Wage Payment Systems are the different methods adopted by organizations by which they remunerate labour. There exist several systems of employee wage payment and incentives, which can be classified under the following names.
Methods of Wage Payments
There are different methods of wage payments. Wages are paid for work done and this is sometimes measured by the time worked i.e. according to the period of time the worker is employed, and sometimes by output. The former is called “piece wages” and the latter “time wages”.
Under “time wages” or time rates a definite sum is paid for a fixed period of time, that is, wages are paid at a fixed rate per hour, day, week; or other period, and each worker in a given category receives the same payment irrespective of differences in individual output.
Under Piece Wages or Piece Rates, payments depend upon output, each worker is paid according to the quantity of work done by him, and irrespective of the time he takes.
There are also various bonus systems to stimulate production. Piece rates, by which the pay of each worker is proportionate to his output, might be thought more satisfactory than time rates, especially from the point of view of the employer and the national economy and they also seem fair to the workers.
However, they are not suitable for all kinds of work, and also the system is liable to abuse if applied unscrupulously. Earnings are usually higher for workers on piece rates than for those on similar work paid on a time basis, and the danger of excessive speed is not great as the workers are not penalised if they fail to reach a given standard or “target”.
This danger is, however, serious if, as under some bonus system, attractive monetary rewards are paid for attaining high standards of production, and efforts to reach these standards may involve strain resulting in injury to health, increase in accidents, and damage to materials and machines.
Trade unions tend to prefer time rates, though they are parties to many collective agreements which include piece rates where these are suitable for the kind of work done. In addition the risk of speeding and the greater difficulty of regulating piece rates by collective agreements there may be tendency of piece rates to weaken the solidarity of the workers because of considerable differences in earnings.
Many individual workers, especially those who can achieve high output, favor piece rates or bonus payments which, if reasonable fixed, enable them to earn more. Where conditions are suitable employers also prefer piece rates because of their inducement work people to concentrate and to do more work.
There are two principal systems of wage payments:
- Time wage system, and
- Piece rate system
Other systems called premium plans or profit sharing schemes are used with either of these two systems to remunerate the employees and to provide them incentive wages for increased productivity.
Method 1. Time Wage System
Under this system, the worker is paid for the amount of time spent on the job. This is the oldest and most common system and the wages are based on a certain period of time during the course of work. The period of time may be an hour, a day, a week, a fortnight or a month and the wage rate will depend upon the period of time. 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.
Wages can be determined by the following formula:
Wages = Number of Hours worked × Rate per hour
Suppose that a worker is paid at the rate of Rs.8.00 per hour and he has spent 200 hours at work during a particular month. His wages for the month will be Rs. 1.600/.
Under this system, wages are paid on the basis of time spent on the job irrespective of the amount of work done. The unit of time may be a day, a week a fortnight or a month.
In the past, daily wages have been the most common basis and, therefore, it came to be known as the ‘Day Wage System’.
(i) This method also avoids wasteful handling of materials and tools. In the absence of rough handling of machinery, repairs and maintenance expenditure is low. Workers can adjust the pace of work so that there is no injury to the health.
(ii) Learners can concentrate on learning the best methods of work and their earnings are not dependent on the amount of work.
(iii) It is the simplest and the oldest method. It is easy to understand and workers can easily compute their own remuneration.
(iv) Unions prefer time wage as it does not differentiate between efficient and inefficient workers. A sense of equality and solidarity is created among them.
(v) Where work done is of an intangible nature, e.g. mechanics, designer engineers, service, etc. it is difficult to measure output accurately and standards of output cannot be laid down.
(vi) The plan is economical as no detailed records of output are required. Clerical work in the computation of wages is minimum. The employer knows the cost of labour.
(vii) As there is no pressure to speed up production, the quality of work can be kept high. A worker can show his skill.
(viii) Earnings of workers are regular and fixed and they do not suffer from temporary loss of efficiency. This gives them a sense of economic security and self-confidence. The worker is assured of a fixed income and can, therefore, plan his expenses accordingly.
(ix) In continuous or assembly line production, the pace of work is beyond the control of an individual worker. Time wage is, therefore, a better method.
(x) It is an objective method and the employer can calculate the wage bill in advance.
Disadvantages of Time System
(i) This system increases the cost per unit of production. Under this system, the cost per unit of production is uncertain because the quantity differs from time to time.
(ii) 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.
(iii) As this system does not make any difference between efficient and inefficient workers, it kills the efficiency of efficient workers.
(iv) Under this system of wage payment, the workers do not make proper utilisation by their time.
(v) As the production is low and the payment to the workers is more, this system increases the cost of production.
(vi) Under this system of wage payment, the quantity of production decreases because the workers do not get any incentive for increasing the production.
(vii) This system requires intensive supervision over workers. It increases the cost of supervision.
(viii) 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 and this system encourages labour unions. Sometimes, these labour unions misuse their powers.
We draw the conclusion that although time workers in the same grade receive the same wages for the day or week for different amounts of work and although the work of each is not measured exactly, they and their foremen have a reasonably clear idea of the amount of work to be done.
In other words, they must approximate to understand standards of output or of steady application to their work, and supervision ensures that this standard is maintained. Those who fail to do so are liable to lose their jobs or be put on to a job with a lower time rate, on the other hand good work can be rewarded by promotion to a higher grade with a better rate of pay.
Thus, although time rates are properly distinguished from incentive system, they have associated with the positive incentives of promotion and the negative of demotion and dismissal. Working at excessive speed is usually more associated with incentives methods than with time rates.
But Richardson also found that during a period of severe unemployment where, because of fear of unemployment, the workers on low time rates and long hours worked at almost intolerable speed and strain imposed by the management, each man knowing that if he failed to keep the pace, there were dozens of men available to take his place.
A foreman or manager who is always forcing the pace and finding fault is responsible for such tension and discontent. Hence, only under exceptional cases time worker is associated with speed.
Method 2. Piece Rates or Piece Wages
Piece rates and bonus systems provide a stimulus to output by varying the payments according to the quantity of work done by each worker or by a team of workers. Thus, workers who produce more receive more. These incentive methods are, therefore, applied when high output is desired, when quality of work is largely controlled by the machines and not by men, or where quality is of secondary importance or can easily be tested by inspection.
As their wages depend upon output the workers in trying to increase production are liable to be careless of quality, and, therefore, somewhat closer inspection of the product for quality is necessary than with time workers, but less supervision of the men to keep them at work is needed.
Incentive methods are suitable where easily defined standardized units are produced in large quantities by repetition work and the output of each worker can easily be counted.
They are effective under these conditions if the quantity produced depends considerably upon the workers efficiency, speed, and concentration on the job.
If overhead costs are high the use of incentives which result in increased output enables such costs to be spread over a larger production and the unit costs are, therefore, reduced.
The work should be regular and continuous so that the worker is not hampered in his efforts to attain a high standard of labour by having to wait for material or because his machine has broken down. Workers on piece rates are likely to protest if their work is interrupted through no fault of their own, and their grievance is legitimate as their power is reduced.
In fairness to the workers, therefore, the management must either organise the work so that interruptions are rare, or where this is not practicable they are agree to reasonable guarantee minimum time payment to cover losses caused by periods of interruption or abandon the piece work system altogether as being unsuitable for such work.
The textile industries provide illustrations of work suitable for piece rates. Thus, in cloth weaving the work is of defined standard and the output is easily measured by a meter on the loom.
The worker can influence the amount produced by quickly repairing breakages in the yarn and by otherwise keeping the looms running well. Quality of work can be controlled by inspection, and where the worker is responsible for defects he can be penalised by a deduction from his earnings, though this should be rarely done, being reserved for repeated carelessness.
Advantages of Piece Rate Wages
(i) This system of wage payment is very easy to understand and very simple to calculate.
(ii) 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.
(iii) This system of wage payment increases the mobility of workers because they can change their enterprise easily.
(iv) 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.
(v) 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.
(vi) The system of wage payment gets more production because all the workers make their best efforts to increase the production.
(vii) 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.
(viii) This system of wage payment minimises the needs of supervision. It reduces the cost of supervision.
(ix) 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.
(x) This system encourages the workers to do more and more work because they get their wages according to their work.
(xi) This system of wage payment justified also because the workers are paid the wages according to the work performed by them.
(xii) This system brings industrial peace also because it satisfies both the workers and the employer.
Limitations of Piece Rate Wage
Piece wage system is, however, subject to the following drawbacks:
(i) The earnings of workers are not stable and they may suffer due to temporary delays or difficulties. They feel insecure and dissatisfied.
(ii) In order to maximise their earnings, workers work with excessive speed. This may affect their health. It also increases the wastage of materials and wear and tear of machinery. The method is not suitable for work of artistic and delicate nature.
(iii) It is very difficult to fix piece wage rates. Employers often cut the piece rate when they find workers are producing large quantities.
(iv) Employees may not stress quality so that rigid quality control becomes necessary.
(v) This system may create jealousy between efficient and inefficient workers. Trade unions do not like it as it affects their solidarity.
(vi) Detailed records of production have to be kept so that the clerical work is increased. The method is not practicable when contribution of individual workers cannot be calculated i.e. construction work.
(vii) The method may lead to industrial disputes. Fixation of piece rates may create controversy. Workers resent loss of output and earnings due to breakdown of machinery or power, non-availability of materials and such other factors beyond their control. Trade unions dislike piece wage system.
It can be concluded that piece rates and other incentive system are satisfactory if applied to suitable kinds of work on the basis of fair time studies, but they are liable to misuse. They have been abused by fixing rates in such a way, that workers could only attain a reasonable level of earning by working at excessive speeds.
Also much discontent has been caused by the practice of fixing a rate on the basis of a time study, and later cutting the rate, which has the effect of lowering earnings or of makings the workers speed up in order to secure a level of earnings equal to that before the rate was cut.
If this is done the system seems to the workers merely a device for speeding, and they may come to the conclusion that however hard they work their earnings will not be allowed to increase much.
Therefore, a fair relationship must be maintained between the earning of the workers different occupations in an undertaking and those in one occupation must not be able, except by working harder, to earn much more than workers in another occupation of similar difficulty, but this should be avoided, not by cutting rates, but by fixing proper rates at the outset on the basis of reliable time studies.
It should, however, be noted that piece rates should generally remain unchanged, except:
- Where a mistake has been made in setting the rate.
- When the price level and as a result of which purchasing power of money has changed.
- Where the conditions of the work have changed making it easier or more difficult.
- Where the basic rate of pay is increased or decreased, whether by collective or individual agreement.
Thus, if an employer buys new costly machines which enable the workers to double their output with no greater effort than before, it would be unfair that the piece rates should remain unchanged and workers gain double earnings.
These high earnings would be badly out of line with those of other work people in the undertaking for whom no improved equipment was available; also if almost the whole benefit from improved methods went to the workers, there would be no increase for the employer to spend money on better machinery and organisation.
If other things being the same, general price level have increased, the purchasing power of the workers would be reduced and, therefore, the workers real earning would be reduced in the same proportion. Hence, the piece rates should change in favour of workers.
Suitability of Piece Rate System:
Piece rate system is suitable in the following situations:
(i) When productivity of the workers is to be increased.
(ii) Where the degree of physical worn is more than the mental work.
(iii) Where output can be measured and quality control system exists to discourage low quality production.
(iv) When methods of production are standardised and the job is of repetitive nature.
(v) Where work does not require personal skills of higher order.
Time wage system is suitable under following conditions:
(i) Where units of output are non-measurable as in case of office work and mental work is involved as in policy working.
(ii) When delays in work are frequent and beyond the control of employees, i.e. where output is uncertain and irregular.
(iii) When quality of work is especially important, e.g. artistic furniture, fine jewellery, etc.
(iv) When supervision is good and supervisors know what constitutes a “fair day’s work”.
(v) When employees have little control over the quantity of output or there is no clear-cut relation between effort and output as in some machine-paced or assembly line jobs.
(vi) When competitive conditions and cost control do not require in advance the precise knowledge of labour costs per unit of output.
(vii) Where machinery and materials used are very sophisticated and expensive.
(viii) Work is of a highly varied nature and standards of performance cannot be established.
(ix) Employees and trade unions strongly oppose incentive payments.
(x) When workers are new and learning the job.
(xi) When collective efforts of a group of persons are essential for completing the job.