This system is also known as payment by results. When wages are paid on that basis of the output of the workers without considering the- time taken in performing work, it is termed as piece wage.
Thus under this system, the workers are paid on basis of quantity of work done, i.e., per unit of output, per article, per job, commodity, etc. For computing total remuneration of workers, a pre-determined rate unit of output is multiplied by the total units produced. The rate is fixed with the of time and motion studies. The formula for wage computation under this system is:
Wages = Number of units produced x Rate of wage per unit
For example, a worker produces 8 units in one day and the rate of wages per unit is 10. The total wages for the day would be: 8 x Rs. 10 = Rs. 80
Suitability of Piece Rate System
Piece rate system of payment of wages is considered suitable:
(i) Where the quantity of work done can be precisely measured and standardized.
(ii) Where the work is of repetitive nature.
(iii) Where it is possible to fix a fair and acceptable piece rate.
(iv) Where the productivity is closely related to skill and efforts.
(v) Where the quality of goods can be controlled.
(vi) Where time cards are maintained for ensuring regularity and punctuality of workers and uninterrupted flow of production.
(vii) Where materials, tools and machines are pettily available to cope with the possible increase in production.
Important advantages of the piece rate system are:
Fairness – Under this system, the reward is related to effort. Efficient workers are rewarded and inefficient workers are penalised.
Increase in productivity – More work is turned out in a shorter period of time. Since there is a direct incentive to work, there is always a tendency on the part of the worker to produce more by adopting correct procedure and techniques of production.
Decreased cost of production – Increase in production results in lower costs due to the reduction in fixed cost and overhead cost per unit of production.
Easy determination of quotation price – The employer is able to know the exact labour cost per unit. This will help to make quotations confidently and accurately.
Less Supervision – As compared with the time rate system, the supervision costs under this system are not high, because the workers are to be paid on the bases of performance. The very attraction of greater reward for greater effort drives them to work hard.
Reduction of Idle time – The quantum of idle time is minimised as workers know that they will not be paid for idle time. Thus it persuades them not to waste their time.
Minimisation of loss due to breakage – The workers handle the machines, toes and implements with great care which helps in minimisation of loss resulting from breakage. They know that the breakage will reduce their output which results in reduced wages.
Some important disadvantages of the system are given below:
(i) Difficulty in fixation of standard piece rate – Setting of a standard rate involves a lot of difficulties and a considerable amount of expend’ has to be incurred. If high piece rate is established, it is very difficult reduce it subsequently.
(ii) Ignores quality – As more output means more wages, the workers always in a hurry to produce more. This results in production of’ standard items, high rate of rejection and ultimately increased c, production per unit.
(iii) Insecurity – The system does not provide guarantee of minimum of wages to the workers. They feel in secured since they would get wages during the period when their efficiency may get reduced factors beyond their control. Thus, at times, workers may be earning even below the subsistence level.
(iv) Conflict – The system may lead to conflict between the managemen’1 the workers, if the output is low due to some fault of the management, as, bad quality of raw material, frequent break-downs of machinery/ failure, etc.
(v) Expensive control systems – Management is compelled to intern expensive control systems of supervision and inspection for maintained of quality of output.
(vi) Speeding – Workers may speed up the work to produce more which cause great injury to their health, speeding also causes undue wastage raw materials and very and tear to machines.
(vii) Effect on production schedule – Workers may work at a seed for a day, earn more wages and then absent themselves for a few days, w may affect the uniform flow of production and the production such may be disturbed.
(viii) Increased cost of production – Cost of production may increase due to more wastage of materials, high cost of supervision and inspection, and wear and tear of machines.
(ix) Frustration among less efficient workers – The system will frustrate the less efficient workers and their efficiency may further decrease because of discontentment.’
The piece rate system is of the following types:
(a) Straight Piece Rate:
This is the simplest and the most common type of piece rate system. Each operation, job or unit of production is termed as a piece. The wage rate fixed for each piece is called piece rate. The worker is paid wages on the basis of work done regardless of the time taken to perform the work. The wage of a worker is calculated by multiplying the number of units produced by him by the specified rate for each unit.
Wages = Number of units produced x Wage rate per unit
The piece rate is fixed with the help of work study. Standard time for each unit is ascertained first. Piece rate is then calculated with reference to hourly rate of wage. For example, if hourly rate of wage is Rs. 10 and the standard time per unit is 90 minutes,
(b) Piece Rate with Graduated Time Rate:
Under this system, workers are actually paid on the basis of output and if the piece rate wages fall below the time rate wages, the worker is paid on time rate basis.
The difference will be recovered from his wages when he earns more than the fixed wages. For example, in a manufacturing concern, the piece rate is Rs.4 per unit, the time rate is Rs.80 per day of 8 hours and the daily fixed work is 20 units.
If a worker manufactures 18 units in a day, the earns Rs.72 (Rs.4 x 18) on the basis of piece rate. But he will get Rs. 80 as his time wages which is Rs. 8 more than what he earns on piece rate basis and this amount of Rs.8 paid to him in excess will be recovered from his wages whenever his piece rate wages exceed the time rate wages.
But if the word manufactures 22 units in a day, he will get Rs.88 (Rs.4 x 22) on piece rate basis. This system has all the merits of both the time and piece rate systems and removes demerits of both. But it is a very complicated and difficult system for the workers understand.
(c) Differential Piece Rate System
Under the differential piece rate system, the payment of wages is made to labor on the basis of piece rates varying with the level of efficiency of workers.
The system provides for higher rewards to more efficient workers. Under this system, there is more than are piece rate to reward efficient workers and to encourage the less efficient workers to improve. Payment at normal piece rate is made for work performed with and up to the standard level of efficiency.
Payment is made at higher piece rate if the efficiency exceeds the standard. Higher piece rates are also applicable for still high efficiency. The system motivates the workers to increase productivity and earn higher wages. The system is complicated and expensive to operate and is difficult for the workers to understand.