Methods of Wage Payment

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Methods of Wage Payment

There is a specific department in a firm called payroll department which is engaged in preparation of payroll based on time recording methods. The department prepares the salary and wages of individual workers.

Payroll also indicates the gross wages payable, the deductions and the net wages payable to each worker. The payrolls are prepared based on the wages payment system implemented, per se, by the firm. The flowing methods of wage payment are explained here:

Flat Time Rate System

Under this system, the workers are paid on an hourly, daily or weekly basis based on the time spent on the job. The overtime is paid as per the requirements of the act. The workers under this system receive a fixed minimum income irrespective of the output produced by them. The method is useful in job where quality is a concern, where individual worker has hardly any control over the job and the speed of production is governed by time.

Wages = Number of hours worked × Wage rate per hour

The benefit of this method to a worker is that the worker is assured of minimum income irrespective of the output produced. Therefore, the quality of product becomes a focus. The limitation of this method is that it does not offer any incentive to the efficient workers.

Time Rate at High Day Rate Plan

Under this system, the workers are paid at time rate but the rate is much higher than that is normally paid in the industry. The thinking is that the workers will work more efficiently. The workers who are efficient, skilled and experienced are selected to work. The wages are paid according to the time taken to complete a job. This method offers high incentives to workers who are talented. A very less degree of supervision is required in this method. However, ensuring that high day rate is really brought, the desired results are difficult.

Wages = Number of hours worked × High day rate per hour

Graduated Time Rate Plan

Under this method, wages are paid at different time rates. The wage rate varies according to the efficiency of the workers. The normal wage rate is paid for the standard efficiency and a higher rate for increased efficiency.

Piece Rate Method

Under this method, the workers are paid as per the production performed by them. A worker who produces higher output earns higher wages. This can be a straight piece rate system where rate per unit is fixed and the worker is paid according to this rate.

There can also be a differential piece rate system where standard rate per hour of production is increased as the output level increases. The increase in rates may be proportionate to the increase in output or proportionately more or less than that is pre-determined.

Taylor’s Differential Piece Rate System

This system presumes that there are only two classes of workers, efficient and inefficient. The model suggests that while efficient workers should be encouraged to the maximum possible extent, the inefficient workers should be penalized. Therefore, two different rates have been suggested for the two different classes of workers.

According to this model, if the workers are efficient, they should be paid at 120% of the normal piece rate and if they are inefficient, they should be paid at 80% of the normal piece rate. The standards of production are pre-fixed. If production is beyond the standard, it is regarded as efficient. It can be further explained through the following example.

Gantt Task Bonus Plan

This model was developed combining time rate, bonus and piece rate plan. The model suggests the following remuneration system given in Table.

Below standardGuaranteed wage rate
Standard output20% bonus of time rate = 120% of time rate
Above standardStandard high rate for the whole output
Assessment of Remuneration Under Gantt Task Bonus Plan

Therefore, the model provides sufficient opportunities to incentives the workers. Following are the advantages of this plan:

  • The workers who are below average receive guaranteed time wages.

  • It differentiates efficient and non-efficient worker due to extra bonus for efficiency.

The limitation is that it segregates workers into two categories: efficient and non-efficient. It is not a good policy for developing better relationship among the workers.

Halsey Premium Plan

The wages plan under this model was developed by F. A. Halsey, an engineer in USA. Under this plan, a standard time is calculated for each unit or job and 50% of time saved is allowed as bonus. If the actual time taken by the worker to perform a job is lesser than the standard, the worker becomes entitled for bonus. The bonus is paid equal to wages of 50% of the time saved. A worker remains assured of time wages if longer time is taken than the standard time.

We can calculate the wages under this model as follows:

Total earnings = × H R + – [ ] 50%( ) S H × R

where H are the hours worked, R is the rate per hour and S is the standard time.

Halsey-Weir Plan

Under this method, only 33.33% of the time is saved instead of 50% as suggested in the previous model. Accordingly, the formula for this method is modified as follows.

Total earnings = × H R + – 33. %1 ( ) S H × R

where H is hours worked, R is rate per hour and S is standard time.

The advantages of this plan are as follows:

  • It guarantees time wages to the workers.

  • Differentiates between efficient and non-efficient workers and provides incentives accordingly.

  • It reduces the labor cost.

  • When production increases, fixed overhead per unit gets reduced.

  • Overall production cost is minimized.

However, the major limitation is that the worker work in hurry to save more time to get higher bonus.

Rowan Plan

This is the premium bonus plan where bonus hours are calculated in proportion to the time taken, which the time saved bears to the time allowed and they are paid for at time rate. The formula for computation of total earnings is as follows:

Total earnings = H x R + (S-H / S) x H x R

where H is hours worked, R is rate per hour and S is standard time.

The advantages of this plan are as follows:

  • The worker receives guaranteed time wages.

  • Since the bonus increases at decreasing rate and efficiency, it ensures the quality of work receive importance at each level.

  • The wages saved in terms of time is shared between workers and employer both; it helps in reducing labor cost per unit.

  • It also helps in reducing fixed overhead per unit due to increased production.

The limitation is that workers do not receive full advantage of the time saved and a highly efficient worker is not adequately compensated.

Group Bonus Plan

At times, the output in a firm is measured in terms of group performance. In such cases, group bonus system is implemented. The total amount of bonus is determined according to productivity. This can be shared equally or in agreed proportion between the group members.

The advantages of this plan are as follows:

  • Developing team spirit among workers.
  • Most effective utilization of materials and time.
  • Group efforts receive better focus and help in productivity.

The group bonus plans can be budgeted expenses bonus where bonus is determined based on the savings in actual total expenditure as compared with the budgeted level of expenditure. Another category can be cost effective bonus where standards are pre-decided for expenses like material, labor and overheads. The actual expenditure against the standards is measured and if there is a savings in actual expenditure, cost effective bonus is applied and a proporation of such savings is distributed among the workers.

Priestman’s Bonus Plan

Under this method, the standards for output are pre-determined and if actual production exceeds the standard level of output, a fixed percentage of bonus is paid on the excess output. The amount of bonus is distributed among the workers in the particular production unit. The limitation of this system is that it does not differentiate between efficient and inefficient workers. This method is generally implemented in foundries.

Towne Profit Sharing Plan

Under this plan, the standards are fixed particularly for labor costs and then actual cost is compared with the fixed standards. If there is a saving in the costs, the saving is shared by the workers and the supervisors in agreed proportion. The concept is that if there is a saving in the cost, not only the workers but also the supervisory staff should also be rewarded since the cost reduction occurred due to joint efforts.

Non-monetary Incentives

Many firms introduce the system of non-monetary incentives. These incentives are given in addition to monetary incentives to encourage the workers and motivate them to contribute more effectively. The benefits may not result in additional remuneration to workers but they certainly help to improve better participation.

Some of the usually practiced nonmonetary incentives include free education and training, medical benefits, subsidized canteen facilities, superannuation benefits like pensions, gratuity, life assurance schemes, sports and recreation facilities, housing facilities, etc.

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