WAGE SYSTEM

INTRODUCTION

There are two basic methods of wage payment, i.e., payment by time and payment by
results (PBR). The latter one is also known as the incentive wage system.

WAGE SYSTEMS METHODS

Payment by time:

This is the age-old and most prevalent method of method the employee is paid on the basis of
time worked such as per day per week, and per month rather than output. This is the main
difference between this system and the incentive system.

The wage rate is predetermined by negotiation, by reference to local rates, or by job

evaluation. This method is useful when a worker has to do unstandardized job. This is
generally the method adopted for white collar clerical and managerial jobs.

The advantage of payment by time rate for an employee is that earnings are predictable and
steady. This breeds a sense of security by assuring employee a fixed packet. The employee
also does not need to argue with wage fixer about his/her remuneration.

However, the disadvantage of time rate is that it does not provide any motivation of a direct
incentive relating the reward to the effort.

Payment by results (PBR):

Under this method, the wage/pay of an employee is paid on the basis of the number of items
an employees produces in the organisation, rather than considering the job done by the
employee at a given time.

This may be through the following two systems:

1. Straight Piece-Work

2. Differential Piece-Work System

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Straight Piece Work:

Under this method, wage payment is made to employees at a uniform rate per unit of
production. In other words, in this system, employee is paid a flat price (in money) for each
unit or piece completed, or paid for time allowed to compete the particular task. This method
of wage payment is more appropriate where production is of repetitive character and easily be
divided into similar units of production.

Differential Piece-Work System:

In this method, wage is paid in relation to J wages per unit of production decreases with
increase in production. But, wage rate per hour still increases of course, not in proportion to
the increased output. This method is applicable where efforts can be related to production and
work is standardised, repetitive, and measurable.

Balance Method:

This method is a combination of time wage and piece wage methods. In this method, a
worker is paid a fixed wage based on the time rate with a provision of piece wage method.
How? This is just like minimum rent with a provision of short working recoupment in case of
royalty. If a worker produces less quantity in a period, he is given wages as per time rate and
excess payment over piece rate is treated as credit.

This credit is compensated in the period when he/she produces more than time rate wages.
Thus, he is given time wage whether he produces more or less than it, i.e., time wage.

ESSENTIAL OF WAGE SYSTEM

the system of wage payment should be such that it is acceptable and beneficial to both
management and workers. Such a system must contain the following features:

Motivation: a good wage system should be providing an incentive to the workers

to produce more. This can be done by linking wages and with the output. Workers

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 should be given a share in the gains of higher productivity. Incentive and sound
judgement should be rewarded.

Stability: the system of wage payment should be permanent and stable.

Fluctuating system may create a doubt in the mind of workers. There should be no
fear of rate cutting with increases in the output. Changes in the wage plan should
not be made unless is a substantial change in the methods of work.

Flexibility: the wage plan must be capable of being adjusted quickly to the
changing requirements of the enterprise. It should permit an early detection and
correction of mistakes.

Equity: the wages differentials should be based on some rational and objective
criteria. The wage system should ensure equal pay for the equal work. The system
should be fair, it should not discriminate among individuals. Variations in skill,
responsibility job conditions etc must be taken care of. The wage rate should be
based on an equitable evaluation of contributions and performance. The wage
system should be just and equitable to all types of employees.

Result oriented: the wage plan should establish a direct relationship between effort
and reward. It should provide for the higher wages to more efficient workers.
Incentive, payments under the plan should be large enough to attract the workers
towards higher productivity.

Simplicity: the system of wage payment should be easy to understand and simple
to operate. A complicated system which can -not be readily understood by the
workers is of little value.

Economy: the cost of designing and administering the system should be

reasonable. The wage system should permit maximum efficiency and minimum
labour cost of unit. The cost of supervision should not be unreasonably high.
Benefits accruing from the wage plan should be more than its costs.

Reasonable standards: standards of work used in a wage plan should be reasonable

and attainable. They should be neither tow easy or too difficult to achieve. Too

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 easy standards would increase the costs and there by defect the very purpose of
the incentive wage plan. Standards beyond the reach of workers will not be
acceptable to them.

Security: a good wage payment system should guarantee a minimum wage to the
workers. Minimum wages should be sufficient to meet the psychological needs for
workers so that they are saved from uncertainly and mental worry. Real wages
should be protected against the inflation.

Mutual cooperation: the wage system should promote co - operation between the
employer and workers. The wage plan should be installed with the co operation
and understanding of the workers.

TAYLORS WAGE SYSTEM

This scheme was originated by F.W. Taylor, who knows a the "father of science
management". Taylor suggests that the worker producing the below standard level be paid
according to the low piece rate. Similarly, the worker producing at or above standard should
be paid according to high piece rate. For this, a standard time is fixed and the worker who
finished the assigned work before the standard time or at standard are paid at a higher rate
and the worker who cannot complete the task within the standard time are paid at a lower
rate. This standard should be set up very accurately with the help of time and motion studies
because it is the demarcating line for higher and lower and lower rates of wages. Thus, two
piece-rates are fixed, one for those who perform the standard task in standard time (may be
termed as efficient workers) and the other for those who perform less than the standard task
in the standard rate time (may be termed as inefficient worker). Usually rates are 120% and
80% of the piecework rate for efficient and inefficient workers respectively.

Requirements for calculating total wages or earnings of the worker under Taylor's
differential piece rate system:

Standard output/ standard yield:

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Standard rate per unit/ normal piece rate = standard wage rate for a period/ standard
yield for the period

Advantages of Taylor's Differential piece-rate system

The advantages of Taylor's differential piece-rate systems are mentioned below:
i. This system provides a great incentive to workers to achieve the standard output and the
slow workers always try to achieve greater efficiency.
ii. The system is beneficial to workers as well as employers, since the workers get wages at
an increased rate according to units produced and the employer get increased output at lower
cost of production.

MULTIPLE WAGE SYSTEM

It is an improvement over Taylor's Differential Plan. According to this plan, three piece rates
for a job is fixed. None of these three piece rates are fixed below the normal level. These
three rates are applied in the manner given below:
Rates Bonus Incentive
1. Upto 83 '/3% Normal Rate
2. Above 83 1/3 % to 100% 110% of Normal Rate
3. Above 110% 120% of Normal Rate
Merits
(1) This plan is liberal for the efficient workers. The workers producing more, get their wages
at increasing rates.
(2) There is no sudden rise in the wages at one point.
(3) It has all merits of Taylor's Differential plan.
Demerits
(1) The system does not guarantee minimum wages for the workers.
(2) There is wide gap in slabs. All workers producing 1% to 83% of the standard output are
considered as sub-standard workers and are paid at the same piece rate.
(3) The general criticisms levelled against Taylor's plan also applies to it.

PROBLEM

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From the following particulars calculate the total earnings of the three workers who are paid
wages

under the Merrick Differential System.

Normal piece rate (upto 80% of High Task Output)

Rs. 5 per unit

High Task

40 units per week

Output of the workers for the week.

32 units

37 units

42 units

Also find out their wages if they are paid on the straight piece rate basis.

Solution

Efficiency level:

A. 32/40 x 100 = 80%

B. 37/40 x 100 = 92.5%

C. 42/40 x 100 = 105%

Wages of A at normal rate (since his efficiency is below standard)

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=32 x Rs.5=Rs 160.

Wages of B at normal rate plus 10% above normal rate (since his efficiency is above 80% of
High

Task but below 100 %.)

= 37x Rs. 5.50 = Rs. 193.50

Wages of C at normal rate plus 20% of normal rate (since his efficiency is above 100%)

= 42 x Rs.6 = Rs.252.

If Straight piece rates are paid:

Wages of A=32 x Rs.5 = Rs. 160

Wages of B=37 x Rs.5 = Rs. 185

Wages of C=42 x Rs.5 = Rs. 210

Thus it is very clear that even if the output of a worker is below standard, he is paid at normal
rate

of wages. Under this scheme bonus is within the reach of every worker since it is paid just at
80

per cent of the efficiency and is step-up after 10 per cent increase in output

CONCLUSION

Service rendered to society, be it labor in factory or field, or moral service, cannot be valued
in monetary units. There cannot be an exact measure of its value, either of what has been
improperly called its "value in exchange" or of its value in use. If we see two individuals,
both working for years, for five hours daily, for the community, at two different occupations

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equally pleasing to them, we can say that, taken all in all, their labors are roughly equivalent.
But their work could not be broken up into fractions, so that the product of each day, each
hour or each minute of the labor of one should be worth the produce of each minute and each
hour of that of the other.

Broadly speaking, we can say that a man who during his whole life deprives himself of
leisure for ten hours daily has given much more to society than he who has deprived himself
of but five hours a day, or has not deprived himself of any leisure at all. But we cannot take
what one man has done during any two hours and say that this produce is worth exactly twice
as much as the produce of one hour's work from another individual, and reward each
proportionately. To do this would be to ignore all that is complex in the industry, the
agriculture, the entire life of society as it is; it would be to ignore the extent to which all
individual work is the outcome of the former and present labors of society as a whole. It
would be to fancy oneself in the Stone Age, when we are living in the Age of Steel.

REFERENCES

http://www.yourarticlelibrary.com/employee-management/wages/two-methods-of-
wage-payment-explained-with-diagram/35344/
http://dwardmac.pitzer.edu/Anarchist_Archives/kropotkin/wages/wages.html
http://www.expertsmind.com/questions/essential-characteristics-of-a-good-wage-
payment-system-30181763.aspx
http://onlineaccountreading.blogspot.in/2015/02/what-is-wages-payment-of-
systems-and.html
http://www.businessdictionary.com/definition/Taylor-wage-system.html
http://www.educationobserver.com/forum/showthread.php?tid=13132
https://www.coursehero.com/file/p6lqd51/Merrick-Differential-Piece-Rate-
System-or-multiple-piece-rate-This-is-a/
http://www.zeepedia.com/read.php?
piece_rate_base_premium_plans_suitability_of_piece_rate_system_group_bonus_
systems_cost_and_management_accounting&b=42&c=13