Wage Payment Systems

2. Piece Wage System

Under piece wage system of payment, wages are based on output and not on time. There is no consideration for time taken in completing a task. A fixed rate is paid for each unit produced, job completed or an operation performed. Workers are not guaranteed minimum wages under this system.

The wages to be paid to a worker can be calculated as follows : Output x Piece Rate.

The quantity produced by a worker will be multiplied by the rate per unit for calculating wages. An equitable piece rate should be fixed for giving incentive to workers for producing more. Different piece rates will be determined for separate jobs. The factors like efforts involved, conditions under which work is to be performed, risk involved, etc. should be taken into account while fixing piece rates.

The piece rate should be reviewed from time to time. These should be linked to price index so that workers are able to maintain a minimum level of real wages. Piece rates should also be revised when competitors do so otherwise there may be a discontentment among workers.

Piece rate system is suitable under following situations :

  1. Where quality is important than quantity.
  2. When work is of a repetitive nature.
  3. When work is standardized and flow of output is continuous.
  4. When production of a worker car be separately measured.
  5. When strict supervision is not possible.
  6. Where production is closely related to human efforts.

Merits of  piece rate system :

  • Wages linked to efforts : Under piece wage system, wages are linked to the output of a worker. The higher the output, higher will be the wages. Workers will try to put in more and more because their wages will go up.
  • Increase in production : Production goes up when wages are paid according to piece-rate-system. Workers will feel encouraged to increase output because their wages will also increase. This increase is fair to both employees and employers. Efficient workers will try to exert their maximum to raise their output.
  • Better utilization of equipment : The machines and other equipment will be put to maximum utilization. Workers may not like to keep the machines idle. The use of machines will also be systematic because any breakdown in these may effect the workers adversely.
  • Distinction between efficient and inefficient : As in time wage system, efficient and inefficient workers are not given equal treatment. Efficient workers will get more because of their better results. Inefficient workers, on other hand, will get lower wages because of low production. There will be sufficient encouragement to efficient workers for showing better results.
  • Less supervision required : Since payments are on the basis of output, workers will not waste any of their time. They will continue to work irrespective of supervision. There may be more and more voluntary efforts on the part of workers and need for supervision is reduced to a minimum.
  • Effective cost control : The increase in output will result in reduction of overhead costs per unit. Some of overhead expenses being fixed, increase in production will reduce expenses per unit. Reduction in cost may benefit consumers in the form of lower price goods.
  • Better planning and control : The certainty in achieving productions targets will improve planning and control. When management is sure of certain quantity of production then it can plan other things with more confidence, it will also ensure better control over production because targets may be regularly reviewed from time to time.

Demerits  of  piece rate system :

  • No guarantee of minimum wages : Under this system of payments workers are not guaranteed minimum wages. There is a direct relationship between output and wages. If a worker does not ensure certain production then wages may also be uncertain. Any type of interruption in work may reduce earnings of workers. So workers are not sure of getting minimum wages.
  • Poor quality of goods : The workers will bother more about the number of units produced rather than their quality. This results in the production of sub-standard goods unless otherwise more supervisors are appointed to keep watch on quality.
  • Not suitable for beginners : The beginners will not be able to produce more goods because of less experience. They will earn much low wages as compared to experienced
    workers because their rate of production will be low.
  • Deterioration in health : Workers may try to work more than their capacity. This may adversely affect their health. They may try to work even when they try not keeping good health because wages are related to production.
  • Cause of dissatisfaction : There may be difference in earning of various workers. Some may earn less and others may earn more. Those who get low wages feel so jealous of others who earn more and this becomes a cause of dissatisfaction among slow workers.
  • Opposition from unions : Piece-rate system of paying wages is opposed by trade unions. There is an unhealthy competition among workers for increasing their wages. It encourages rivalry among workers and it may become a cause of disunity. The existence of unions is endangered when some sections among them feel jealous of others. Unions will never support a system where workers earn different amounts of wages and this becomes a cause of disharmony among them.
  • Difficulty in fixing Piece-Rates : The fixation of piece rates is not an easy thing. If a low rate is fixed then workers may not feel encouraged to increase their production. When a high piece-rate is fixed then it will increase the cost of production of goods. The fixation of piece rate may become a cause of an industrial dispute. It may be very difficult to fix a rate acceptable to workers and management.

Types of Piece Rate System :

Piece rate system may be of three types. These types are as follows :

  1. Straight Piece Rate : In this method one piece rate is fixed and whole production is paid on this basis. If a piece rate of 5 $ per units is fixed then the wages will be calculated by multiplying output by the rate fixed. A worker production 100 units will get 500 $ (100 x 5 $). If production is raised to 120 units then wages will be 600 $ (120 x 5 $). A worker will have to increase his output in order of get higher wages. The rate of payment remains the same irrespective of level of output.
  2. Increasing Piece Rate : In this method different rates are fixed for different levels of production. Higher rates are given when production increase beyond a certain level. For example, a piece rate of 5 $ per unit may be fixed for production up-to 100 units, 6 $ per unit for output between 101-150 units and 7 $ per unit for a production beyond 150 units and so on. There is an incentive to get higher rate for raising production beyond a certain level.
  3. Decreasing Piece Rate : In this method the rate per unit decrease with increase in output, 7 $ per unit may be allowed up-to a production of 100 units 6   $ per unit for production between 101-150 units, 5 $ per unit for an output beyond 150 units and so on. This method discourages workers from raising their output because better efforts are rewarded at lower piece.

3. Balance or Debt Method  

Balance or debt method is a combination of time and piece wage systems. The worker is guaranteed a time rate with an alternative piece rate. If the wages calculated at piece rate exceed time rate the worker gets credit. On the other hand, if time wages exceed piece wages, the worker is paid time wage and the deficit is carried forward as debt to be re-conserved in future.

This method provides a sense of security to the employees. At the same time, an efficient worker has an opportunity to increase his wages. Workers of ordinary ability are given a sufficient incentive to attain the same standard of living, by getting guaranteed time wage, even though the excess paid to them is later deducted from there future credit balance.

This method is suitable in industries where the flow of work is minimum. But rates in this method has to be fixed on the most scientific basis.