Written by A piece rate system is a form of remuneration where workers are paid on the basis of the number of units produced.
It is a remuneration structure where employees are paid for each unit of output they produce, rather than for the number of hours they work.
In this system, employees are paid a fixed amount for each unit of work they complete, regardless of how much time it takes them to finish the work.
Unlike the time rate system where employees are paid based on time worked, the piece rate system involves paying workers based on the number of outputs produced.
The basic principle of a piece-rate system is that the workers are paid for their productivity, rather than the number of hours they work.
This means that if an employee produces more units, he earns more money, and if he produces fewer units, he earns less.
This type of wage structure provides incentives for employees to work more efficiently and effectively, as they are directly rewarded for their efforts.
The formula to calculate wages under the piece rate system is the number of units produced multiplied by the piece rate.
Example
On a normal day of 8 hours, I was able to produce 100 units. The usual hourly rate applicable to all workers is N20. Calculate my gross wages.
Suggestion solution:
To calculate total wages using a piece rate basis, we will multiply the number of units produced by the piece rate.
Since the number of units produced is 100 and the piece rate is N20, it follows that my gross wage is N20 * 100 or N2000.
Advantages of Piece-rate System
1. Efficiency: Under a piece rate system, the workers’ wages are determined by the amount of output they produce, rather than the number of hours worked.
This means that workers are directly rewarded for their effort and productivity.
As a result, workers are likely to put in more effort to produce more output, which can lead to increased efficiency and productivity.
2. Increase in production: Another advantage of the piece rate system is that it can increase production.
If wages are paid using a piece-rate system, production will increase because workers have a direct financial incentive to increase their productivity.
Since workers are paid on the amount of output they produce, they are encouraged to work harder and produce more output in order to earn more money.
3. Less supervision: When workers are paid on a piece-rate basis, less supervision is required.
Since workers are paid based on the amount of output they produce in a piece-rate system, they are motivated to work independently and efficiently, thereby requiring lesser supervision.
4. Better utilization of equipment/machines: When workers are remunerated on a piece-rate basis, machines and other equipment will be better utilized and managed.
This is because workers’ wages depend on the functionality of the equipment. If the machine, for example, breaks down, workers’ wages may be adversely affected because they would not be able to produce goods.
Furthermore, by using a piece-rate system, an organization can reduce repair costs on machines and equipment because workers may put more effort into keeping the machines and equipment in good working conditions because their wages depend on the equipment.
5. Effective cost control: Piece-rate system is usually associated with an increase in production, which can result in a reduction in overhead expenses per unit.
Overhead costs are fixed costs that do not directly change with the level of output.
As production levels increase, the fixed overhead expenses are spread across a greater number of units, resulting in a decrease in the overhead expenses per unit.
Since the piece rate system is usually associated with increased production, it can potentially reduce the overhead expenses per unit.
Disadvantages of the Piece-rate system
1. Poor quality of goods: Since workers are paid based on the number of units they produce, piece rate system can lead to a focus on the number of goods produced over the quality of goods.
Rather than focusing on bettering the quality of goods, workers will focus on producing more units of goods within a short period so as to maximize their pay.
Workers will produce poor quality or sub-standard goods and services because they will be in a rush to produce more goods and services.
Therefore, piece rate can lead to the production of poor-quality goods if workers prioritize quantity over quality in a bid to maximize their pay.
2. No fixed minimum wages: Workers’ wages in a piece rate system are determined by the number of units they produce or tasks they complete.
In other words, workers’ wages depend on their productivity, which means that there is no guarantee that a worker will earn a minimum wage in a piece rate system.
For example, if a garment worker is paid N10 per shirt he sews, he is going to earn money only if he is able to sew a shirt, regardless of the time spent.
So, if he works in the shop for 10 hours a day and could not finish sewing a shirt, he will earn nothing even though he has worked for 10 hours.
Because minimum wage is not guaranteed, new and unskilled workers may suffer since they are not able to produce as many units as old or skilled workers could.
3. Dislike by trade unions: Trade unions often prefer wage systems that guarantee a minimum wage for workers.
In a piece rate system, if a worker does not produce enough units or complete a particular task, there is no guarantee of a minimum wage.
Since the piece rate system does not guarantee minimum wage, trade unions are often opposed to it.
4. Health problems: Since work is based on the number of units produced, workers may be over-stressed.
Workers may feel pressure to produce more than they can handle to earn more money, which can result in overexertion, exhaustion, and even injuries.
Furthermore, workers who are feeling unwell or have other personal problems may still come to work because they won’t be paid if they don’t work.
5. Unfairness in pay: Employees who are faster or more efficient may earn more than those who are slower or less skilled, even if they are working equally hard.
This can result in resentment and dissatisfaction among workers, especially if they perceive the system as unfair.
