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Piece Rates
Pay for Performance

 

The purpose of piece rates is to motivate employee performance in return for a monetary reward.

A simple, valid concept which is centuries old. The purpose of this page is to explain the benefits and the potential pitfalls.

 

Where can piece rates apply? Anywhere work content can be predicted.

Piece work is traditional in factory settings, especially apparel. But other applications abound.

Harvesting trees in consistent conditions such as tree farms.

Agriculture, plant; cultivate; harvest pick and pack. These rates may be set by the state.

Hotel housekeepers, maids

Commercial or home electronics installer.

Energy installation; windmills, solar panels; both commercial and private.

Maintenance with a clear work description such as preventive maintenance. Piecework is difficult to apply to the activity of repair, trouble shooting, maintenance, and warranty because specific content of the work is much less predictable.

Construction piece rates are commonly used, and a JPR article applies to the special considerations. Click on the link to the left to read.

 

Why do incentives work to everyone's benefit?

Incentives are effective employee motivators because most people go to work for money in the first place. Incentives, or piece rates, offer an opportunity for employees to increase their pay by their own efforts both physical and mental.

Web pages report statistically significant improvement with piece rates, such as the page at http://faculty.washington.edu/lanshi/Research/field_experiment_2007_lan_shi.pdf which concludes that tree cutters on piece rate performed from 23% to 36% faster than hourly cutters. This is primarily a statistical report, but that increase corresponds with my own, less formal, observations.

But incentives also benefit a company, who perhaps for the first time will measure labor performance and relate it not only to costs but also to output, and calendar performance, and customer service, and capacity.

Wikipedia has it right when they say "An advantage for the company is that this method of payment helps to guarantee the costs per unit produced, which is useful for planning and forecasting purposes."

 

Piece rates may, probably will, require more careful reporting

A key factor to recognize is that workers on piece rates must still be paid at least the minimum wage, state or Federal; and that all work hours must be considered in the minimum wage calculation. As a result, reporting must record not only the production on which piecework is applied but also timekeeping of all hours, and the arithmetic to assure that the letter of the law is followed.

  Piece rates involve bookkeeping and labor law in addition to the expectations themselves. The company lawyer and CPA must play a significant part in any actions.

 

The bottom line, will incentives pay for themselves?

Let's look at the basic premise, which is that productivity and output tend to increase with incentives. Is that written in stone somewhere? Not that I know of.

Professionally I believe that productivity and output tend to increase with incentives. I do believe that, generally speaking, workers will work harder to earn incentive pay. But we also tend to work smarter for more pay, and we will do that before we work harder. Therefore, you had better make all the smart moves before putting up an incentive. Get rid of waste, delay; set the crew size correctly.

The benefits for incentives for your organization will be unique, so consider the organization's culture, the local community, motivation. If the following factors are present, perhaps incentives would be successful in your situation:

1) The work to be done is well defined and consistent; materials are available; tools and equipment are maintained; quality standards are well understood and enforced.

2) Scheduling and reporting are reliable; payroll is administered correctly.

3) Delay and lost time are quite low.

4) Waste has been already been removed from the process.

If these factors are not present, I do not recommend incentives. As a matter of fact, management may be quite dissatisfied with incentives, as employees will make the improvements that have been overlooked, and collect an incentive because of it, by working smarter and not necessarily harder.

But, even in this scenario, output will rise and projects will be completed faster. Unit labor costs will stay the same, and overhead absorption will probably improve. So, all in all even a "loose" incentive can result in a good outcome for management. A better plan would be to correct the inefficiencies first, then judge whether incentives are needed at all. In any event, balance expected improvement against any extra costs you anticipate.

 

A good sequence, in theory and perhaps for your company, could be:

1. Observe work first; find, judge, and prioritize problems; correct them.

2. Set up reporting forms for high priority / high frequency activities, itemized to isolate actual results. The objective is to determine the actual minutes taken to perform each particular task, over enough jobs to establish a repeatable reliable average. (Note that this time is what occurs, not necessarily how long the job should require.)

Print a series of forms, one for each major task that a crew is assigned. Require employeess to complete a form for each project assigned, each customer. Not only will this report define what people do and how long it takes, it will give insights as to the profitability of each customer, and of each kind of service the company performs. Later feed this information to finance for costing.

Report travel on specialized forms as well.

3. Have employees / vehicles report on the forms daily.

4. Keep score, summarize and build history. Ask questions to clarify and sharpen reporting. Issue results back to the employees.

5. Build intelligence from reports. Look at averages, judge which elements are out of line, or take too long, based on your own experience or further observation. Consider the degrees of difficulty; what is important and what can be forecast or predicted? Build that into expectations.

6. Relate results to project profitability.

7. Then when all these building blocks are in place, consider if the step of incentives or piece rate is likely to be cost effective.

8. You will note that the steps described are similar to any manager or dispatcher's routine; instruct an employee what to do, explain how long it should take, and request a report when done, for the next assignment. That's the way to do it, with the minimum paperwork necessary.

 

Some more sophisticated concepts

 

A. From Frederick Taylor, part of his 1885 brief on Piece Rate. see  

Us industrial engineers always reference our patron saint Frederick Taylor; read here how he explained his piece rate plan. http://www.answers.com/topic/a-piece-rate-system-of-wages

 

B. The worker's viewpoint

For one study on field workers and their thoughts on piece rate versus hourly wage, see: http://www.cnr.berkeley.edu/ucce50/ag-labor/7research/7calag07.htm The comments were made in an agricultural setting, but they accurately reflect the manufacturing floor as well.

 

C. A piece rate agreement is what you make it .

Piece work is nothing more than a agreement, where one party offers what he is willing to pay and another agrees or not.

The typical piece rate in a factory may depend on work measurement, my specialty, but that is not necessarily true elsewhere. There are piece rates for many trades and businesses. These may be time studied, or negotiated, or set near the price that applies locally for the work. In Texas there are piece rates for agricultural workers picking commodities; rates are set by a state commissioner.

So it is certainly practical for you to set piece rates. Set a goal, and pay according to results. I'll be happy to help you set the goals and the reporting mechanisms, but also please see a labor law attorney and your CPA.

In some applications such as apparel piecework plans, the rate paid is essentially all of the labor cost, agreed in advance with employee and buyer, so bookkeeping is simplified and more predictable.

In construction, incentive pay can be tied to the prevailing price paid by local contractors, for instance a value per block laid or square foot of slab, so that estimating and actual cost are more closely related.

Incidentally, an employee is typically responsible for quality, so rework would be performed "on the clock". Be sure that quality standards are well defined and enforcement quick and fair. In such cases the minimum wage may apply, so your time system has to be accurate.

Incentives often reward output, or units produced. But any criteria may be selected, such as widgets built or installed, or customer satisfaction, or first time quality, or phone calls, or tests processed, or block laid, or applications processed, or feet of cable, or cubic yards of concrete poured, or cartons shipped, or tests completed. The key is to create a measurement system to meet business objectives.

 

D. Bookkeeping comments on the web

There are many web references. The most common is the point that workers on piece rates must still be paid at least the minimum wage, state or Federal; and that all work hours must be considered in the minimum wage arithmetic. http://www.twc.state.tx.us/ui/lablaw/tmwsum.html

Other sites suggest that piece work requires more paperwork that a company might be used to, and I definitely agree. see also http://www.summitquote.com/uploads/Piece_Rate_Contractors_May_June.pdf

 

E. The work measurement mechanisms

If you measure the work to set a incentive rate, time study and predetermined times are both acceptable mechanisms to collect the information necessary. Work sampling may supplement either, but will not alone be accurate enough to serve as a foundation.

Because pay will depend on the incentive system, use more care in setting those rates than for measurement which does not determine pay.

If tasks are short cycle, where an operator has considerable practice opportunity, a predetermined time system will be more accurate. Consider MTM, or Work Factor, Master Standard Data, perhaps MODAPTS.

Not only the measurement system determines the accuracy of data collection; a larger number of observations will be necessary if time study is used than would be necessary for a non-incentive system.

 

F. A View of the Incentive Context

Aubrey C. Daniels, Ph.D., is founder and CEO of management consulting firm Aubrey Daniels & Associates (ADA). He made these comments, with which I definitely agree, in http://www.entrepreneur.com/humanresources/employeemanagementcolumnistdavidjavitch/article54952.htmlon September 02, 2002. He says, "To get the most out of any incentive plan, I would advise the following:

1. Let the performers track their performance daily. The payout can be monthly, but feedback should be available daily.

2. Separate incentive pay from regular pay. I would advise issuing separate checks and giving them out on different days.

3. Consider non-cash incentives. These are not confused with ordinary pay and actually have advantages over cash. For further details, you may want to read about this in my book Performance Management: Improving Quality Productivity Through Positive Reinforcement, which is available at www.aubreydaniels.com.

4. Individual incentives are more effective than group incentives. You may add an incentive for group accomplishments, but the plan should differentiate between individual contributions and accomplishments.

5. Make sure that your day-to-day management is positive. No matter how much money you put into rewards, you'll waste both money and time if you use negative reinforcement as your management style. There's no substitute for daily contact with employees--asking how they're doing, asking if you can help with any problems and, most importantly, recognizing even small improvements.

6. Systematically evaluate the effectiveness of your plan on performance, cost and employee satisfaction."  

 

What Now?

If your idea is to motivate employee performance in return for a monetary reward, Jackson Productivity Research Inc. can help you establish a fair and consistent system.

Your particular objectives and circumstances are unique.

One size does not fit all, because a number of factors affect a piecerate plan.

We've done this before, and can apply our experience to generate a successful application for you, quickly and objectively. We are familiar with incentives and piecework in both unionized and non-union situations. We can determine what is needed, establish plans and priorities, and implement the actions. We can train your resources, perform the work entirely, lead, or work within your organization. Please give us a call or email to initiate discussion, at no cost or obligation.

Jack Greene, 843-422-1298.

e-mail us

 

Jack Greene has headed Industrial Engineering for ITT Latin America and RayBan Sunglasses, and w orldwide IE for Abbott Labs. Now as president of JPR, Jack can work with your organization, from strategic guidance at the executive level to practical, hands-on application of time study, piece rate and work measurement techniques.

Good luck in your use of piecework. Jack Greene, President Jackson Productivity Research Inc.