substantially by the requirements of production process and cannot be controlled by the workers.
The most common type of incentive system is straight piece work, which simply means a constant rate of pay per unit of output. Bonus plans represent another method of incentive pay and involve, in general, the determination of standard tasks. Bonuses are paid for production above standard.
A great many problems arise in connection with incentive plans. Of basic importance is the way in which production standards are determined under either straight piece work or bonus systems. Under bonus plans, the extent to which increased production will be rewarded must be decided. The question of incentive rate adjustment in the light of technical changes is also important. Another crucial area is the guarantee of minimum earnings under the incentive systems.
A substantial amount of controversy between labour and management has arisen over the use of incentive pay methods. Organised labour does not, however, have a uniform position in the matter. Some unions are opposed in principle to the incentive plans; others accept wage incentives and are concerned primarily with the equitable determination of rates and prevention of abuses.
Payment of Wages – 2 Main Systems: Time Rate System and Piece Rate System (With Advantages, Disadvantages and Formula)
Wages can be paid to the employees either on the basis of time or on the basis of production done by them.
Thus, there are two system of wage payment:
1. Time rate System.
2. Piece rate System.
Time rate system is the oldest method of wage payment. Under this method the employee is paid on the basis of time worked i.e. a day, a week, a fortnight or a month irrespective of quantity produced. It must be remembered here that wages are paid after the time fixed for work is completed irrespective of output or completion of the work.
Every worker knows how much wages he will get after specific period as an arrangement regarding wages is reached between employees and management regarding the wage rate.
Wages = Number of hours worked × Rate per hour
For example, A worker is paid at the rate of Rs.10 per hour and he spent 100 hours at work.
So his wages will be:
Wages = Number of hours worked × Rate per hour
= 100 × 10
(i) Flat Time Rate:
It is the oldest and simple method of wage payment. Under this system workers are paid at the flat rate on the basis of time they are employed. The flat rate may be per hour, per day, per week, per month etc.
(ii) High Pay Rate:
One of the basic drawbacks of the time rate system is that it does not attract the highly skilled workers. High pay rate system suits to highly skilled workers. Under this method overtime is not allowed and workers are required to achieve the target within time. The success of the system depends on the cooperation of efficient workers. It also requires proper setting of standards.
(iii) Measured Pay Rate:
Under this workers are given a specified work and rate is fixed according to the level of performance. Higher wages will be given for higher performance. This method is criticise on the ground that additional remuneration is given for any improvement in the performance.
(iv) Graduated Time Rate:
Under this method the wage rate is fixed with cost of living index changes. This method is the choice of workers as they get additional wages when cost of living index changes.
(v) Differential Time Rate:
Under this system different wages are fixed for different workers as per their personal abilities. Higher wages are paid to meritorious workers and incentives are given to workers for their performance.
Following are the advantages of time rate system:
(i) Simple – The very first advantage of time rate system is that it is simple to understand and easy to use. The workers can easily understand this method and compute their earnings.
(ii) Regularity – Regularity is another feature of this method. Earnings are regular and fixed, there being no uncertainty of any type. So workers get regular earnings and plan their expenditures in advance on the basis of their earnings.
(iii) Clerical Work – Workload of clerks and other officials also gets reduced. In this method, the clerical work in the wage calculations is minimum because no records of output are required.
(iv) Amount of Wages – In this method, the employees can predict the wages in advance, similarly for the employer i.e., employer can predict his liability for the payment of wages in future with accuracy which makes the arrangements of funds very easy.
(v) Quality – There is no restriction regarding the quantity of output, employees try to maintain the top quality of goods. The employees work with ease and patience. So it can be said that the output in this system is of good quality.
(vi) Protection – Workers are sure to get certain amount of wage so they can plan their expenditures and also can make their family budget. This method protects the wages of trainees, aged and other employees who temporarily fall sick.
(vii) No Wastage – There is no consideration of quantity, workers make the production by giving more importance to quality, which avoids wasteful handling of material, machines and tools.
(viii) Preference – Since time rate system of wage payment does not differentiate between efficient and inefficient workers, so it is preferred by workers and trade unions.
(ix) Popular Method – This is the most popular method. It is favoured ad practised by most of employers and employees.
(x) Lesser Administrative Expenses – Every worker takes his job and his duty sincerely and honestly and as such lesser inspection and supervision is required which reduces the administrative expenses.
Disadvantages of Time Rate System:
Following are the disadvantages of the time rate system of wage payment:
(i) Lack of Incentive for Efficiency – The major disadvantage of this method is the lack of incentives i.e., both efficient and inefficient workers get equal remuneration on the same job, as such there is no incentive for efficient workers.
(ii) Need for More Supervision – The workers become careless, as no specific amount of work is required to be performed. This is why more supervision is required.
(iii) Loss of Efficiency – There is no discrimination in this method between the efficient and inefficient workers. So efficient workers have no incentives to work better in terms of quality and quantity, which decreases the morale and efficiency of the efficient workers.
(iv) Difficult Assessment of Work – As there is no record of individual’s performance or output. So in this method it is very difficult to assess the workers’ efficiency.
(v) Loss of Production – Carelessness and slackness of both workers and management results in loss of production.
(vi) Reduced Morale – This method destroys the morale of the workers, and even efficient workers come to the level of inefficient workers. Sometimes competition takes the negative side.
Suitability of Time Rate System:
The time rate system is suitable in the following situations:
(i) Work is of varied nature and standards of performance are difficult to set.
(ii) Where quality of goods is more important.
(iii) Where mental work is involved such as administration, management policy making.
(iv) Trade union is very strong and is opposed to output-related payment.
(v) Highly skilled and competent manpower is employed which does not require to be closely supervised.
(vi) When it is difficult to fix the standard time for doing the job.
(vii) When the job relates to office or is clerical work.
(viii) When collective effort of group of persons necessary to perform the job.
2. Piece Rate System:
Under this system the worker is paid on the basis of output i.e., amount of work done. The earnings of the workers are governed by the production quantities and wage rate per piece. The rate of wages is fixed in advance. Though the time is not important in this system, it is assumed that the worker will not take more than the average time to complete a job. The earnings of the worker depend upon the speed of his work and his own individual skill and efficiency.
As against the time rate system where every employee is paid the same wage, under this system the wage varies according to the worker. A superior worker will earn more than the inferior worker. The higher the output of the worker, the greater are his wages.
Wages = Number of units produced x Rate per unit
For example, Suppose piece rate prescribed is Rs.20 per unit produced.
If a worker produces 10 units, his wages will be as follows:
Wages = Number of units produced x Rate per unit
Wages = 10 x 20
Wages = Rs.200
There are four types of piece rate system:
(i) Straight Piece Rate System:
It is the simple method of payment under which payment is made to workers according to the units produced at fixed rate. Another type of this method is piece rate with guaranteed time rate with additional advantage of piece rate.
(ii) Taylor Differential Piece Rate System:
The differential piece rate system makes the correlation between the increase in the efficiency of the worker and the increase in wage rates. With this an efficient worker gets more wages in comparison to the inefficient one. The two wage rates are determined in this system i.e. higher wage rate for the worker who produces more than the standard output and lower wage rate for the worker who produces standard or less than standard output.
(iii) Merrick Multiple Piece Rate System:
Under this system three piece rates are applied to workers with different levels of performance.
(iv) Gantt’s Task and Bonus Plan:
Under this the standard time is fixed for doing particular task and then workers’ actual performance is compared with the standard time. If worker takes more time than the standard time then he is given wage for the time taken by him.
(a) If worker takes the standard time then he is given wages for the standard time + 20% as the bonus on the wages earned.
(b) If worker takes time less than the standard time then he is given wages equal to the standard time + 20% of the wages for the standard time.
The following are the advantages of piece rate system:
(i) Increased Production – Production increases as every worker tries to produce more and more. Efforts on the part of very worker results in the amount of output.
(ii) Simple – Wages are based on the number of units produced by workers so both management and workers can calculate their wages in advance. On the basis of this they can plan their expenditures.
(iii) Better Employer Employee Relations – The relations between employer and employees improve as rate of wages is decided in advance and there are no chances of conflict.
(iv) Proper Use of Tools and Equipments – Every worker tries to produce more and more so it makes the efficient use of tools and equipments.
(v) Benefits to Consumers – The large-scale increased output reduces the cost of production and also the prices of the products. The customers get these products at cheaper rates.
(vi) Easy Determination of Quotation Price – The employer is able to know the exact labour cost per unit. This will help to make quotations confidently and accurately.
(vii) Less Supervision – As compared with the time rate system, the supervision costs under this system are not high, because the workers are to be paid on the basis of performance. The very attraction of greater reward for greater effort drives them to work hard.
(viii) Reduction of Idle Time – The quantum of idle time is minimised as workers know that they will not be paid for idle time. Thus it persuades them not to waste their time.
(ix) Minimisation of Loss due to Breakage – The workers handle the machines, tools and implements with great care which helps in minimisation of loss resulting from breakage. They know that the breakage will reduce their output which results in reduced wages.
Some important disadvantages of the system are given below:
(i) Difficulty in Fixation of Standard Piece Rate – Setting of a standard rate involves a lot of difficulties and a considerable amount of expense has to be incurred. If high piece rate is established, it is very difficult reduce it subsequently.
(ii) Ignores Quality – As more output means more wages, the workers are always in a hurry to produce more. This results in production of substandard items, high rate of rejection and ultimately increased production cost per unit.
(iii) Insecurity – The system does not provide guarantee of minimum wages to the workers. They feel insecure since they would get less wages during the period when their efficiency may get reduced due to factors beyond their control. Thus, at times, workers may be earning even below the subsistence level.
(iv) Conflict – The system may lead to conflict between the management and the workers, if the output is low due to some fault of the management, such as bad quality of raw material, frequent break downs failure of machinery etc.
(v) Expensive Control Systems – Management is compelled to intern expensive control systems of supervision and inspection for maintaining quality of output.
(vi) Speeding – Workers may Speed up the work to produce more which causes great injury to their health. Speeding also causes undue wastage of raw materials and wear and tear to machines.
(vii) Effect on Production Schedule – Workers may work at a seed for a day, earn more wages and then absent themselves for a few days, which may affect the uniform flow of production and the production as such may be disturbed.
(viii) Increased Cost of Production – Cost of production may increase due to more wastage of materials, high cost of supervision and inspection, and wear and tear of machines.
(ix) Frustration among Less Efficient Workers – The system will frustrate the less efficient workers and their efficiency may further decrease because of discontentment.
Piece rate system of payment of wages is considered suitable where:
(i) The quantity of work done can be precisely measured and standardised.
(ii) The work is of repetitive nature;
(iii) It is possible to fix a fair and acceptable piece rate;
(iv) The productivity is closely related to skill and efforts;
(v) The quality of goods can be controlled;
(vi) Time cards are maintained for ensuring regularity and punctuality of workers and uninterrupted flow of production; and
(vii) Materials, tools and machines are pettily available to cope with the possible increase in production.