The evolution of forms and systems of remuneration reflects the long search for a balance of interests of employers and employees. The form of payment is an important element in implementing its reproductive and incentive (motivational) function. And important is not only the amount of wages, but also how and by what rules it is formed.
Let’s consider the problem that exists since the appearance of the wage labor: how to pay for it in the best way.
The basic forms of wages are piecework time-based forms. Multiple payment systems are based on a combination of these two forms of payment. In different periods of industrial civilization prevailed then one or the other form.
Wages has various functions that can be implemented with the help of the systems based on piecework or time-based forms of payment. Furthermore, we must distinguish the appropriate form of payment for both the employee and the employer. Their interests may coincide in some situations but sometimes can be opposite. The most important function of wages for the employee is reproductive one and for the employer the incentive function of wages is of great importance.
Which of the two forms of remuneration is better and more effective in a modern market economy?
At first glance, the piecework form of payment fully meets the interests of the employee and the employer, because the value of earnings depends on the amount of products or services made (sold), the results of labor and productivity. Direct relationship between the results of labor and the value of remuneration is a real advantage of the piecework form of payment.
The employer’s interests are successfully implemented because the employee is interested in increasing production and in this respect it should not be controlled. If the employee for any reason reduces production, he looses his wages first of all. Consequently, his risk is higher than the risk of the employer. If we consider that the piecework form of payment attracts the workers willing to work hard and intensely, it can be perceived as a sort of market signal of the desire of the employee to work productively .
The employee’s interests are implemented due to the fact that he has a real opportunity to increase his earnings by doing more work and increasing labor productivity. In addition, the work based on piecework form of payment can be given almost to any employee, regardless of his reputation, health or documents (e.g. harvesting, unloading cars etc.). The risk of the employer in such cases is small: the employee gets some equipment (basket, box, bag etc.) and earns as much as he does.
In piecework form of payment the utility of the employee depends on his abilities. The research of the American economists indicates that the productivity of workers with piecework form of payment is higher than with the time-based.
So why since the middle of the 20th century the amount of workers with piecework form of payment in most developed countries declines rapidly? For example, in 1950-70 their share in the U.S. decreased from 70 to 30%, in France (since the early 60s ) it decreased from 40 to 15%.
The fact is that piecework form of payment causes a number of disadvantages and creates a lot of problems both for employees and employers:
- It can be difficult for the employer to take into account factors that are beyond the control of the employee but affecting production (illness, equipment failure, disruptions in supply, weather conditions etc.) If the earnings doesn’t depend on the results, he will hardly want to do his best. It must be taken into account that the increasing of the production of the workers with the piecework form of payment depends not only on their own efforts and improvement and development of their abilities. It is determined by the totality of the effective functioning factors of the particular workplace – its technical, organizational, economic training. The result of work of the employee with the piecework form of payment reflects the work of engineers, support workers and many other professionals.
- There is also a problem of correlation between employee efforts and employer’s goals. Not every aspect of employment is observable or measurable. How to measure, for example, honesty, courtesy, friendliness, good manners, devotion to the interests of the company? Establishment of any evaluation criteria can lead to the fact that the employee will strive to improve aspects that meet the criteria, ignoring other aspects of the job not measured quantitatively.
- A serious disadvantage of the piecework payment for the employer is a danger that in the pursuit of quantity of production workers will not pay attention to its quality. Costs for quality control of products (services) may negate the savings on the other forms of control.
- The system of piecework payment links the earnings of the employee with his individual work, ignoring the work of the department, unit or organization as a whole, which affects the collective motivation and group work. The weakening of the sense of belonging to a community occurs. The success of the colleagues and the overall performance of the firm is not very important for the worker with the piecework payment. He has no incentive to achieve results in the long run, it is important how much he earns at this very moment. One consequence of this is the high turnover of the staff.
- Often problems with the incorrect use of equipment occur. Excessive haste of workers leads to the equipment failure, breach of safety standards, an increase in injuries, overuse of raw materials. Some companies abroad even require the use of earners’ own tools or machines in the work.
- It’s not easy to set reasonable standards of output norms, especially when reviewing them during the introduction of new equipment . This is especially actual for industries with frequent changes of products and technology.
- At the same annual rate of salary the employees prefer time-based form of payment. Most of them have a natural aversion to risk and having financial obligations associated with the regular cost (flat fee, buying food etc.) prefer greater certainty of earnings. In this regard, the transition to the piecework form of payment requires leveling of the differences in wages that compensate workers worry about possible fluctuations in their earnings, which will bring additional costs to the employer. By the way, this also explains why workers with the piecework form of payment have higher wages than the ones with time-based form of payment.
- When using the system of piecework payment employees are often face the so-called “ratchet effect”. It is as follows. Worker produces more output than company expected. The manager connects this with the fact that the work is not too heavy and therefore wages is too high. That’s why there is a high probability that the wage rate decreases.
- When using the piecework form of payment it is difficult to measure an individual output. If the quantitative aspects of the work can be measured objectively, the quality often requires subjective judgment. If only part of the functions performed by the employee can be objectively measured, then the other unmeasured functions will be ignored. But how to measure an individual output of the worker collector on the conveyor? In this case, group incentives are more appropriate.
In this regard it should be noted that in addition to the individual form of piecework payment, companies abroad are increasingly used to stimulate groups and various profit-sharing system – with an emphasis on the group reward and not on the individual workers. A group form of piecework payment allows to closely integrate the interests of the employee and the employer by the means of linking the collective earnings to the performance of the company. The main problem connected with this is the “free-rider problem”, when laziness of some workers is compensated by the diligence of others, which certainly doesn’t contribute to the motivation of the latter. This problem is easily resolved in small groups. But what if the team is rather big, and some employees are not too sure about the diligence and performance of others? The creation of the atmosphere of belonging (to the interests of the organization) can help in this situation. It’s not so easy to do when using a piecework form of payment.
The managers should be properly encouraged for the performance of their departments. But here comes the problem of measurement, for example, the result of the manager over what period should be evaluated? Foreign experts believe that it is better to take into account one year results of the manager, but the results over the past few years. It is also recommended to link the leader’s wages to the cost of the company shares, bringing together their interests with the interests of the shareholders.
As you can see, the piecework form of payment has many disadvantages. Although there are no such disadvantages in the time-based form of payment, it also has its own disadvantages.
The wide spread of time-based form of payment is explained by many factors, the most important of which is the scientific and technological progress, amending the technology and the organization of the production. The division of labor and specialization becomes deeper, skill requirements rise, including the service sector. More often it is difficult or impossible to distinguish and quantify the results of the individual employee work from the general results. The manufacturing process is often strictly regulated. Sometimes there is no possibility of increasing the output and sometimes it is not even necessary, especially if the increase in output can lead to poor quality or if the company solves the problem of saving material resources.
An important advantage of the time-based form of payment for the employer is reducing of quality control cost. In this case it’s easier to form a sense of belonging to the interests of the entire organization of the employee (corporate patriotism). It reduces staff turnover and such models of staff motivation that “work” only while long-term cooperation of the employee and the company can be used.
Time-based form of payment is a guarantee of a relatively stable earnings to the employee. The team in which time-based form of payment is used, is usually more cohesive as it has less staff turnover and the economic interests of some workers rarely confront the interests of others .
But it also has a lot of problems. The employee actually receives the money for the presence at the workplace, he has no incentive to productive work. There is a need to overseer, who controls the labor process and the volume of output. But it is very expensive, reduces the possibility of specialization. The observer must have sufficient information. Sometimes detailed control can be simply impracticable. Supervisors may conspire with those workers whom they have to control, so they also are to be controlled.
In the conditions of perfect competition the companies that use the piecework form of payment, as well as the time-based form of payment, will receive the same, normal profit. While firms that use time-based form of payment, will be unable to pay the costs of control (the value of their profits would be lower than normal and they go bankrupt), and the costs will be covered by the workers from their wages. By the way, it is another explanation of the lower earnings of the employees with the time-based form of payment. The choice of the form of payment system may depend on the costs of control: the companies with high costs would prefer the piecework form of payment, and firms with low costs will choose time-based one.
Using time-based form of payment, i.e. payment only for the presence at the workplace, the employer bears the risk of fluctuations in the performance of the employee. A productive worker increases profit of the company, non-productive – on the contrary, but the wages they have are the same. It’s more difficult to link the work to the final result. In addition, workers can put their own interests above the interests of the consumer, which in the long run can bring harm to the company.
The piecework form of payment in its pure form is reasonable when a person works independently and produces a homogeneous product. In today’s integrated and highly mechanized production, which uses mainly intellectual labor rather than physical, it is a rare situation. Nevertheless, the piecework form of payment is used in light industry and trade. It can be successfully used in mass production, where workers perform simple repetitive tasks, since in this case it is easy to measure the results of their work and put a payment in direct dependence on the output. The piecework form of payment is used if it is necessary to encourage the workers to further increase production volumes, if there are quantitative indicators of production, which the workers are able to increase.
In the spheres related to the provision of services the time-based form of payment is often effective, because it is difficult to determine the scope of services provided to customers by the individual employee. Time-based form of payment is reasonable in such circumstances when the employee can’t influence the growth of the production. With this form the labor of leaders, engineers and technical workers is paid. Time-based form of payment is effectively used today in the remuneration of highly qualified professionals working in services (lawyers, psychiatrists), the final result of the activities of which affects their professional reputation.
The form of payment is an important element in implementing its reproductive and incentive (motivational) function. And important is not only the amount of wages, but also how and by what rules it is formed.
Managers should consider advantages of each form of payment and the possibility of the negative effects and to use the form, that allows to intelligently combine the interests of the employees and the organization.