Since the prime object of cost systems and cost methods is to increase efficiency, and since a knowledge of wage systems is necessary for the designing of a proper cost system, it is very necessary that the accountant be familiar with the workings and advantages of the various methods of paying wages.
The purpose here is to present and explain briefly the different wage systems that are commonly recognized, and to indicate certain advantages or difficulties connected with their adaptation to conditions. No one method can ever be recommended as the best; for each has its own characteristics, which make it peculiarly suited to some conditions, and at the same time impossible in others.
The general methods or plans of paying wages are known as:
(1) Day Rate
(3) Differential (piece) Rate
(6) “Stint” System
(7) Contract System
(8) Profit Sharing
(9) Stock Distributing
Each plan is subject to more or less modification. There are, particularly, many forms of the premium and bonus systems, some of which are known as the “Differential Bonus,” the “Gantt System,” the “Santa Fe System,” etc.
(1) Day Rate
The “Day Rate” method groups several workmen in a body, and pays each one a certain sum for a certain number of hours’ work, this amount depending partly on the skill called for, partly on the locality in which the plant is placed, and partly on the labor conditions existing at the time. This is the original elementary method; and since all the other plans have been devised in an effort to get away from it, it is natural to assume that there are grave defects connected with its use.
Many of these can be traced back to a single general cause, “lack of incentive.” The workman has little or nothing to gain by putting his heart in his work and exerting himself. He is kept up to about a certain dead level by the fear of losing his job, and that is all. Why should he do more than the man next to him, when they are both paid alike? This reasoning does not apply to the one man in a thousand who goes ahead and by sheer energy makes a place for himself “higher up”; but it does apply to the great mass of workers. The result is shown in both quantity and quality of output.
Still another objection to this plan comes from the difficulty of finding labor costs, for a uniform labor cost per week is nowhere near a uniform cost per article made. The wages remain even, while the product varies from day to day, and still more between man and man.
There are classes of labor, however, for which no other kind of rate is applicable. Where the work is a pure function of time, as in the case of firemen, watchmen, inspectors, etc., the natural rate is a time rate. Repair men, inventors, and men who are planning and constructing special machines, also come under a time rate, because of the nature of their work. In general, indirect labor is more suited for payment by time than direct labor.
The “Piece-work” plan is a system of paying wages on the basis of the amount of work done, the rate being based on past experience or ascertained by test. Under this plan the employer, after making what he considers a fair estimate, sets the workmen’s rate for the various operations incident to the production of an article.
If the rate is fair, the entire arrangement looks so equitable that it may be surprising to learn that in many cases much friction and dissatisfaction have arisen from its use. A question at once arises concerning the cause.
To answer this we may sketch an imaginary case. An employer, having decided to introduce the piece-work system in his business, sets out to determine the allowance he should make on each piece of work. He and his assistants watch the men and their work for some time beforehand. Then he makes what he considers a fair allowance for the increased production that will follow under the new plan, and waits for results. Under the stimulus of payment proportioned to effort, the rate of production soon shows enormous gains; and the employer finds that production has increased 50 per cent, 60 per cent, or has even doubled, instead of increasing according to the low per cent he allowed in discounting the new rates. As a result, the men who were earning, say $2.75 per day, are soon earning $4 or more.
By this time the employer is likely to think that his employees cheated him in the beginning, and, as a result of this, are now receiving altogether too much pay; so he proceeds to cut the rate per piece, and the trouble with his workmen begins. They, on their part, soon discover that they are between two fires; if they produce too little their wages are small, and if they produce too much they receive a cut, after which they must continue to work harder and receive no more pay than they did formerly. The natural result of this is an agreement between the workmen in each class to limit their production to a certain amount which they consider safe. At this point the piece-work system has broken down and failed in the purpose for which it was introduced.
In studying the above instance, two conflicting lines of action are seen. The employer is working for the largest possible results for a given wage scale, and the men are working to receive the maximum wages for their time and work. The employer must have had in mind that the wages would not increase much over what they were before, or at least not in the same proportion as the production increased. So he fails to see where he has gained anything by his change of methods. The workmen consider that they have been trapped by the cut in the piece rate, and are correspondingly bitter over the situation.
It is clear to be seen that the critical point here lies in the rate per article. In the example given, the employer was ignorant as to just what the men could do; and this is the basis of trouble in nine cases out of ten. To establish a successful piece-work system it is essential to set such a rate that, barring unusual business depression or some equally untoward event, it can be maintained fixed and unchanging.
If the employer wishes to approximate maximum pro duction, he must be prepared and willing to pay more than the ordinary day rate he paid before; and no piecework plan will attain its object unless he takes that stand. If he can afford to pay a certain amount for the making of an article now, he can surely afford to pay the same amount per article when a larger number are produced per day; and all the more so because the indirect expenses are increased comparatively little for an increased production in the same time, while, as these expenses are distributed over a larger number of articles produced, the cost of each article is proportionately decreased.
The first step necessary to determine the proper rate is to get true records of the work that can be done. In the matter of small, or wholly machine-made articles, this is not difficult. If the operations are complex and include much handling of the material, it will be necessary to separate the whole process into simple operations, and fix a time for each one. The sum of these time rates, plus a percentage for unavoidable delays, will determine the time to be taken on the article as a whole. These analyses are important items in establishing a cost system; and experience has shown them to be the most accurate and practical methods of fixing the proper rate.
(3) Differential (Piece) Rate Plan
The “Differential Rate” plan is a specialized piecework method modified by an application of time rate to the work. The idea is to pay a certain piece rate up to a certain amount of production in a given time, and above that amount to pay an increased rate either on the whole amount produced, or only on the output above the set standard.
The considerations and cautions mentioned in the straight piece-work plan are all applicable here, and with double force, since the ideas are the same but more emphasized.
The differential rate plan is devised specially to meet conditions where the indirect expenses are relatively very large. To get the best results in such a case the productive capacity must be made as effective as possible even at a sacrifice in the labor cost. What is lost there will be more than made up by distributing the large amount of indirect expenses over the increased output. The principal disadvantage connected with the differential plan lies in the danger of making ill-judged rates at its introduction. The utmost skill and judgment are necessary to guard against this. The differential rate plan also calls for a well-organized supervising corps, the actual increase of cost for this depending entirely on local conditions, the nature of the shop, and the organization.
(4) Premium Plan
The “Premium” plan, together with its modifications, differs from piece-work methods in basing the wages primarily on a time rate instead of on the product, and then paying extra wages for time saved in the operations. It resembles piece-work in that it presupposes fixing a time rate on the process of manufacturing single articles, or on the separate steps in such processes. The fact that it guarantees a minimum wage, at least, places it in a more favorable light before employees, and often results in less opposition on their part to its introduction than they show toward the piece-work plan.
(5) Bonus Plan
Linked to the premium plan and related to it in general principles, are the several forms of “Bonus” plans. There is an increase of pay as the time to do a definite amount of work is shortened; but instead of being calculated directly from the time saved, it takes the form of an increase in the hourly wages for the time actually spent, the rate depending on the per cent of time gained, and increasing in proportion.
(5a) Gillette and Dana Bonus Plan
A form of the bonus system described by Gillette and Dana proposes to pay each workman a daily wage plus a piece rate on each unit in excess of a specified minimum. Thus, a laborer receives $1.50 a day for shoveling earth, and on each cubic yard in excess of 15 cubic yards per day, he receives a bonus of 7 cents per yard. If he shovels 25 cubic yards, he receives $1.50 plus $o.70=$2.20.
(5b) Differential Bonus Plan
The “Differential Bonus” is much the same, except that there is an increasing scale for big performances. In the foregoing example the workman might receive 7 cents bonus for every cubic yard above 15, and an additional 7 cents bonus for every cubic yard over 20. His day’s pay for the above work would then be $1.50 plus $0.35 plus $0.70=32.55.
(5c) Gantt System
The Gantt system of differential payment is known as “Task Work with a Bonus.” A high standard is set, but one entirely possible of attainment. The workman receives a regular day rate; and in addition, if he reaches the standard, he is paid a lump bonus, which may be 25 per cent or 33 1-3 per cent more than his regular wages. This system seems to have worked out very well in practice; and it is specially recommended as a good transition step from the old day rate to some form of piece-work.
A very important feature of the Gantt plan is the bonus that the foreman gets for every man under him who makes his bonus. Thus, if a foreman had twelve men under him and eight of the twelve made their bonus, the foreman would get, say 80 cents bonus, or 10 cents for each man. The result in practice has been to make the foreman a teacher of the men, invariably giving his attention to the men below grade in order to get them up to the bonus standard.
(5d) Sundry Bonus Systems
The names “Merit,” “Standard Operation Plan,” “Gain-Sharing,” and others, are sometimes given to wagepayment plans worked out in particular shops or industries. If they differ at all from plans here described, it is only in details devised to meet particular conditions.
Since the plans described as “Premium” or “Bonus” are so closely related in object and principle, they may be grouped together for discussion and comparison with other methods.
In introducing a premium or bonus system, the same caution must be observed as with the piece-work systems. It is essential to be quite sure of the correct standard before the step is taken, if the disastrous results that have accompanied too high piece rates are to be avoided. If an error is made on the side of too high a scale, it is less costly than in piece-work, because the employer is not working on so narrow a margin; also, the effect of such an error would be more evenly divided.
(6) “Stint” System
In the “Stint” system the appeal is made to the workman by a gift of all the time he may save. A certain output is assigned as a day’s or a week’s work. If he does it in less time, say seven hours, he has earned his wages and is free to go home.
(7) Contract System and List Percentage System
Each employee is regarded as a contractor who has a given time to finish a definite job. As in the case of the “Stint” system, if he gets through beforehand he has earned his wages, but, instead of leaving, he undertakes a new contract. In some cases he is penalized if his work is not done in contract time.
When the units of work are large, the foreman often becomes the contractor, and becomes responsible for the completion of the job. There is a wide amount of freedom in the arrangements for wage paying and profit making between him and the management. Under the contract system in its pure form, he hires his own men and arranges the work as seems best to him, while the company allows him a certain amount for the job. Anything that he saves out of this goes to him as profit. Strict inspection of his work is necessary, of course, to hold him up to the proper standard.
(8-9) Profit Sharing and Stock Distributing
The “Profit Sharing” plan provides that the workmen shall share in a certain percentage of the profits of the shop as a whole.
Stock distributing makes the employee a part owner in the business, and so gives him an interest and incentive to use his best efforts for its welfare.
A special form of profit sharing which has proved successful in operation, though it can be used only under special conditions, consists in setting a price on every article manufactured. The factory is charged only with such expenditures as relate directly to the production of this article and over which the factory management has supervision. Credit is then given to the factory at these scheduled prices for all articles produced, whether they are sold or not. At the end of the year, or when an actual inventory is taken, the factory account in the ledger will show the factory profit, and will represent the saving or difference between the actual cost and scheduled prices. The saving, according to this plan, is distributed among the foremen of the various departments, and sometimes among the employees as well, according to the rate of pay of each. A penalty is provided for poor attendance; and other penalties of various kinds may be incorporated in the plan, according to the conditions under which it is operated.
Access the contact form and send us your feedback, questions, etc. We are always welcome to help someone out. You can also contact us if you wish to submit your writing, cartoons, jokes, etc. and we will consider posting them to share with the world! The Facebook and LinkedIn groups are also good areas to find people interested in accounting like yourself, don’t hesitate to join as everyone of all levels are welcome to become part of the community.