SYSTEMS OF WAGE PAYMENT

SYSTEMS OF WAGE PAYMENT

A)    TIME RATE SYSTEM

B)    PIECE RATE SYSTEM

Time rate system:

It is the oldest and simplest method of wage payment used extensively in the industrial as well as government departments. Wages are paid as per the time spent by the workers in the factory. The production given by them is not taken into consideration. The employer buys the hours of the workers and pays them accordingly. Time rate system is also called as day wage system. In the time rate system, efficiency, sincerity, ability is not given attention and all the workers are paid at one and the same rate as per the period spent in the factory.

ADVANTAGES OF TIME RATE SYSTEM:

1)     Easy and simple: Time rate is easy to understand and simple to follow and calculate. Wage calculations are also easy and quick. Each worker knows how much wage payment he is entitled to at the end of the month. This gives convenience to employer and employees.

  

2)     Guarantee of minimum wage: It gives the guarantee of certain minimum wage payment to every worker irrespective of their working capacity. Workers get a regular and stable income and this gives a sense of security to all workers as regards wage payment.

  

3)     Maintains quality of production: Quality of production is maintained here as the workers are not in a hurry to complete the work. They do not rush the job and spoil the quality because of the temptation to earn more. Workers tend to work slowly and with care. Even accidents are less as workers use the machines in a careful manner.

  

4)     Support from trade unions: Workers and trade unions accept and support time rate system as all workers are placed in one category as regards wage payment. This ensures unity among workers. Trade unions normally prefer time rate system of wage payment.

  

5)     Avoids quarrels among workers: Time rate avoids heart burning and quarrels among the workers as uniform wages are paid to all. Here efficiency, honesty and sincerity of workers are not given any special weightage. Wage rate is the same for sincere and lazy workers.

  

6)     Convenient in modern factory system: Time rate payment is convenient in modern factory system where production process is continuous and integrated. It is not possible to measure the work completed by one individual worker and hence time rate system is convenient.

  

DISADVANTAGES OF TIME RATE SYSTEM:

1)     Not scientific: Time rate is not scientific system of wage payment as there is no direct linking between wages and production/productivity. Wages bill may increase without corresponding increase in the production. This will bring loss to the employer / management.

  

2)     Absence of positive encouragement: In the time rate system, there is no positive encouragement to workers to improve their efficiency/ performance as the wage rate is uniform to all workers; efficient and inefficient.

3)     No distinction between workers: In the time rate system no distinction is made between efficient and lazy workers, both are paid at one rate which is unfair. This system gives punishment to sincere and efficient workers. They are discouraged as they are paid less than what they deserve. They may even leave the job.

4)     No initiative to workers: Time rate fails to encourage workers to take more interest and initiative in their work. In fact, it encourages them to follow “go slow” policy. This is because wage payment is not linked with the production given.

  

5)     Labour cost may increase: In the time rate system, there is a possibility of increase in the labour cost without corresponding increase in the production. Workers may work with slow speed, give less production but collect the wage as per time or day fixed.

  

6)     Strict supervision: In the time rate strict supervision on the workers is essential as payment is for period and not production. This raises the expenditure on supervision.

7)     No effect on productivity/ efficiency: Time rate fails to raise productivity and efficiency of labour force. It is not an incentive system of wage payment.

Piece rate system:

This is another basic system of wage payment. It is just opposite to the time rate. It is also treated as an incentive wage system as it encourages workers to produce more and also to earn more. In the piece rate system, wages are paid as per the output or production given by the worker and not as per the time spent by the worker in the factory. Payment is by results in terms of output given. Wage rate is fixed per piece of work or for certain quantity of production. The production given by a worker at the end of the day is counted and payment is made accordingly.

MERITS/ ADVANTAGES OF PIECE RATE SYSTEM:

1)   Linking of wages with production: Here wages are linked with production or productivity. It raises the productivity of labour. Workers work with speed and use their capacity fully as the wage payment is directly related to the quantity of production given by a worker.

  

2)   Distinction is made between efficient and inefficient workers: Distinction is made between efficient and inefficient worker and full justice is done to efficient worker as he gets payment in proportion to the production given. Efficient workers support the piece rate system but it is not preferred by unskilled and inefficient workers. They get less payment under this method as their capacity to produce is less.

  

3)   Encourages workers to take initiative in the work: Piece rate system encourages workers to take more interest and initiative in the work as every worker gets full reward of his efforts. There is direct efforts-reward relationship in the piece rate system.

  

4)   Fair to employer and employees: This system is fair to employers as well as employees. The employees get income in proportion to production given by them and the employer gets production in proportion to the wage paid.

  

5)    Incentive system: This system serves as the incentive system. Workers work efficiently and take interest in the work due to corresponding benefit/ reward in the form of higher wage payment.

6)    Limited supervision adequate: In this system strict supervision on the workers is not necessary as workers work sincerely. This is because their wage payment is directly linked with their sincerity and ability.

7)    Freedom of work to workers: Workers get more freedom of work and there is effective control on the cost of production in the piece rate system.

8)    Brings cordial relations: Piece rate brings cordial labour- management relations and industrial peace.

 DEMERITS/LIMITATION OF PIECE RATE SYSTEM

1)  No guarantee of minimum wage payment: There is no guarantee of certain minimum wage payment to a worker. This may prove to be dangerous particularly to a newly recruited worker and workers who are below average

2)   Workers suffer even when they are not at fault: Sometimes workers suffer in wage payment even when they are not fault. Due to power failure, etc they may not be able to give production and naturally they will not be eligible for wage payment even when they remain present in the factory for the whole day.

  

3)   Complicated system: Piece rate system is complicated and difficult as it is difficult to understand by ordinary workers. Management will have to keep elaborate records of production given by each worker. Workers also make complaints as regards wage payment when they feel that due payment is not made to them.

  

4)   Disturbs unity of workers: Piece rate affects the unity among workers as wage payment will not be uniform to all workers. This will lead to quarrel among workers. Trade unions oppose piece rate system on the ground that it will lead to rivalry among workers and destroy unity among them.

  

5)   Not fair to trainees: Piece rate system is not fair to trainees, as their capacity to produce is less and naturally they will get less wages.

  

6)   Quality of production is adversely affected: It affects the quality of production as workers may work with speed and this may bring down the quality of production. In addition the wastages and spoiled work are likely to increase due to haste on the part of the workers to labour hard and over strain themselves in order to earn more. This affects the health of workers.

 TIME RATE V/s PIECE RATE SYSTEMS

        

   

Meaning: Wages are paid as per the time spent by workers.	Wages are paid as per the output or production given by workers.
Old/new system: Oldest and simplest method of wage payment.	Modern and incentive system of wage system.
Guarantee of wages: Gives guarantee of certain minimum wage payment to every worker.	Fails to give guarantee of minimum wage payment to every worker.
Support: Employees and trade unions support time rate system.	Employers and efficient workers prefer piece rate system.
Understanding of system: Easy to understand and simple to administer.	Complicated system as various recorded and registers are required to be maintained
Distinction between workers: Distinction is not made between efficient and inefficient workers as all are paid at one and same rate.	Distinction is made between efficient and inefficient workers. Efficient worker is paid more while an inefficient worker is paid less.
Effect on production: Encourages workers to follow go-slow policy and naturally production suffers.	Encourages workers to take more interest in the work and naturally production increases.
Quality of production: Quality, workmanship of production are not affected, raw materials, machinery are utilised properly. The spoiled work is also negligible.	Quality, workmanship of production may suffer. Increase in spoiled work and wastage of raw materials.
Supervision: Strict supervision is necessary as workers are paid as per the period spent.	Strict supervision is not necessary as workers are paid in proportion to the production given.
Suitability:  Suitable to manufacturing units, also suitable when individual contribution is not easily measurable.	Suitable when contribution of individual worker is measurable and work is standardised and repitive in character.

INCENTIVE SYSTEMS OF WAGE PAYMENT

The wage plan should be highly incentive means it should encourage workers to take more initiative and interest in the work, produce more and also earn more. The wage plan which serves all these purposes is called incentive wage plan. Such an incentive plan is beneficial to both - employers and employees as well as it is useful for the rapid industrial growth.

Incentives include monetary as weft as non-monetary benefits offered. There is motivation to work hard and to earn more. In every incentive plan, wages are linked with the given output. Incentives are not fixed like wages and salaries. They vary from individual to individual and from period to period.

ILO defines incentives as "payment by results". Incentives can also be described as "incentive systems of payment".

According to Dale Yoder, “Incentive wages relate earnings to productivity and may use premiums, bonuses, or a variety of rates to compensate for superior performance” Piece rate system is the oldest incentive wage plan which is also useful for attracting and retaining qualified personnel in the organisation and for motivating personnel to higher levels of performance. In many incentive plans, a combination of time rate and piece rate systems is used. Such combination creates an ideal incentive plan.

TYPES OF INCENTIVE PLANS:

There are two types of incentive plans:

(a) Individual incentive plans, and

(b) Group incentive plans.

Individual incentive plan is meant for individual employees. He has to work hard i.e. efficiently, produce more and share the monetary benefits for himself. The benefit is directly linked with his ability, efficiency and capacity.

In the group incentive plan, the incentive is not for individual employee but for the group of employees working in one department or section. Such group incentive plan may cover the entire labour force of a production unit. The group will work collectively, give more production and share the benefit. Initially the benefit will be given to the group and thereafter, it will be divided among the members of the group.

Management is interested in group incentive plan while employees are interested in individual incentive plans. Production activities are now conducted in an integrated manner and naturally incentives should be offered to the employees. Group incentive plans are better as they encourage team spirit and develop cooperation and understanding among the employees. This avoids wastages and promotes productivity.

FEATURES/REQUISITES OF A GOOD INCENTIVE PLAN:

Simplicity:

A good incentive plan is one which is easy to understand and simple to operate. An average worker must be able to know the incentive offered and what he is expected to do. The monetary as well as non-monetary benefits offered must be made clear to all workers.

          

Encourage initiative:

A good incentive plan should create initiative among workers to work more and to earn more. It must offer more income to workers and more profit/production to the firm or company.

Definiteness and flexibility:

A good incentive plan should be definite. This means frequent changes should not be made as regard rates, etc. as such changes create confusion and doubts in the minds of workers. Such plan must give clear benefits to workers

In addition, an ideal incentive plan should be flexible. It should take care of technological and other changes taking place from time-to-time. There should be suitable provision for such adjustment. Flexibility makes incentive plan adaptable.

Wide coverage and equitable:

A good incentive plan should not be for employees in certain departments only. It should have a wide coverage and almost all employees should be covered in such plan. Such wide coverage makes the plan popular at all levels and among all categories of workers.

An incentive plan should be equitable. This means it should provide equal opportunity to all employees to show efficiency and earn more. This avoids dissatisfaction among employees and makes the plan just and fair to all employees.

Guarantee of minimum wage payment:

An incentive wage plan should include certain minimum wage payment to every worker per month. This should be irrespective of the production he gives. Such provision of guarantee payments creates a sense of security and confidence among workers.

Scientific fixation of standard workload:

Under the incentive plan, extra payment is given for the extra work i.e. work which is over and above certain quality. Such standard work-load must be clear, specific and fixed with scientific time studies so that majority of employees will be able to give extra production for extra payment.

Justice to employer and employees:

A good incentive plan should do justice to both parties. The employer must get additional production along with extra profit and the workers must get extra payment for extra production.

PROFIT-SHARING

Profit-sharing is regarded as a steppingstone to industrial democracy. Prof. Seager observes: "Profit-sharing is an agreement by which employees receive a share, fixed in advance of the profits."

Profit-sharing usually involves the determination of an organisation's profit at the end of the fiscal year and the distribution of a percentage of the profits to the workers qualified to share in the earnings. The percentage to be shared by the workers is often predetermined at the beginning of the work period and IS often communicated to the workers so that they have some knowledge of their potential gains. To enable the workers to participate in profit-sharing, they are required to work for certain number of years and develop some seniority. The theory behind profit-sharing is that management feels its workers will fulfill their responsibilities more diligently if they realise that their efforts may result in higher profits, which will be returned to the workers through profit-sharing.

FEATURES OF PROFIT-SHARING:

The main features of the profit-sharing schemes are:

            (a)           The agreement is voluntary and based on joint consultation made

freely between the employers and the employees.

            (b)           The payment may be in form of cash, stock of future credits of

some amount over and above the normal remuneration that would otherwise be paid to employees in a given situation.

            (c)            The employees should have some minimum qualifications, such

as tenure or satisfy some other conditions of the service which may be determined by the management.

            (d)           The amount to be distributed among the participants is computed

on the basis of some agreed formula, which is to be applied in all circumstances.

            (e)           The amount to be distributed depends on the price earned by the

enterprise.

            (f)            The proportion of the profits distributed among the employees is

determined in advance.  

Objectives of Profit-sharing:

1)    To supplement the regular earning of the workers,

2)    To create a sense of partnership among the workers and the management,

3)    To enable the workers to participate in the prosperity of their company,

4)    To develop cordial labour-management relations and to improve employee morale.

5)    To introduce incentive wage plan

6)    To raise productive efficiency by reducing costs and increasing output

7)    To reduce labour turnover and to improve public relations.

8)    To provide for employee security in the event of death, retirement or disability

ADVANTAGES OF PROFIT-SHARING:

1) Extra income to workers: Workers get extra cash payment due to profit-sharing arrangement. This money is useful for raising their welfare. Workers can purchase costly consumer durables out of this money available at one time. Thus, profit­-sharing provides better life and welfare to workers. It creates contended labour force with higher standard of living. Profit-­sharing plan acts as a good supplement to regular wages paid to employees. In fact, profit-sharing is aptly described as a form of added remuneration.

2) Workers take more initiative and interest in the work: Due to profit-sharing arrangement, workers/ employees take more interest in the work. This develops team spirit among the employees because their share in the profit depends on their collective initiative, efforts and hard work. In this sense, profit-sharing is useful for motivating employees. It encourages employees to be regular, stable and efficient as the benefits of these elements are offered to them through profit-sharing. Here, efforts and reward are directly and proportionately linked. This encourages employees to take keen interest in the work and develops team spirit.

Profit-sharing acts not only as supplement to regular wages (i.e. as an incentive wage plan) but also as a motivating factor to all employees. It creates common objective before employer and employees and diverts their energies for achieving one common objective.

3) Increase in production and productivity: Profit- sharing acts as a driving force for more production and productivity. It motivates workers for raising production as they get direct and immediate benefit of additional efforts on their part. The benefits of increase in production are available to employer and employees.

4) Fair to employer and employees: Profit-sharing gives mere remuneration to workers along with more profit to employer. Employer pays a part of profit to workers but he is not adversely affected as profit is paid only when it exceeds a particular limit agreed by both the parties. This arrangement is, certainly fair to both parties. There is an element of social justice in it.

5) Ensures cordial industrial relations: Profit-sharing creates cordial labour-management relations. It. reduces industrial disputes, strikes and lock-outs. This is because both have common objective and both are likely to suffer due to industrial disputes, strikes and lock-outs. Thus, profit-sharing reduces industrial disputes and leads to friendly relations between employer and employees. It certainly acts as a tool for reducing industrial disputes and also for creating industrial peace.

Thus, profit-sharing agreement encourages workers to work efficiently and also avoid dispute and quarrels with the employer. It acts as a natural and self-imposed check on industrial disputes. Profit-sharing creates team spirit in the higher cadres of management as well as in the rank and file of workers.

6) Less supervision required: Profit-sharing reduces the expenditure on supervision of workers as they take interest in the work on their own. Moreover, wastage of' materials, volume of spoiled work, etc. are also reduced.

7) Stability to labour force: Profit-sharing brings stability to labour force as the benefit of profit-sharing is usually given only to those who work in the company for the whole year. Thus, profit-sharing brings down the rate of labour turnover and this gives benefit to the employer/ management.

8) Promotes social justice: Profit-sharing is a method of social justice. It is a method by which workers are given the reward of their hard work and also allowed to participate in the progress and prosperity of their company. Profit-sharing introduces industrial democracy as workers are treated not only as wage earners but also as partners for sharing the profits of the company.

DISADVANTAGES OF PROFIT-SHARING:

1) Uncertainty: There is high degree of uncertainty in the profit-sharing scheme/plan. Profit-sharing is uncertain because it will be paid only when the profit exceeds a particular limit. The profit may not cross a particular limit due to market forces and the workers will suffer. Thus, profit-sharing does not give full guarantee of extra payment to workers. It acts like a fair weather plan.

           

2) Unfair to efficient workers: Profit-sharing is a group incentive plan. It gives equal benefit to all workers. Distinction is not made between good and bad workers. As a result sincere and efficient workers get less than what they deserve while insincere and inefficient get more than what they deserve.

3) Opposition from trade unions: Trade unions and workers feel that bonus payment is better than profit:-sharing. They generally oppose to profit-sharing and demand bonus from the employer as it is a cheap alternative to profit-sharing.

4) Disputes on calculation of net profit: In profit-sharing, the net profit is to be calculated at the end of the financial year. There is a possibility of difficulties as regards the calculation of the net profit. The employer may like to manipulate the accounts and show less profit while workers may calculate it as high. Such quarrel affects both the parties as it leads to dispute and delay in payment. In brief, ascertaining net profits is one sensitive problem in profit-sharing.

5) Adverse effects on labour-management relations: Sometimes, relations between labour and management are adversely affected on the point of profit-sharing agreement. This defeats the very purpose of profit-sharing. Disputes are possible as regards the profit-sharing agreement itself.

6) Not useful during depression: Profit-sharing as a method of extra remuneration to workers can be used during the period of prosperity when profits are high. It cannot be used during the years of depression. Even newly established companies are not in a position to introduce profit-sharing scheme for their employees.

7) Opposition from conservative employers: The concept of profit-sharing is not fully acceptable to conservative employers. They feel that profit is the reward for the risks and uncertainties. They also argue that workers must be prepared to share profit as well as loss in the business.