Piece Rate Compensation In Human Resources

In practice, the piece rate for a particular completed task in an industrial setting is usually set by industrial engineers, who attempt through time-and-motion studies to determine how many pieces N a standard employee, working at a standard pace, can produce in one hour. A standard hourly wage rate W for the employee will have been set, taking into account the wages paid in the local labor market as well as firm-specific factors, such as a policy of paying efficiency wages, a policy of wage compression, and so on. Then the piece rate for the task will be set at WIN, so that a standard employee, working at a standard pace, will make a standard wage.Advocates of piece-rate compensation will often employ an analogy. Imagine a firm that sources, say, steel rods from two different suppliers, one of which is more efficient than the other. We would hardly expect the firm to pay the second, less efficient, supplier more per steel rod than it pays the first. The cost of producing steel rods is the business of the supplier, not the client firm, which simply wishes to source its steel rods as cheaply as possible. By simple analogy, piece rate compensation is the obvious compensation system to employ because it ensures that the purchaser, the employer pays for what she gets-namely, labor services sufficient to complete a specified task. But labor is not quite the commodity that steel rods are, which is where our five-factor analysis will begin.Most of the problems encountered with piece-rate pay are technological in origin, so this will occupy much of our discussion. Piece-rate pay is ideal when the technology is Simple: There is no ambiguity; there are few or no discernible quality differences in how the job is done; workers are foot-soldiers; employees can't adversely affect the capital equipment they work with; neither training nor cooperation among workers is a serious concern; and there is little extraneous uncertainty connecting worker inputs with the level of output.In piece rate settings more generally, task ambiguity is killing. Quality problems can be killing, unless quality can be monitored reasonably easily and a problem can be traced back to the responsible culprit, who then usually corrects the problem, paying a penalty (or at least going uncompensated for the botched work).Maintenance of capital equipment can be a problem when piece rates are employed, insofar as workers abuse machinery in pursuit of higher output rates.Consequently, in some cases workers are required to purchase their own tools, and in other cases the individual worker is required to pay consumables such as drill bits. Where a substantial amount of cooperation is needed, piece rates generally do poorly. And even when employees work largely independently - think of clothing manufacturing and the individual worker at his or her sewing machine-training new workers can be problematic, due to the opportunity cost this imposes on the trainer's piece rate earnings. A standard practice is to have, on each shift, a "lead" worker who is responsible to help less-experienced workers and whose compensation is based on (or supplemented) time spent training, supervising, and the like.