What’s it: A piece-rate wage is a wage system in which workers are paid based on the output produced. This is an alternative to time-based wages, calculated based on hours worked. This pay system is suitable for businesses where their products are standardized, and quality is not an important factor to consider. In addition, unlike time-based wages, companies can directly relate worker productivity to wages paid. If workers are more productive and produce more output, they get paid more.
How does piece-rate wage work?
Piece-rate wages are based on how much output each worker produces rather than the total time they work. So if they can produce more output, they get paid more.
Companies will usually pay at the normal rate for each output produced. However, if employees reach more than targeted, they will earn extra money according to how many products have been produced.
For example, the company targets output per worker to be 100 units and offers a normal wage rate of $5 per unit. And, if workers can produce more than the target, the company offers a wage rate of $6 per extra unit produced.
Say a worker is in high spirits and can produce as many as 110 units. So, he gets paid $560 = ($5 x 100) + ($6 x 10).
In what business is the piece rate suitable?
Companies in the service sector may rarely use this wage system because the output produced by each worker is difficult to measure. Likewise, administrative jobs are also not suitable to apply it.
And in general, it is widely applied in businesses where:
The output is standardized. The company focuses more on quantity than quality. They sell their products at low prices because quality is not their main value proposition. Instead, they are more concerned with low prices to attract demand. Thus, they will try to increase production to achieve higher economies of scale. And workers will pursue quantity over quality.
Mass production usually applies to this system. Quality has been designed from scratch using computer-aided machines. And, workers only focus on doing the parts at each workstation.
Output per worker is measurable. Companies pay workers according to their contribution, namely the output produced by each. Thus, the company is less likely to pay more or pay less.
On the other hand, if companies use time-based wages, they may pay more or less. For example, lazy and enthusiastic workers spend the same total hours working and, therefore, earn the same payment. As a result, lazy workers tend to get higher pay per output because they produce less output. Meanwhile, his hard-working colleagues earn lower wages per output.
What are the advantages of a piece-rate wage?
Piece rates allow companies to directly link employee productivity with their compensation. If employees are more productive and produce more output, the company pays them more. Conversely, if they are less productive, the company pays them less.
Other advantages of piece rates are:
Stimulate effort. Employees are eager to produce more products to get paid more. They then, for example, devised better methods to produce the product faster. And they are passionate about learning by doing. So, they can pursue more output.
Less supervision. Companies need fewer supervisors. No matter how much time workers spend, it doesn’t affect their pay. Thus, they focus more on total output than on total hours worked. As a result, they are likely to make the most of their working time.
In contrast, workers focus on hours worked under a time-based wage system. As a result, they may be lazy and produce less output. They get normal pay as long as they work according to normal working hours. In these cases, companies usually need more supervisors to ensure they stay on the job.
Easier to increase production. When demand increases, it is easier for companies to meet it by increasing production. The company may just need to increase the wage rate for the extra output to motivate employees to be more productive.
More effective working time. Workers are likely to make the most of their working time, hoping to produce more output. There is no reason for employees to be lazy.
What are the disadvantages of piece-rate wages?
Sacrifice quality. Workers will pursue quantity over quality. And it can be dangerous if they completely ignore quality. Output may not meet the standards required by the company because they concentrate on making products in large quantities.
As a result, the product may not be sold because of poor quality. In the end, it could damage the company’s reputation. And, it is dangerous in the long run because consumers no longer trust the company’s products.
To overcome this possibility, the company may need a quality control system. However, it is often expensive.
Unfair pay. Piece-rate wages require employees to be skilled and fast to perform tasks. If they are too careful in their work, they will not earn as much as those who rush.
Such differences are seen for new workers and old workers. New workers are likely to be paid less because they are less skilled. They don’t have high working hours yet, so they don’t benefit from learning by doing.
Lower pay due to machine error. The pay received by workers does not always reflect their efforts. For example, the machine shuts down because the production facility is old. As a result, it disrupts the production process. And, employees cannot normally work, resulting in less output they produce. In the end, they earn less money even though it is not their fault.
Applicable only to certain businesses. This system may be more suitable for manufacturing. On the other hand, as previously mentioned, it is not suitable for service businesses because output per worker is difficult to measure.
Danger to employee morale. Work tends to be monotonous, and employees are too focused on their respective jobs. As a result, they will spend less time socializing with coworkers. Otherwise, they will only produce less output, and worse, the production process can be disrupted. As a result, they get bored and can lower their spirits.
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