When time and piece rates are combined, the system of wage payments are known as either progressive system of wage payments or premium Bonus systems. Mr. Cadbury and employers discovered that a certain percentage of workmen have a special capacity for speed, and will always earn about 20 per cent above the average, if they are given the chance to do so.
What is more, even the average workmen seldom give the best result of his work to the employer unless some incentive is offered to do so. They had recourse to the piece wage system described above as an improvement on the day- wage method of remuneration.
One of the objections to the piece- wage system was that the employee was not guaranteed any minimum wage, and in cases where the supply of labour was abundant, the piece wage rate was so lowered that it led to sweating any other evils.
Workmen association and trade unions began to object to the piece wage system pure and simple, and agitated for a guarantee of fair minimum wage in connection with certain trades. This gave rise to a number of systems of wage payments which technically came to be known as “Progressive Wage” systems or Premium Bonus Methods, of wage payments.
Under these systems of wage payments, the employee besides being guaranteed a minimum wage, the amount of which is based on a certain time occupied by him, is promised an extra reward in case the output in that time were to exceed the standard laid down.
The objective of the these premium or bonus plans is the quickening of production, and constitute a combination of the normal day wage and piece rate; but the bonus or premium is calculated in the terms of hours saved. The different principles differ mainly on the principle of calculating bonus, and also as the basis on which the advantage of saving of time is assured between the workmen and the employer.
The most prominent method employed is to fix a standard time in which a specified job or a portion must be performed, but if the workmen performs it within a shorter time, a specified proportion to the value of time thus saved forms the standard of calculation of the bonus which is to be paid to him.
1. Straight Piece Rates System:
The straight piece rate system can be applied to individual workers or team of workers, and the earnings whether of an individual or a team of workers are directly proportionate to the amount of work done.
If for example, the piece rate is 10 paise a unit of output, a worker who produces 120 units earns Rs. 12 in a day, and another who produces 150 units earns Rs. 15 in a day, and so on. Teams of workers are similarly paid according to the output of the whole team, and the total amount earned is then divided between the members.
The system, whether the rates are individual or collective (for a team) is simple and easy to understand. The worker can readily calculate with his earnings will be, for he knows hour by hour what he is producing and he, therefore, knows for himself what he should receive in his pay envelope at the end of the week. Consequently, he has more confidence in it than in some complicated bonus systems involving elaborate calculations which are made in the office and which he may not fully understand.
The system is a good one if applied fairly on the basis of a satisfactory time study. It tends to result in greater concentration and effort by the worker to secure higher earnings. The piece rates and related time studies cannot be controlled by collective agreements but must be fixed for each type of work within each undertaking.
However, in England, trade unions usually insist in collective negotiations that the average earnings of experienced workers on piece rates shall be higher by specified percentage—generally between 10 and 33.3 per cent—than the time rates paid to time workers in the same occupation. Hence, it is said that the employer can afford to pay these greater amounts both because output is higher and because overhead or standing costs are reduced per unit produced by being spread over higher output.
It aims at recognising the merit of the workers. The workers are provided with the necessary incentive to prove their worth by increasing efficiency. In other words, the workers may earn more by increasing their efficiency, since the rate of payment is directly proportional to the quantity of work done.
However, the system of the unsuitable for delicate type of work as quality of performance is likely to suffer because the workers are anxious to produce maximum units of a given commodity within a given period of time so as to earn maximum amount of remuneration. It lays greater strain on the worker and affects his health adversely.
2. Differential Piece Rate System:
The simplest form the differential piece rate is that devised by Mr. Frederick W. Taylor, the “Father of Scientific Management,” who set two piece rates, the higher of which was paid only to those workers who reached or exceeded a specified standard. Whether the system will provide an incentive to work at high speed depends upon the difference between the two piece rates and upon the standard set.
Taylor set a high standard of output and the piece rate paid to workers who reached the specified standard, was considerably above the rate paid to those whose output was below the standard. One of his object was to eliminate the latter i.e. inefficient from the workshop by discouragement of low earnings, and to staff it with quick workers, a policy which earned for him the title of, “Speedy” Taylor.
The system can be applied less drastically. An easier standard of output can be set, but with a smaller increase in the piece rate for work beyond the standard. There is a differential piece rate system which has been developed by having three piece rates instead of two, the highest rate being paid to the workers who reach standard (i.e. 100 per cent of standard), the second to those who reach a given proportion e.g. 80 per cent or 90 per cent of the standard and the third to other workers. The system could be further elaborated by having four or more piece rates each related to a different level of output, but the growing complexity would be a disadvantage.
Under the straight piece rates system the incentive to work at unduly high speed is slight, as the rate is paid for high or low production, but the differential system by its special inducement of a jump in earnings if the set standard is reached, is more liable to result in speeding and strain for workers average and under average efficiency. This risk varies according to the rise in piece rate as the output of the worker increases, the danger of excessive speed being greater if the rise is large than if it is small.
The differential system has been mainly applied in undertakings with costly machinery, the employer being able to afford to pay a higher piece rate to quicker worker because his overhead costs are spread over a bigger output and are, therefore, less per unit than if machines are operated by slower workers. This saving in overhead cost per unit of output is the chief attraction of the system and largely determines the difference between the two rates.
3. Merrick Multiple Piece Rate System:
It is a modification of the Taylor system; under this system three different piece rates are fixed. The highest rate is being paid to the workers who reach the standard laid down i.e., who produces 100% of the output laid down. The second is those who reach a given proportion i.e., whose produces above 80 per cent but below 100 per cent.
The third is paid to those workers who efficiency is less than 80 per cent i.e., who produces less than 80 per cent of the standard output. It is, thus, obvious that the rate is lowest when the efficiency is below 80%, it is highest when the worker has achieved 100% efficiency.
4. Bonus System or Premium Systems:
It should be made clear here that term “bonus” is here applied to forms of wage payment devised to stimulate production other than straight piece rates or differential piece rates.
It is, thus, obvious that straight piece rates differential piece rates and bonus system all intend to stimulate production. They are also known as incentive method of wage payments of progressive wage system of premium bonus methods.
The straight piece rate has the merit of simplicity but, though offering an incentive, it does not provide any special reward for workers who reach a given standard of output. The differential piece rate system offers such a reward but may lead to excessive speed of work because, though the standard which entitled a worker to receive the higher piece rate may be reasonable, he still has the attraction of earnings at this rate for output beyond the standard.
To avoid this inducement while retaining the advantage of setting an output standard, several bonus systems have been devised. However, their practical value depends upon the reasonableness of the standard set and of the wages which workers of average ability can earn.
Bonus systems are often introduced where a piece rate would not be suitable out an incentive is needed.
Features of Bonus System:
(i) The fixing of standard time for a given task is usually done on the basis of time study or is the basis of average daily production. In some systems the task is a difficult one and can be achieved in the standard time by only a small number of workers, while in other systems the task is within the reach of a majority of the workers.
(ii) Workers are paid a bonus, which complete the task in less than standard time. The worker receives the hourly rate for the time he has actually taken, and in addition to it a bonus is also paid.
(iii) Workers are paid at full rate that do not reach or exceed the standard. Hence, there is no penalty on workers who do not reach the standard.
The amount of bonus is usually a percentage of the hourly rate multiplied by the time saved; i.e., the difference between the times he has taken to complete the task and standard time.
In some systems the proportion of the hourly rate is as low as 30 or 50 per cent, in others it is 100 per cent or even 120 per cent. Usually low percentages are related to a fairly easy tasks and high percentages to difficult tasks.
It is thus, obvious that all Bonus Systems involve the setting of a standard time, standard task, standard wage rate and fixing the rate of bonus to be earned by worker who completes the task in less than standard time.
5. Halsey Premium System or Weir System:
It attempts to combine the advantage of time and piece rates and eliminate their drawbacks. Under the system, certain quantity of work is fixed as a standard output, which is to be completed within a prescribed time. In the Halsey system workers who do not exceed the standard time (i.e. finishes the task within standard time) are paid an hourly rate, but those who do the task in less than the standard time receive the hourly rate for the time they take and, in addition, a percentage, usually 30 or 50 per cent, of the hourly rate for the time saved.
The premium is calculated on each job separately, according to the following formula.
Premium = % (Hourly rate × Time saved)
For example, if the time fixed is 10 hours (standard time), and the task is completed in 6 hours, the worker is paid at hourly rate for these six hours and, in addition to it, a portion say 50% of the 4 hours saved i.e., 50% of the income as result of hours saved.
Suppose the time rate is Rs. 10/- per hour;
The Premium can also be calculated according to the following formula in Halsey Premium Plan.
Premium = % of Time Saved/Time taken × Day Wage
Day Wage = (Standard Time x Standard Hourly Rate)
In the above example rate or premium is 15% i.e. 50/100,
Standard Time = 10 hours, hourly rate = Rs. 10/ = Time Saved, = 4 hours,
Day wage = 10 × 10 = 100
Premium = 50/100 × 4/100 × 100
= Rs. 2.
The worker has completed the task in six hours; the payment for these six hours would be at hourly rate that is equal to
= (hourly rate x time taken)
= 10 × 6 = Rs.60 … (1)
The payment (premium) for the time saved that is 4 hours would be equal to 50/100 (hourly rate × time saved)
= 1/2 (10 × 4)
= Rs. 20 … (2)
The worker would, therefore, in all receive (1+2)
= 60 + 20 = Rs. 80
Thus, the system gives a bonus or the premium to the worker at a fixed rate for the time saved.
This system encourages every workman to try his best to earn the premium. In laying down the standard task, care must be taken to fix an output which is fair one, which an average workman generally produces; as otherwise. If too high a standard is laid down, the majority of workman might lose heart after having vainly tried to obtain the same by repeated efforts, and may give up trying to increase their output or raise their speed.
The premium fixed should also be moderate and not very high, as otherwise, the employees may begin to earn very high premiums even at the cost of health. It may affect the efficiency and leads heart burning, since an efficient worker may increase his wages to a very high level.
To put in the works of Halsey, “If the premium be cut, the workmen will rightly understand it to mean, as under the piece work plan, that their earnings are not permitted to pass a certain limit, and that too much exertion is unsafe. The very purpose of the plan is to avoid this by dividing the savings between employer and employee as to remove the necessity of cutting the rate, and hence enable the workmen earnings to be limited only by his own ability and activity. The baneful feature of the piece-work plan is, thus, completely obviated, and instead of periodical cuts, with their resulting ill-feeling, the premiums lead the workmen to greater effort, resulting in constant increase of output, decrease of cost and earnings.”
6. Rowan’s System:
Rowan’s system, which was first used in Clyde side, goes even farther than Halsey’s in penalizing fast workers, the object being still more to safeguard management against having to pay big sums in bonuses if a bad mistake has been made in setting the standard time and, the task is too easy.
Under the system, the workman is guaranteed a minimum wage on the time basis. After that a standard time is fixed for the completion of every task and if he completes the task in less time he is given a bonus of the time actually saved in proportion to the total time.
Thus, Rowan devised a scheme of bonuses on variable percentage instead of Halsey’s fixed percentage. In this system the percentages are determined by the ratio of time saved to the standard time for the task. For example, if the worker saves one-fifth of the standard time (i.e. 2 in the above example) his percentage for bonus calculations under this system would be twenty i.e. 2/10 × 100 = 20. Similarly, if he saves one quarter of the time the percentage is twenty five per cent; and so on.
Though the percentage of the bonus increases more as time is saved, but the sum to which it is applied (i.e. Time taken × Hourly rate) becomes smaller. The maximum amount of bonus is reached when a worker does the task in half the standard time, and if he saves more than half the time allowed or standard time his bonus diminishes.
Thus, Rowan System will afford higher premium only if the time saved is less than 50% of the time allowed. At 50% both Halsey and Rowan Systems will result in the same premium, and if the time saved is more than 50% of the time allowed, then Halsey System and not the Rowan Systems will afford greater premium.
However, the Rowan System has been considered as complicated because of the variable percentages. The Rowan System is more favourable for the lower grades of workers, but the incentive declines rapidly with the increase in time saved, whereas in the Halsey System incentive declines less rapidly. For this reason, the Rowan System has been criticised because it penalise the most efficient workers.
7. Bonus at the Rate of 100 Per cent:
Under this system, any worker who completes the task in less than the standard time is paid at full hourly rate for the time taken, and in addition receives a bonus at the full hourly rate for the difference between the time he actually takes and the standard time. In fact the system provides a guaranteed minimum hourly rate for the workers who do not reach the standard, and the straight piece rate for workers who reach or exceed it.
Suppose the hourly rate is Rs. 10 per hour and the standard time is four hours.
If a worker completes the task in more than 4 hours, then he is paid at the hourly rate. Suppose it is 5 hours, then his earnings would be equal to = hourly rate × time taken
10 × 5 = Rs.50
If he completes the task just in 4 hours then, his earnings would be equal to = hourly rate × time taken
= 10 × 4 = Rs. 40
If he completes the task in 3 hours, then his earnings will be equal to = hourly rate × time taken + 100% bonus for the time saved.
= 10 × 3 + 1 × 10
= Rs. 40
If he completes the task in 2 hours, then his earnings will be equal to
= hourly rate × time taken + 100% bonus for the time saved
= 10 × 2 + 2 × 10
= Rs. 40.
8. Gantt Bonus System:
Gantt, who was an associate of Taylor, adopted Halsey methods of a guaranteed minimum time rate and a bonus calculated as a percentage of the full time rate saved, but like Taylor he set a difficult task and offered a high reward to efficient workers.
Gantt’s piece rate increases as more time is saved. Firms can afford these higher rates because overhead costs per unit are reduced by the high output of the efficient worker. The foreman is also paid a bonus based on the number of his workers who do the task within the standard time. This is the recognition of the part he can play in eliminating delays and interruption and in arranging conditions favourable to production.
Under this system if workers complete the standard task within standard time, then he is paid the hourly rate plus bonus which is a percentage of the taken time in which he completes the task.
Suppose the standard time is 8 hours and the hourly rate is Rs.10, the bonus is prescribed as 25% on the time taken to complete the task.
If the worker completes the task in 10 hours instead of 8 hours (standard time), then he is paid only hourly rate, his total earnings would be equal to
= hourly rate × time taken
= 10 × 10 = Rs.100
If he completes the task in 8 hours i.e. the standard time, then he is paid hourly rate plus bonus at the rate of 25% of the time taken, that is equal to = hourly rate × time taken + bonus (25% of 8 hours)
= 10 × 8 + 20
= Rs. 100
If he completes the task in 6 hours, then he is paid the wages of the standard time i.e. eight hours plus bonus of eight hours, which is equal to
= Standard time × hourly rate + bonus (25% of the standard time)
= 8 × 10 + 20
= Rs. 100.
9. Barth System:
Another incentive scheme, sometimes adopted, is known as Barth System. Barth system is also based on standard time and hourly rate.
The essential characteristics of Barth System are that:
(i) Workers are not guaranteed a minimum time rate, and
(ii) Wages are calculated by multiplying the standard time by the time taken then multiplying the square root of the product by hourly rate.
The formula is thus as follows:
10. Sliding Scale System:
Wages may be fixed on a sliding scale system. Under the sliding scale system, wages are made to vary according to the changes in the prices of product or the cost of living or the profits earned by the industry. When wages are co-related with prices, certain basic prices are taken. Wages rise in a given proportion with the rise in the prices of the product. If prices fall, wages are reduced but generally they are not allowed to fall below a certain level.
The system, however, is open to many objections. It is difficult to obtain a satisfactory basis for the calculation of prices as they may change due to variety of causes and the worker should not be expected to participate in the risk of the market. Under increasing returns, prices may fall but the profits may be higher. Besides, employers and workers both may try to bring about changes in the prices to their advantages.
11. “Task Wages” System:
Under the “task wages” system each man has been assigned a task to be done in a prescribed manner, with definite appliances, and to be completed within a certain time. With the help of investigations and trained experts, the standard task is determined i.e. how much output can be produced by a worker in a given time.
If the work is done within the time allowed by the expert and upto the given standard of quality, the workman receives extra compensation (usually 20 to 50 per cent of the time allowed) in addition to his day’s pay. If it is not done in the time set or not upto the given standard of quality, the workman receives his day’s pay only. The danger is that unscrupulous employers may use their powers to fix the standard as means of exploitation.
12. Emerson Efficiency System:
In the well-known Emerson Efficiency system the bonus begins at a specified level of production, for example 70 or 75 per cent of the standard.
Workers who do not reach the specified level are paid at the ordinary time rate, but above that level, instead of a straight piece rate, payment is on graduated scale, providing what is essentially a time rate which increases slowly at first but more rapidly as the workers approach 100 per cent efficiency.
In other words, workers who do not reach the specified level are paid ordinary time rate i.e. daily wages, but above that level bonus is also paid, which gradually increases with the increase in production or efficiency.
(i) No bonus is paid to a worker, whose efficiency is 70% or below.
(ii) Suppose also 100% production or 100% efficiency is equal to = 800 units of production.
(iii) Now when production is 400 units, efficiency would be = 50% at this. The amount of wages at this level would be equal to daily wages and no bonus is paid at the efficiency.
(iv) When production is 600 units, efficiency would be equal to 75%. The amount of wages at this level would be equal = (daily wages + 1% bonus).
(v) When production is 700 units, efficiency would be equal to = 87.5%. The amount of wages at this would be equal to (daily wages + 8% bonus).
(vi) When the amount of production is 750 units, efficiency would be equal to = 93.5%. The amount of wages would be equal to = (daily wages +14% bonus).
(vii) When production is 800 units, efficiency is equal to = 100%. Total wages at this level = (daily wages + 20% bonus).
It is thus, obvious, that the rate of bonus increases as the efficiency of the worker increases. Moreover, the rate of increase in bonus with the increase in efficiency is progressive or graduated.