Methods Used for Making Wage Payment to Workers | Essay | HRM

In this essay we will discuss about the top three methods used for making wage payment to workers. The methods are: 1. Time Rate Wage System 2. Piece-Rate Wage System 3. Incentive Wage System.

Essay # 1. Time Rate Wage System:

Under the scheme, wages are determined according to the time which the worker spends on the job assigned to him it is like the employer buying the employee’s time. This system is also known as Day Work System or Straight Time Rate System of wage payment. The unit of time may range from one hour to one year. Time wages are generally taken to mean the sum total of an hourly rate times the number of hours worked. Salary refers to compensation on a weekly, monthly or annual basis.

Wages are calculated at a pre-determined rate per hour, day, month or a year. The actual earnings due to the worker obviously depend on the time he engages himself with the work given to him. In this system, therefore, the unit of time and the rate are the significant features.

E = RN, E = Total earnings, R = Rate per hour, month, day, and N = Number of hours, day, etc. worked.

Rates and units of time vary according to the grades of employees. The higher the grade of the employee, the longer is the unit of time. Annual contracts are made for payments to managers and other high officials though payments may be actually made in monthly installments.

Usually for categories like engineers mainly monthly rates are fixed. For other categories, the day, hour or weekly rates are taken as the basis. Rate also varies according to the grade of the workers. Higher salary scales are provided for skilled, supervisory and managerial grades.

Time scales are laid down for various categories of personnel so that they are compensated in suitable terms for their skill, executive responsibility, administrative decisions which their position calls for. Annual increments are granted in the scale so that additional year of experience would bring an additional remuneration. Opportunities are also afforded for meritorious workers to move into higher grades.

Advantages of Time Rate Wages:

The advantages of time rate wages may be summarised as under:

1. Wage calculation and administration is easier since wages are not required to be fixed after measuring the output produced by individual workers. This method of wage payment implies only laying of standard hours of work and fixation of time-tied rate applicable for different grades.

2. It provides a guaranteed minimum remuneration on the basis of time for which they have worked, irrespective of the output turned out by them.

3. This system of wage payment is particularly encouraging to beginners since remuneration on the basis of hours worked is paid to them. If their remuneration is directly linked to the output the beginners would not have secured any wage because it is not possible for novices to pick up the work in initial days of their joining duties.

4. Since there is no necessity of hurry in somehow increasing the output, there will be no tension for the workers; consequently, they can pay more concentrated attention on quality of the product or service.

Disadvantages of Time Rate:

1. The main drawback of this method is lack of incentive for higher productivity. Intelligent personnel may not evince maximum interest in their job since there is no particular stimulus under this method. This method does not make any distinction between meritorious and mediocre workers of a specified category and pays them uniform time rates.

Employer always seeks to pay the minimum possible time rate and as such even the best of the workers would not be prompted to show their maximum possible talent. As Kimbal and Kimbal put it. Employer who pays only the rate earned by the poorest man may get only the output he pays for, every from his best men. Absence of linkage between output and rate of pay obviously does not provide stimulus for higher output.

As Yoder very aptly puts it, “The stimulation of performance among employees who are working on an hourly or daily rate is frequently difficult for they may conclude that no direct and immediate relationship exists between their output and their rate of pay. Thus this wage system does not ordinarily bring about increase in output.

2. Due to absence of direct linkage between the output and the rate of wages of worker, time wages “may not allow exceptional employees to earn as much as they might under other systems.” Yoder observes, “All employees are necessarily reduced to something approximating their average value so that exceptional producers are thus penalized”.

3. Time wage pose the difficulty of regulating labour costs. Since no precise relation exists between output and wage payments, there will be uncertainty as to the possibility of producing enough to cover the elements of cost including the labour costs. Labour costs may become more compared to the rate of physical output production contributed by the personnel.

4. This method of wage payment will tempt the workers to resort to “go slow” tactics, often deliberately. Employees will be prone to slow down the rate of production, in order to prolong the work process. This tendency will have deterrent effect on output levels and overhead costs.

5. Although the workers are not rigidly required to Keep up to a production schedule, time wages will also not provide the needed incentive to them to maintain and improve the quality of the output.

6. Close and constant supervision and timely executive action will become inevitable to secure reasonable contribution from the workers in terms of quantity and quality of the product. Because time rates offer no special incentive, they increase the responsibility imposed upon foreman who must see to it that employees are encouraged to do their best.

Suitability of Time Rate:

In spite of the above noted defects this method of wage payment has to be adopted under the following circumstances:

1. When the units of output per worker are not capable of being measured.

2. Where delays in work are frequent but are beyond the control of the employees.

3. Where special emphasis is laid on quality of the product.

Essay # 2. Piece-Rate Wage System:

Piece wage system envisages payment on the basis of output turned out by the employees. Wages are related directly to the skill, effort and results realised by respective employees.

Standardised piece of work or job is assigned to the workers and wages are paid on completion of the job concerned with them. “The piece rate wage in its simplest form represents a payment of so much per unit processed.” In piece work system the payment is made for the amount of work performed and not for the time expended.

As Kimbal and Kimbal put it, job capable for being measured in physical terms is standardised and a rate per piece is agreed upon. The earnings of the workers represent the number of pieces completed by them multiplied by the rate prescribed for each piece. If N = Number of pieces produced and r = rate per piece, then the worker’s earnings would be expressed as E = Nr.

Advantages of Piece-Rate Wage System:

Advantages of this system are given below:

1. This system of wage payment stimulates higher rate of production since wages are related to levels of productive performance. Incentive for higher rate of output is the most marked feature of this method.

2. Meritorious workers are enabled to increase their earnings by maximising their performance in terms of jobs allotted to them. Merit, skill or talents are directly rewarded under this method of payment according to results scored in performance of the jobs. It apparently restores to the ambitious workman the opportunity to secure increased compensation due to him on account of his greater skill and diligence.

3. This method virtually eliminates the tendency of go-slow policy on the part of workers because slower the rate of production, lower will be the wages accruing to them.

4. Output targets can be reached with greater degree of certainty by linking payments with the jobs completed by the workers.

5. This method of wage payment facilitates strict control over costs by basing them on output recorded. Recording and cost-accounting would be easier. “Piece rates are convenient from the management’s standpoint in that they simplify the measurement of labour costs and permit ready forecasting of such costs.”

6. As this system sustains and stimulates higher production, the cost per unit of output tends to decline with every increase in production because “the increased production is obtained with practically no increase in overhead costs.”

7. Since workers have no alternative except to complete the jobs as per instructions due to the linkage of wages to output the need and responsibility of supervision would be reduced.

Disadvantages of Piece-Rate Wage System:

Following are the disadvantages of this method:

1. Under the straight piece-wage plan, no minimum remuneration is guaranteed. If due to reasons beyond one’s control delays occur in performance of the jobs, concerned worker would have to go without any remuneration.

2. Beginners and average workers will not be able to earn reasonable wages because of their inability to complete the work as fast as their experienced counterparts do.

3. Piece rates cannot be adopted in new processes where production levels are not precisely assessed and determined.

4. Since workers are prone to step up output as much as possible to earn more wages, quality of workmanship is likely to be ignored. Quantity will be over-emphasised at the cost of quality unless close supervision is maintained.

5. Since wages are linked with output there will develop a tendency among workers to labour hard and overstrain themselves to record higher and higher output to get increased wages. Overwork affects the health of the workers. “Piece rates would encourage a disregard for essential health considerations.”

6. Piece rates are unsuitable in circumstances where work is intermittent and job cannot be standardised.

7. This system is said to awaken greed in the workers each trying to overtake the other. Since capacities of workers widely differ, their earnings as per piece- rates also vary widely causing dissatisfaction among them.

8. Trade unions very often oppose this system of wage payment on ethical ground that it will lead to rivalry among workers and destroy brotherly feeling among them.

Suitability of Piece-Rate Wage System:

This method can be justifiable adopted under the following circumstances:

1. When units of output are readily measurable.

2. When an explicit relation exists between employee’s efforts and the quantity of output.

3. When the job is scientifically standardised, the flow of work is regular and consistent and when breakdowns are the least.

4. Where it becomes inevitable to forecast accurately the labour-costs per unit.

5. Where quality consideration are comparatively less significant then quantity targets.

Difference between Time and Piece-Rate Methods:

The difference between the two is given below:

Essay # 3. Incentive Wage System:

Incentive method usually implies the payment of a guaranteed minimum irrespective of the output plus additional remuneration for larger output, time saved, costs reduced and better workmanship. Many incentive plans constitute mostly the combination of time-and-piece-rate systems of remuneration.

The objectives of incentive plans are to assure a minimum sum of earnings to give sufficient scope for talented workers to increase their emoluments through quicker, economical and superior performance and to establish a reasonable link between labour costs and output. Incentive plans envisage a basic rate usually on time basis applicable to all workers and incentive rates payable to the more efficient among them as extra compensation for their meritorious performance in terms of time, costs and quality. The incentive rates may take the form of bonus or premium.

Bonus means the payment to workers of the entire benefit accruing from savings in costs, time, improvement in quality, etc. Premium means that the benefit accruing to the firm as the result of higher output or better quality is shared equally or on some agreed basis between the management and the workers.

Fixation of basic rate, laying down of standard time, determination of incentive rates and deciding about the scheme of sharing or imparting the benefit to the efficient personnel are the highlights of incentive plans.

Essentials of a Good Incentive System:

A good incentive, system should have following essentials:

1. It should be designed after consultation with the supervisors, employees representatives, etc.

2. This system should be simple and intelligible to the employees.

3. There should be a clear-cut description of the standard job in such a manner as to lay down the best and the most economical method of doing a job in the context of existing equipment or the expected addition and improvements of the existing equipment.

4. The standard task in terms of output and time of performance should be laid down on the basis of accurate time studies.

5. Fair rates on hourly or daily basis should be guaranteed to the workers to assure for them the reasonable earnings essential for suitable standard of living.

6. Incentive rates or scales of bonus or premium should be determined preferably by job-evaluation techniques.

7. Payment schemes should make due allowance for ‘wasting time’ caused by delays beyond the control of the employees.