This article throws light upon the top five methods of wage payment to employees. The methods are: 1. Time Rate System (Fixed Salary Method) 2. Piece Rate System 3. Salary plus Commission on Sales 4. Profit Sharing System 5. Non-Financial System.
Method # 1. Time Rate System:
It is a system where wages are paid on the basis of time spent by workers on the job. Time may be spent in hours, days, weeks or month, that is, wages may be paid per hour, per day, per week or per month. Total wages are determined by multiplying wages per unit of time with total time spent on the job.
Wages = Rate per unit of time x Total units of time spent
If wages are determined on hourly basis say Rs. 100/- per hour and a worker works for 8 hours a day, his total wages will be Rs. 800 (Rs. 100 x 8). If wages are determined on daily basis, say Rs. 500/-per day and a worker works for 20 days in a month, his total wages for the month will be Rs. 10,000 (Rs. 500 x 20).
This system of payment rewards experience rather than performance. Irrespective of the abilities of employees or the quality and quantity of performance, time rates focus on time spent on the job. It is usual to find that most of the organisations pay fixed salary to employees based on fixed number of hours they spend on the job. However, there is increase in salary as there is a scale of pay along which the employee moves with increments every year until he reaches the maximum of the scale.
Merits of Time Rate System:
Time rate system of wage payment has the following merits:
It is simple to understand. Workers can easily understand it and, therefore, feel satisfied with the amount of wages they earn.
(b) Quality work:
This is a good system for doing quality work. Workers are not in a hurry to finish their work. They work slowly and do not compromise with quality of work. It does not emphasise on quantity of output at the cost of quality.
(c) Reduction in costs:
Quality work reduces wastage and cost of supervision. This reduces overall administrative costs. It also helps in predicting the labour costs as fixed amount is paid to employees. Number of hours per day are usually fixed and do not vary frequently.
(d) Promotes sense of unity:
Workers working for same time get same pay. This promotes unity amongst them. Differences in pay are due to incremental scale or different positions.
(e) Sense of guarantee:
Unless a worker is absent from work, this method assures wages irrespective of output. Even if he cannot produce the desired units of output, his wages are not affected if he works for fixed hours a day. There is, thus, stability of job. People know there will be gradual increase in rewards within the grades.
Limitations of Time Rate System:
Time rate system of wage payment suffers from the following limitations:
(a) Affects production:
As workers are paid on the basis of time, they do not hurry to complete their jobs. This negatively affects production.
(b) Affects efficiency:
The system makes no distinction between efficient and inefficient workers. As efficient workers are paid the same amount (who produce more) as inefficient ones (who produce less) provided they work for same time, the efficient workers tend to slow their speed of work. They have no motivation to become more productive.
(c) Closed supervision:
Workers tend to be slow and take time to complete the work. This increases control and supervision over their activities. The cost of supervision is, thus, high.
(d) High cost of labour:
Labour cost fluctuates for same units of output. This affects cost of products and their prices (and thereby profits).
(e) Employer-employee relations:
Employers want employees to complete the work fast but employees work slowly as they have no incentive to produce more. This strains employer – employee relations which affects organisational efficiency.
Suitability of Time Rate System:
The time rate system of wage payment is suitable in the following cases:
(a) Where quality of goods is to be maintained.
(b) Where artistic work like carving is to be performed.
(c) Where workers are new to the job. Beginners learn to work without contributing much to output.
(d) Where skilled work (computer operations) needs to be performed.
(e) Where work cannot be measured in terms of output like wages to gate man, machine operator, typist etc.
(f) Where production is time consuming because of frequent movement of goods from one machine to the other.
Method # 2. Piece Rate System:
It is a system where wages are paid on the basis of units (or output) produced. It does not matter how much time is spent on producing these units. The units may be expressed in terms of number or weight. Wages are, thus, related to work and not time. Total wages are determined by multiplying wages per unit of output with total number of units produced.
Wages = Rate per unit of output x Total number of units produced.
If wage rate is Rs. 10 per unit and a worker produces 100 units in a week, his wages for the week will be Rs. 1,000 (10 x 100). Another worker who produces 120 units in the same time will earn Rs. 1,200 (10 x 120).
Forms of Piece Rate System:
Piece rate system of wage payment can take the following forms:
(a) Straight piece wage:
In this method, workers are paid according to the number of units produced by them.
(b) Group piece wage:
If output is produced by a group of workers, wages are paid to the group as a whole. Share of each individual is determined on the basis of his contribution to the group effort. If, for example, a group of five workers earns Rs. 5,000 in a week and all the workers have equal share in group earnings (one-fifth), every worker will be paid Rs. 1,000 as his contribution to group effort.
Merits of Piece Rate System:
Piece rate system of wage payment has the following merits:
(a) High output:
This system provides incentive to produce more. Employees are motivated to put extra efforts to earn more.
(b) Low cost:
As workers work fast, cost of supervision is low. Cost of production is also spread over larger number of units. This reduces cost and increases profits.
(c) Efficient handling of machines:
Employees work on machines carefully. They know that mishandling will slow the production and their wages.
(d) Rewards related to efforts:
It distinguishes between efficient and inefficient workers. Those who produce more are paid more. Though everybody working on the same job does not receive the same income, there is fairness in the system of payment as rewards are related to production.
(e) Optimum utilisation of time:
Workers do not work at leisure. They make best use of time to produce more in order to earn more.
(f) Easy acceptance to change:
Workers accept changes in methods and techniques of production. New methods result in more production and more wages.
Limitations of Piece Rate System:
This system of wage payment suffers from the following limitations:
(a) Low quality:
In the effort to produce more (to earn more wages), workers may compromise with the quality and safety standards. They produce quantity rather than quality. Increase in output may increase the scrap rate. For this system to operate, thus, there should be quality control mechanism in the organisations.
(b) Mishandling of tools:
Workers hurry with production processes. They want to produce more and in doing so, they may mishandle the tools and machines. This increases maintenance cost of tools and equipment’s.
(c) Loss for beginners:
Those who have just begun to work on jobs may not be able to produce as much as others can. Their wages are, thus, lower than others.
(d) Long-run perspective:
Maximising output puts physical and mental strain on workers. This can negatively affect their health which is bad for the organisation in the long- run.
Continuous effort by employees to produce more may result in over production. Unless there is corresponding increase in sales, money gets blocked in stock.
(f) Discrimination amongst workers:
Though efficient workers should be paid more than inefficient ones, this system develops conflicts amongst inefficient workers. This may result in inter-personal jealousy and rivalry and make the work place unfriendly.
This system is not suitable for all types of jobs. Output cannot be easily measured in certain jobs like service sector and managerial jobs. Spending time, effort and skills on the job are more important variables than quantity.
Suitability of Piece Rate System:
Though piece rate system is better than time rate system, managers must scientifically determine wages per piece. Scientific methods involve time and motion studies to determine the piece wage.
This system is suitable in the following cases:
1. Where output can be determined in terms of number of units.
2. Where quantity of output is important than quality.
3. Where production processes do not require specialised skills.
4. Where work procedures are standardised in nature.
Time Rate and Piece Rate Systems of Wage Payment:
Time rate system
1. Wages are determined on the basis of time spent by employees on the job.
2. It does not distinguish between efficient and inefficient workers.
3. It is suitable where quality is important than quantity.
4. It requires supervision to ensure that workers do not waste time.
5. It ensures efficient handling of machines and tools.
6. Workers work at ease. They work slowly.
7. It results in high cost of production.
Piece rate system:
1. Wages are determined on the basis of units produced by employees.
2. It makes distinction between efficient and inefficient workers.
3. It is suitable where quantity is important than quality.
4. It requires supervision to ensure that workers do not overproduce goods.
5. It may result in inefficient handling of machines and tools.
6. Workers work fast. They strain themselves.
7. It results in low cost of production.
Method # 3. Salary plus Commission on Sales:
In this method of paying compensation, direct salary is paid and commission is paid in addition if the employee makes contribution above a certain amount. This method attempts to combine the merits of both salary and commission method and minimize their limitations.
The employee is assigned a fixed quota to be achieved in a certain time period. Salary is paid for achieving the targeted quota and fixed percentage of output is paid as commission if output is above the target. This system of payment, thus, ensures direct salary and a motivation system by providing incentives to increase sales.
This system has the following merits:
1. It provides security of return as employees are sure to get a fixed amount of salary.
2. It encourages them to work more as they get commission if they achieve more than the target.
3. It provides satisfaction to employees as it considers efficiency. Those who work more earn more.
4. Incentives are linked to targets as well as quality of performance as desired by the superiors. Linking pay to performance that can be measured is a fair system of rewards rather than the one which does not distinguish between the high and low performers.
5. It saves operational costs as organisations targets to reward only those who perform well.
6. High performers are motivated to work as they know commission is related to productive effort and low achievement is discouraged.
7. It promotes result-oriented culture in the organisation with focus on activities that are valued by the organisation.
It suffers from the following limitations:
1. Since a fixed amount of salary is paid to all the employees, those who are not attracted by extra commission do not work to increase the output.
2. It increases administrative work for the company as separate record has to be maintained for each employee.
3. The focus is more on individual performance than group performance which is essential to deal with complex and interdependent business situations.
4. This system may promote resentment by trade unions. Management and union may have conflicts and unions object to individualistic nature of rewards rather than the spirit of collective bargaining.
This system of paying compensation is adopted by consumer goods companies as they promote extra effort by salesmen by paying them more. Some industrial product companies, financial services companies and insurance companies also adopt this method of payment to get more business from clients.
Method # 4. Profit Sharing System:
Under this system of payment, employees share profits of the company, besides a fixed salary. It is adopted by companies that produce high value goods with high expenses and high profit margins. Employees are given a share in profits rather than commission on direct output. They attempt to reduce the expenses so that profit margins increase and their remuneration also increases.
This system of payment can make the wage costs variable. Employees have incentive to work hard and share the benefits in good times. As they would also have to share the losses in bad times, the system ensures that compensation is safeguarded during adverse conditions of fall in profits.
Share in profits is paid in addition to existing salary. It promotes employees to use the resources carefully and avoid wastage as small as switching the lights and fans when not in use or keeping the machinery off when material is not being processed.
Method # 5. Non-Financial System of Compensation:
Under this system, employees do not get financial incentives for promoting the targets. They are given incentives by way of promotion or fringe benefits like credit card, club facility car, holiday entitlement, health insurance, flexible working hours, loan subsidies etc.
Companies also conduct training programmes for them preferably outside the company premises to break monotony on the job and make them feel part of the company team. The sense of oneness and belongingness to the company motivates them to work for the company. Some employees are even sent abroad for training programmes.
Companies also hold ceremonies to felicitate outstanding employees for their jobs by offering them awards and recognition in exotic hill stations or five-star hotels. These awards are given by famous dignitaries which gives the necessary boost to the employees. Thus, non-financial incentives are a way of managing rewards.
They are the substitutes for financial returns and adjusted in the overall compensation package of the employees. Employees have the flexibility to choose from the list of benefits to which they are entitled. However, these schemes do not apply universally to all employees in the organisation. The list of benefits varies for people working at different levels.