The piece-rate wage system is widely applied in areas with cheap labor. It is not the best system of paying your workers as it pressures them to do more than their capacity to earn better. However, it may also help improve productivity because it forces lazy employees to work properly to get paid. Piece-rate wage system advantages and disadvantages exist simultaneously. Read further to see if it suits your organization.
What is the Piece-Rate Wage System?
Piece-rate wage system refers to paying the workers per piece of product they produce. It may also refer to paying the workers per the duty performed. It is different from hourly wages and does not necessarily depend on how much time you work. Instead, it considers your performance and output to calculate your payout. However, most companies ensure that the worker’s pay is per the minimum wage. They keep a record of the working hours as well. It ensures minimum wage if the employee is not able to achieve assigned goals.
Types of Piece-Rate Wage System
The piece-rate wage system is of two basic types:
Straight Piece Rate System
The straight piece rate system means that the workers are paid for the number of pieces they produce regardless of the time taken.
Differential Piece Rate System
On the other hand, the differential piece rate system is reward-based. In such a system, workers who perform the tasks within the given time get paid better than those who reach their goals past the deadline.
Considerations of Piece-Rate Wage System
The piece-way system has its own conditions and considerations. It is not adapted widely, instead opted for in situations when the tasks are repetitive, and the output quantity has to be high. The organization must make sure to comply with minimum wage and overtime laws. There are a few factors you must consider when going for the piece-rate wage system in your company.
Payment After Task
Opposed to hourly or monthly payments, piece-rate pay depends on paying after the assigned tasks only. It enables the workers to make more money by completing more tasks in a specific period. It is a good choice for those who want to increase their by working more. Yet, the workers must know that they will be paid only after completing the task. Also, the employees might not be paid for an incomplete task in the given time despite 50% completion.
Another factor to consider when thinking of this wage system is that your production is somehow dependent on the workers’ performance. You might assign a task to a set of workers expecting it to be done by the end of the day. But, let’s say three of the workers are slow compared to the others. They might not be able to complete the task in time leading to delayed output.
Independent of the Time Spent
The piece-rate pay system does not directly rely on the time taken to perform a task. The company does not pay the workers depending on their time on the workstation. It may be considered an advantage for the company and a disadvantage for the workers.
Applications of Piece-Rate Wage System
The piece-rate wage system is utilized when:
- The tasks are repetitive
- You need to get the work done sooner
- Not many supervisors are available
- The quality of goods needs to be assessed
- The company has appropriate workstations and machinery
- A fair rate is fixed for the workers
Advantages of Piece-Wage System
While the piece-wage system has its con of dependency on the worker’s capacity, it is manageable. The piece-rate wage system comes with numerous pros like easy calculation of wages, improved production, less wastage of time, etc. Let’s tell you about the advantages of the piece-wage system in detail.
The piece-rate system enhances the employee’s productivity. They work hard to do as many pieces per day to get the best amount in the end. They understand that their performance directly affects their total income and they work more efficiently to get paid more.
Reduced Production Costs
When a set of employees work hard to achieve their targets, you will not need to hire and train more people. Skilled, experienced people reduce production costs. They understand the process and are less likely to make mistakes. They also work vigilantly to give their best output and earn more money.
Less Idle Employees
Let’s say I tell you that each minute of your work at your office will contribute to your salary. Would you waste time sitting idle or gossiping with colleagues? Most likely not.
Piece-rate pay workers typically work without long breaks, so they do not fall short of money at the end of the month. This structure motivates the employees to utilize every moment of their work. It gives you a more productive environment.
When the workers are working per piece at a particular belt, it is easy to quantify production. The management understands the labor cost per product and uses it to make quotations. It also helps the employees to estimate their working capability.
Easy Wage Calculation
It is quite easy to calculate the overall wage when you are paying your workers per piece according to a pre-decided rate. It eradicates the need for calculating the hours worked or leaves taken. The management calculates the wage by multiplying the number of units produced by the pay rate per unit.
When you understand the capacity of your workers, it also makes it easy to calculate and plan the tasks accordingly. You can measure the capability of the employees and assign minimum targets accordingly. The management can also see if they need to employ more people in the department to achieve daily goals.
Disadvantages of Piece-Rate Wage System
Besides some advantages, the piece-rate wage system also has some not-so-favorable features. Here are the piece-rate wage system disadvantages.
Less Workforce Interest
One of the disadvantages of the piece-rate wage system is that many people do not prefer being paid by the piece. If a worker is not feeling well, they might not be able to produce many items. The output affects their income eventually. However, if they work in a monthly-payment setup, they can avail of sick days and join when they feel good.
The race to do more in less time deteriorates the quality many times. While the raw material and processes are validated throughout, your workers might not give their best towards every piece. If they ignore the quality of the products altogether, it can damage the brand’s reputation. Continuously degrading quality may also incur a financial loss to the company.
The employees working in a piece-rate wage system are usually in bad financial condition and working hard to improve their circumstances. Such jobs give them money according to the performed tasks. They do not care about their health or job satisfaction initially. However, they lose interest in the job and feel tired. This leads to discontentment and deteriorating health. They also constantly live in fear of losing revenue if they are not able to perform well any day.
Dependency on Workers
The organization is dependent on workers and divides tasks accordingly. Yet, if one of the workers is injured or sick, it impacts the whole process. The absence of even one worker can disrupt your batch production.
How to Calculate Wage in the Piece-Rate Pay System?
The company usually decides a specific rate per piece for each item and multiplies it by the number of pieces produced by each worker. The worker and the management both keep a record of the daily output.
How does the Piece-Rate Method Impact Performance?
Piece-rate method works on the reward system. It increases productivity and requires less supervision. The employees work hard to get the rewards for their performance.
What are the Limitations of the Piece-Rate Wage?
The piece-rate wage system does not promise high wages to the workers. The organization may also face difficulties in fixing a fair rate. This system does not give a guarantee of a fixed income. The payout of a worker may be high in one month and low in the next, depending on his performance.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.