Piece Rate, Piece Work, Piece Rate Pay Systems
The purpose of piece rates is to motivate employee performance in return for a monetary reward. A simple, valid concept which is centuries old. Incentives are effective employee motivators because most people go to work for money in the first place. Incentives, piecerate, or piece rate pay systems, offer an opportunity for employees to increase their pay by their own efforts both physical and mental.
Please keep in mind that piece rates don't replace minimum wage laws. But piece rates will often insure that actual labor costs match budgeted costs more closely.
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 apply anywhere the work content can be predicted. Piecerates have traditionally been set in factories, especially apparel. But other labor intensive activity is also well suited for piecework, for instance:
1. Construction; masonry, block, brick, slabs, beams, electrical, dry wall and sheeting, stucco application, painting, piping and plumbing, carpentry. roofing
2. Installation for commercial or home; HVAC, electronics, security, TV, irrigation, flooring, appliances, septic tank, energy equipment such as windmills and solar panels
3. Hotel housekeepers, maids
4. Maintenance with a clear work description such as preventive maintenance
5. 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.
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.
Will incentives pay for themselves? Maybe so, because productivity and output tend to increase with incentives. But balance improvement against any extra costs you anticipate, and consider options to gain many of the benefits with somewhat less structure.
A piece rate agreement is what you make it . A piece work agreement can be simple, 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, 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, a tradesman 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.
Travel and traffic are factors in construction, delivery, off site and remote locations
Construction, delivery, off-site and remote locations will involve travel. Any discussion of travel in this day and age will focus on GPS, global positioning systems. GPS is very sophisticated today and will get more so. It is inexpensive and many commercial applications exist to allow effective route planning; your organization could use it for that purpose at least. Instructions to drivers should include GPS input.
When GPS can recognize rush hour, and road construction delays, and the weather, and accident backups, it will become even more useful but that time is not yet I think; stay tuned.
There is at least one more travel factor to consider, which arose with a masonry client of JPR. We talked about the potential problems of setting rates for travel during the day, and someone would mention the hypothetical day in court when an employee would claim the incentive made him drive too fast and he had an accident and got hurt. I'm an engineer and not a lawyer, so I don't know the answer to that nor if that is different from any on-the-job exposure.
Observe the work and correct the problems you see; then adopt reliable reporting. Maybe you will improve enough you won't choose piece rate.
These actions are very effective and pretty simple to accomplish. Once you have performed them, results may be quite impressive.
1. Observe; field and remote operations may yield the most improvement but this approach is effective for any work situation which is not measured.
Work measurement (someone with a watch and a note pad is all it takes) can spot inefficient practices which were eminently correctable. Typically,
a. Lost time is prevalent, and study can quantify how much and why it occurred.
b. Crews are not the right size.
c. Correctable constraints and delay are common, usually because some activity is not performed when crews are ready to perform the next operation.
d. The work pace is not what management expected.
e. Non-value-added time during the work day is excessive.
Management, when it learns of these problems, can improve communications, change internal practices and supervision, balance crews, and add equipment based on the results. Then of course after the person with the watch has observed the work, it is easy to establish formal rates and expectations for individuals and crews.
2. Adopt an effective reporting system and use it.
a. Develop an informative, simple, reporting system for the key results, especially output, time spent, time lost.
b. Install the system and let employees know that you monitor activity. Involve direct supervision in the process.
c. Summarize and analyze reports, then act accordingly.
d. 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.
e. Relate results to project profitability, and to the rates that are part of the local bid structure for work.
Good luck with your project.
Jackson Productivity Research Inc.