Basic Methods of Remuneration System

Time Rate System

The time rate or day rate is related to the hours of wage and is commonly used. The wage rate can be fixed on hourly, daily, weekly, fortnightly or monthly basis depending on the nature of his skill.

This method can be applied in the following circumstances:

• The quality of work is more important;
• The output of a worker cannot be measured;
• Where output of a worker is not in his control;
• Where the work can be closely supervised;
• Where increase in output is negligible compared to the incentive.

Advantages of Time Rate System

The advantages of time rate system are:

• It is simple and easy to understand;
• It is recognized by trade unions as all workers are paid alike;
• It involves less clerical expenditure;
• A steady income is assured;
• As there is no hurry, tools and materials are handled carefully. Wastage is minimized.

Disadvantages of Time Rate System

• It does not encourage initiative;
• Labour cost may raise thereby decreasing profit. This may be caused by decrease in productivity;
• Standards for labour are difficult to set;
• Production may decrease thus upsetting production schedules, creating production bottlenecks and increasing cost per unit;
• Labour cost cannot be estimated for the purpose of quotations;
• It creates more idle time;
• This system encourages inefficiency;
• It requires close supervision to ensure that employees are working.

A few variations of this system are in use. They are:

High Wage Plan

Compared to the wage rate prevailing in the region, a higher time rate is fixed. This is done to attract efficient workers so that output is high. To enable the workers to achieve the standard, suitable working conditions are created.

Unsuitable or inefficient workers are taken off the scheme.

The employer benefits because overheads and wage costs per unit are reduced.

This scheme is suitable when high quality and productivity are required. But it should be possible to set up standards and measure the output.

The advantages are:

• Reduces supervision;
• Simple and inexpensive (because of lower labour cost per unit);
• Attracts skilled workers;
• Increases productivity;
• Decreases wages and overhead cost per unit.

• Different Time Rates: For different levels of efficiency, different rates are fixed. For efficiency up to the standard level, normal wages are paid and for efficiency beyond the standard level, the rate is gradually increased. This is similar to differential piece rate system.
• Measured Day Work (Graduated): The hourly rates are divided into two parts. One part is the fixed part which depends on the nature of the job and the other part is variable depending on the merit rating and cost of living.

This system is very complicated. The calculations involved increase when the workers change jobs frequently. Merit rating may be arbitrary. There is multiplicity of rates. The workers do not easily understand the system. Because of all these factors this system is not popular.

Payment by Results

Payment by results is a method of paying wages which depends on the output or units produced by the worker. The worker can increase his income by producing more units. The main classifications of payment by results are003A

• payment is directly proportionate to the worker’s production; for example, straight piece work system;
• payment proportionately increases as the production increases, like the differential piece-work system;
• the rate of payment decreases as output increases e.g. premium bonus methods;
• The payment varies at different levels of production like the accelerated premium method.

Piece Rate System

The wages are paid on the basis of the output of workers, i.e., on the basis of quantity of output. It is simple and common method of wage payment. The worker is paid on the basis of his work, not taking into account the time involved.

The wage is calculated as follows:

Wage = Number of units produced x Rate per unit.

The piece rate can be applied in the following cases:

• The work is of standard or repetitive nature;
• Piece rate can be easily fixed;
• There is uninterrupted flow of work;
• It is necessary for the employer to get maximum production; and
• Quantity of output depends on effort and does not require skill.

The piece rate can be fixed by determining the time required to complete a piece. This can be done from past experience or estimation or time and motion study. In case the job is new, a few trial runs can enable fixation of piece rates. After this, the time is correlated to the wage rate to determine the piece rate.

Merits of Piece Rate System

• A worker becomes an expert by continuously doing the work. Thus he can earn more.
• It increases efficiency.
• It reduces costs.
• Idle time is automatically controlled.
• The reward is related to effort. Efficiency is recognized.
• Quotations can be easily made as cost per unit is known.
• Supervision can be reduced as workers are paid according to performance.
• Workers endeavor to increase production by discovering new techniques of producing goods.

Demerits of Piece Rate System

• Quality may be sacrificed to increase production.
• Wastage may be high if not properly supervised.
• It necessitates more supervision and inspection so that units attain the standard quality.
• In order to maximize output, the workers may use machines and tools recklessly.
• If work stops due to machine break down, power failure etc., the workers may feel insecure.
• The workers’ health may be affected due to over-strain.
• The inefficient and less efficient people may feel frustrated.
• Lack of ready market may cause over production and surplus.
• Determination of piece rate is difficult.

Piece Rate with Guaranteed Time Rate

A certain level of output is determined. Workers are paid on the basis of output. If the output is less than the standard, the worker is paid on time rate basis.

Thus, this system incorporates the merits of the time rate and piece rate system and eliminates the demerits of them.

But it is very complicated and misunderstandings may arise.