What’s it: Time-based wage is a remuneration system calculated based on the time contributed by workers. It is usually calculated based on hours worked. Thus, the total wage paid to each individual is equal to the total hours worked times the hourly rate. Thus, the higher the total hours worked, the greater the compensation received by the employee, assuming a fixed hourly rate. In another variation, rates may be based on daily rather than hourly.
How does time-based wage work?
Time-based wages are an alternative to piece-rate wages. The latter is based on the output produced by workers.
Now take a simple example. Your company offers you $10 per hour. Say, an employee spends 40 hours working during the week. He received equal $400 = $10 x 40 for the week. He will receive more money if:
- Spending more time working, for example, overtime
- Hourly wage rates rise, for example, due to a tight labor market
Time-based wages are usually suitable for some businesses but not others. For example, businesses typically apply it when:
- Output per worker is difficult to measure
- Output is non-standardized
The output produced by each worker is difficult to measure. Examples are hotel receptionists or hotel drivers – and, in general, service businesses fall into this category. They contribute to the business, but their output is invisible to the naked eye. Therefore, it is easier to calculate payments based on how much time they spend working.
Products are not standardized. This means companies attach importance to quality as their selling proposition. Thus, they can sell the product higher than the standardized product.
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And, it requires workers to ensure the quality is up to the company standard. Thus, such work requires more caution than chasing time.
Since they are paid based on total hours worked, there is no reason for workers to rush into work. Instead, they should be more careful in doing their job. They shouldn’t be sacrificing quality for the sake of producing more output. That’s because whatever the total output they produce, it doesn’t determine the wages they receive. So, they may spend more time ensuring the quality meets the company’s requirements.
On the other hand, workers may only go after quantity if the company pays based on the total output produced (the piece rate). They may sacrifice quality to get paid more by producing more output. Piece rate is more suitable for standardized products where quality is not an important consideration.
What are the advantages of time-based wage?
Less harmful to quality. As mentioned above, this pay system allows workers to focus on quality. They don’t rush into work and chase quantity to get paid more.
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More applicable in many cases. Indeed, this compensation system is suitable for jobs where output is difficult to measure. In addition to the service sector, administrative work can also apply it. In fact, when the product is standardized, and the output per worker is measurable, it can also be applied.
Easier cost budgeting. Companies can more easily plan employee cost budgets because it only calculates the number of employees with total working hours.
Conversely, if using the piece rate, the company must estimate the output produced. It may be more complicated because the total output is not only affected by employee productivity but also by machines and production equipment. For example, when the machine is old, the production machine shuts down, causing the production process to stop. As a result, total output – as well as labor costs – did not match the plan.
Measurable income. For workers, they are more comfortable with calculating their income. Whether they are passionate about work or lazy, they get a normal paycheck as long as they spend the same total working hours.
What are the disadvantages of time-based wage?
Calculations are more complex. Unlike payroll, calculating payments to individual employees can be more time-consuming.
Apart from that, it also requires a reliable clocking system. Companies must record the total hours worked for each worker, which can vary greatly between individuals. Some may work normal hours, others may take overtime or leave due to illness.
Then, if wages are paid weekly, the company multiplies each employee’s total hours worked by the individual wage rate. It all requires more complicated calculations than using a salary or piece-rate system.
Pay is not commensurate with productivity. Some employees may work hard to produce more output. Others may be lazy, making their output lower.
But, since both of them spent the same total hours worked, they earned the same total wages. Apart from being inconsistent with productivity, this remuneration system can also be demotivating. For example, more diligent workers may also perceive the company as unfair, affecting their morale at work.
The company should pay supervisors more. Your company needs supervisors to oversee workers prevent their lazy habits. They ensure the workers stay where they are and get the job done. They also ensure workers produce good quality products. Without them, workers may be lazy, which is detrimental to your company.
Then, if you have many workers, you need more supervisors. Thus, you also have to spend more money to pay them.
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