Methods of Wage Payment to Workers in Cost Accounting!
The remuneration paid to employees should reduce labour turnover, increase productivity of employees and improve the quality of output.
There are two basic methods of wage payment:
(1) Payment made on the basis of time spent by the workers in the factory irrespective of output produced.
ADVERTISEMENTS:
(2) Payment of wages on the basis of production or work done irrespective, of time taken by the worker.
These methods of wage payment are respectively called time wages and piece wages.
(A) Time Rate System:
Under this method the workers are paid on the basis of hourly daily, weekly or monthly rate.
There are five variations of time wages which are as follows:
ADVERTISEMENTS:
(1) Flat time rate.
(2) High day rate.
(3) Measured day rate.
(4) Graduated time rate.
ADVERTISEMENTS:
(5) Differential time rate.
(1) Flat Time Rate:
Under this method workers are paid at a single rate on the basis of the time they are employed. The flat rate may be per hour, per day or per week or on monthly basis. The earnings of employees depend on total time they spend in the factory. The flat rate is decided on the basis of rates prevailing in the locality where the industry is situated.
This flat rate is suitable for highly skilled workers, unskilled workers and apprentices. It is suitable in the under mentioned types of work.
ADVERTISEMENTS:
(1) Where high quality goods are being produced.
(2) Where production is mechanised and involves high speed.
(3) Situations where output cannot be measured.
(4) Where effective and close supervision is possible.
ADVERTISEMENTS:
(5) Where incentive schemes cannot be introduced as the workers may not be directly involved with the final output.
Time rate is simple and easy to calculate. The worker is assured of payment for time spent in the factory.
However, this method has the following disadvantages which far outweigh its advantages:
(1) Employees are not rewarded on the basis of merit as both inefficient and efficient workers are paid at the same rate.
ADVERTISEMENTS:
(2) Employees are paid wages for idle time also, since they are not paid on the basis of output.
(3) The labour cost per unit does not remain, constant as the output ‘fluctuates and this makes it difficult to prepare tenders or quotations.
(4) Supervision cost may go up as strict supervision is essential to get the work done.
(5) The workers may go slowly on work to create scope for overtime which doubles the labour cost.
ADVERTISEMENTS:
To conclude the flat time rate does not recognise effort and it is not helpful in increasing output.
(2) High Day Rate:
This method is introduced to attract skilled workers by offering the highest wages in the industry. This method also intends to remove the draw backs of flat time rate which does not provide incentive for efficiency. High rate is paid to employees to achieve, present targets of output. The target or standard output fixed is at high level which only a skilled worker can achieve.
When high rate of wages are paid, overtime work is not permitted. High day rate reduces the labour cost and over-head cost per Unit with the help of high output. This method will be successful only if efficient workers cooperate in achieving high standards of output.
(3) Measured Day Rate:
Under this method of time wages the workers are given a particular work to be performed and the rate is fixed on the basis of the level of performance of specified work. This gives incentive to workers to get paid at high rate for high performance. The main drawback of measured day rate is that the workers are not paid any additional remuneration for any improvement in the level of performance originally specified.
ADVERTISEMENTS:
(4) Graduated Time Rate:
Under this method the wage rate is fixed by linking it with cost of living index. The rate of wages goes on changing with change in cost of living index. During the period of rising prices the workers find it helpful as they are compensated for increased prices.
(5) Differential Time Rate:
This method recognises individual efficiency and skill. The workers in the same group will be paid at different rates. High rates-are paid for efficient workers and lower rates are paid for inefficient workers. There is positive incentive offered for improvement of performance.
(B) Piece Rate System:
This is also called ‘payment by results’. The workers are paid on the basis of output produced by them. The earnings of the workers depend on the number of units of output produced and the wage rate per unit received by the worker. The payment by results system is successful only if the work is of repetitive nature.
The effect of piece rate is that the remuneration is at constant rate and labour cost per unit remains stable throughout the range of output. The total cost per unit decreases considerably on account of reduction in the fixed overhead per unit for increased volume of production.
Variations of Piece Wages:
There are four variations of piece wages.
They are as under:
(I) Straight Piece Rate.
(II) Differential Piece Rate.
(1) Taylor’s differential piece rate system.
(2) Merrick’s multiple piece rate system.
(3) Gantt’s task and bonus plan.
(I) Straight Piece Rate:
Under straight piece rate system workers are paid according to the number of units produced at a fixed rate per unit.
Advantages:
(1) Employees are paid according to merit as the efficient workers earn more wages as their output is more. In this way it distinguishes between efficient and ordinary workers.
(2) Piece rate acts as incentive to induce the workers to produce more.
(3) Higher output brings down the cost per unit and increases the profit margin of employers.
(4) Under this method employer has no worries about payment for idle time and more over it reduces idle time, thus ensuring effective usage of available time.
(5) Submitting of tenders does not create any difficulty as the labour cost per unit is constant.
(6) Machinery and tools are taken care of by the workers as they are aware that the defects or breakdown will reduce their chances of higher production and higher wages.
(7) The supervision cost is low. It is in the workers interest to work sincerely and close supervision is not required.
(8) There is inducement or encouragement to average workers also to produce more and earn more wages.
Disadvantages:
(1) Fixing of straight piece rate is difficult. If low piece rate is fixed it will frustrate the workers. Thus, ‘equitable piece rates’ are to be fixed to induce the workers.
(2) Flat piece rate being uniform piece rate paid to the employees irrespective of level of output, it may not induce efficient workers to produce more and reach higher levels of effectiveness.
(3) The wages of employees may reduce considerably due to the fault of employer or co-workers in many instances.
(4) In situations of declining demand for goods, the production may go on increasing, embarrassingly.
(5) Workers will always be aiming to produce more and in their anxiety may cause more accidents and undue haste and strain may prove to be injurious to the worker’s health.
(6) The workers’ anxiety for higher production may lead to more defectives, spoilage, and wastage of raw materials.
(II) Differential Piece Rates:
This is an improvement over straight piece rate to increase the performance of both efficient and inefficient workers. Two or more rates are offered to workers. Higher performance is paid at a higher rate and lower performance is paid at lower piece rate. In other words the increase in wages is in proportion to increase in production.
There are three types of differential piece rates:
(1) Taylor’s differential piece rate
(2) Merrick’s differential piece rate system (Multiple piece rate system)
(3) Gantt’ Task and Bonus plan.
(1) Taylor’s Differential Piece Rate System:
The ‘Father of Scientific Management’ F.W. Taylor has introduced this method.
Main features of the method are as under:
(a) Time wages or minimum wages are not guaranteed.
(b) Standard output is determined and standard time is fixed for the output, based on time and motion studies.
(c) Actual performance of workers is compared with the standard and the efficiency level of the performance is computed as percentage of the standard.
(d) Two piece rates are to be applied for computation of earnings of each worker.
‘Low price rate’ is applicable for below standard output.
‘High piece rate’ is applicable for output at or above standard.
For example – if standard output per hour is 10 units and high piece rate is Re. 1.20 per unit and low piece rate Re. 0.80 per unit, workers producing 10 units or more per hour are paid at Rs. 1.20 per unit and those who produce less than 10 units per hour are paid at Re. 0.80 per unit.
Though no rates are specified, high piece rate of 120% of the straight piece rate and low piece rate of 80% of the straight piece rate are usually employed.
This method is intended to reward efficient workers and penalise substandard workers. The assumption is that ‘slow workers’ also will try to improve and attain the standard to earn more.
This method was not popular due to its ‘harsh’ treatment of average workers and trade unions were against it because it does not guarantee time wages.
(2) Merrick’s Multiple or Differential Piece Rate System:
This method is an improvement over Taylor’s method. This method has three rates for different level of performance. Wages are paid at ordinary piece rate to those workers whose performance is less than 83% of standard output; 110% of the ordinary piece rate is given to workers whose level of performance is between 83% and 100% of the standard and 120% of the ordinary piece rate is given to workers who produce more than 100% of the standard output.
(3) Gantt’s Task and Bonus Plan:
Under this method a standard time is fixed for a task to be performed by workers.
Actual time taken is compared with the standard time and efficiency is ascertained-
(1) Time wages are paid to the workers whose performance is below 100%, i.e., those who take more than the standard time.
(2) Time wages and 20% of lime wages as bonus are paid to those workers who take standard time to complete the job (whose performance is at 100%).
(3) Wages at high piece rate on the whole output are paid to the workers who take less than standard time (whose efficiency is above 100%).
Some authors have provided for 20% bonus over and above high piece rate for above standard workers. But an overwhelming majority of authorities concur with the rates given above and are used here.
Premium plans are introduced to enhance the individual performance of workers. The workers are induced to show efficiency by performance of job in less than the standard time.
Under the premium plans, a standard time is fixed for a specific job or operation and the worker is paid for the actual time taken by him at hourly rate plus wages for a portion of the time saved as bonus. “A premium and bonus plan” is called “incentive plan” because the worker is provided incentive to earn more wages by completing the work in less time.
(1) The plan should be simple and easy for workers to understand.
(2) The plan should offer sufficient incentive to the workers.
(3) The standard time should be set on the basis of time and motion study and should be realistic.
(4) Standard time once fixed should remain for a long duration unless there are changes in the method of work.
(5) The system should increase production and lower the cost of production.
(6) The workers should have scope for higher earnings with each improvement in performance level.
(7) The quality of output is also to be maintained.
(8) The system should also benefit indirect workers.
(9) It should reduce labour turnover.
(10) The cost of operating the schemes should be minimum.
Premium Bonus Systems:
The following are some of the popular premium bonus systems:
(1) Halsey premium plan
(2) Halsey – Weir premium plan
(3) Rowan system
(4) Barth variable sharing plan
(5) Emerson’s efficiency plan
(6) Bedaux point premium system, and
(7) Accelerating premium plan, etc.
(1) The Halsey Premium Plan:
This system is known as fifty-fifty plan. It was introduced by F.A. Halsey, an American engineer.
Under this method a standard time is fixed for the performance of each job; worker is paid for actual time taken at an hourly rate plus 50% of time saved as bonus:
(1) It is simple to understand and easy to calculate.
(2) Standard time is fixed for each job.
(3) Both employer and employee get benefited equally from the time saved by the worker.
(4) Introducing this method is easy.
(5) It provides incentive for efficient workers. At the same time below average workers are not penalised.
(6) The time saved has the effect of reducing labour cost and overhead.
Demerits:
(1) Fixation of standard time, which is to be uniform is very difficult.
(2) If wage rates are low incentive value may be low.
(3) Earnings are reduced at high level of efficiency.
(2) Halsey-Weir Scheme:
Under this method the worker gets a bonus at 3 0% of time saved unlike 50% under Halsey plan. Except for this change, Halsey and Halsey-weir plans are similar.
(3) Rowan System or Rowan Plan:
This scheme was introduced in 1901 by David Rowan of Glasgow, England. The wages are calculated on the basis of hours worked whereas the ‘bonus is that proportion of the wages of time taken which the time saved bears to the standard time allowed’.
Merits:
(i) Time wages are guaranteed to the worker.
(ii) It is suitable for learners and beginners.
(iii) Both the workers and employers are benefited.
(iv) It pays higher bonus to workers when compared with Halsey scheme upto a specific level of time saved.
Demerits:
(i) It is difficult to understand and calculate for the ordinary workers.
(ii) Efficiency beyond certain point is not rewarded.
(iii) The system is more complex and expensive.
(4) Barth’s Variable Sharing Plan:
Under this scheme wages are not guaranteed. The earnings is calculated by multiplying the rate per hour by the geometric mean of standard hour and actual hours worked.
Thus,
(5) Emerson’s Efficiency Plan:
Under this plan, a standard time is fixed for every job or work. Worker’s output is measured as a percentage of the standard fixed. When a worker’s efficiency reaches 66 2/3% of the standard, he becomes eligible to get bonus at given rate. The rate of bonus increases gradually when efficiency .percentage goes up from 67% to 100% of the basic time rate. For every additional 1% efficiency beyond 100%, additional bonus is 1 % of the time rate.
Emerson’s plan is beneficial to the workers as they are guaranteed with time wages and also are entitled to get bonus. Even average workers can earn bonus since it starts at 66 2/3% of the standard. When workers attain and cross the standard by reaching and surpassing 100% efficiency level, bonus also accelerates.
(6) Bedeaux’s Point Premium System:
It is a combination of time and bonus schemes. Standard time for a job is determined by time study. Standard production per hour is fixed and the unit of measurement is ‘minute’. An hour is taken as sixty minutes. Each minute at standard time is called a point-Bedaux point or ‘B’.
The number of points has to be determined in respect of each job. If actual time is more than the standard time, the worker is paid on hourly basis. Excess production is counted in points, for which a bonus of 75% is allowed to the worker and remaining 25% goes to the foreman, which itself is a novel feature.
Where,
B.S. = Number of points saved, i.e., number of points actually earned less the standard number of points for the job.
R.H. = basic Rate per hour.
(7) Accelerating Premium Plan:
Under this premium plan, bonus increases at a faster rate as output increases. The plan offers a higher incentive to the workers. The efficiency is determined on the basis of time saved or increased output. The plan is a complex one. It goads and forces the workers to increase production. Beyond a limit, workers may find the strain is intolerable.
Group Bonus Systems:
Premium bonus schemes are meant for individual incentive where their output can be measured. In some cases individual output cannot be measured. Under such circumstances group bonus schemes take the place of individual bonus plans. The total bonus earnings are determined according to productivity of the group. Such bonus can be shared between workers of different skills in different specified proportions, the latter being commonly based on the individual time rates although agreed percentage allocations may be used.
The main group bonus schemes are as under:
(1) Budgeted expenses bonus,
(2) Cost efficiency bonus,
(3) Priest man system,
(4) Towne’s Gain sharing system, and
(5) Waste reduction scheme.
(1) Budgeted Expenses Bonus:
Under this, method bonus, is based, on the savings in actual expenditure compared with the total budgeted expenditure.
(2) Cost Efficiency Bonus:
Under this method, the bonus is based on reduction of total cost or of specific elements of costs. The standard cost is fixed, actual cost is compared with the standard and the difference in the form of saving is ascertained and a portion of such saving is paid to employees as bonus.
(3) Priestman System:
This method is used in foundries and related works in which standard output is fixed. Where actual production exceeds the standard, workers are paid bonus equal to the percentage in output over the standard. When actual production is less than the standard, no bonus is paid though time rates are guaranteed.
(4) Towne’ Gain Sharing Plan:
This group bonus scheme was introduced by Mr. H.R. Towne in U.S.A., during the year 1886. The bonus is paid on the basis of savings in labour cost. The actual costs are compared with standard costs, one half of the savings is paid to workers pro rata with the wages earned. In addition to the workers the supervisory staffs are also paid a part of the bonus.
(5) Waste Reduction Bonus:
This method intends to reduce material wastage. It is adopted in industries where material cost is high.
In this scheme standard wastage is fixed; a percentage of the reduction in wastage is paid as bonus to the workers.
Indirect Monetary Incentives:
The prosperity of business firms depends on employees. The employees are given a share in the profits based on the prosperity of the concern. Thus, co-partnership and profit sharing schemes fell under the category of indirect monetary incentives.
(a) Profit Sharing:
In this scheme there is an agreement between the management and employees, whereby the employer pays them a predetermined share of the profits of the undertaking in addition to wages.
In India payment of bonus based on profit sharing is governed by payment of bonus Act, 1965. The available surplus during the year is ascertained as per the provisions of the Act and 67% of the available surplus is treated as amount available for bonus in the case of companies (except banking companies). In case of a banking company 60% of available surplus is treated as allocable surplus. The minimum bonus is 8.33% of salary and maximum bonus is 20% of salary.
Disadvantages of Profit Sharing Scheme:
Although both direct and indirect workers are entitled to bonus this scheme have certain drawbacks. Profit earning depends on the efforts of workers to a limited extent. Profits may not accrue even if production and productivity is high. Profits fluctuate year to year. Moreover profit is influenced by accounting decisions and business policies. It many frustrate the employees. It is very difficult to find a suitable way for apportioning profits on the basis of efficiency and there is a time lag between service rendered and payment of bonus. Therefore, it may not induce higher efficiency.
(b) Co-Partnership:
In co-partnership or co-ownership employees are allotted shares of the company and they are to receive profits in proportion to their capital. In certain cases employees are given loan to buy the shares of the company and minimum period of service to be rendered is prescribed to get the shares allotted. This reduces labour turnover. This scheme increases morale of the employees to a great extent if the company is profitable. Example – The stock option schemes in software companies.
Non-Monetary Incentives:
The employees are provided better facilities, instead of additional monetary payments. This is done to attract the efficient workers.
Non-financial incentives include the following:
(1) Favourable working conditions
(2) Free health care
(3) Providing rent free accommodation
(4) Free education facilities for children
(5) Free transport facilities
(6) Free holiday facility
(7) Providing subsidised food
(8) Welfare facilities
(9) Opportunities for advancement, and
(10) Protective clothing, liveries, uniforms, etc.
Advantages of Non-Monetary Incentives:
(1) Attracting efficient and skilled labour force
(2) Increasing the morale of employees
(3) Reduction of labour turnover
(4) Establishment of goodwill for the company, and
(5) Reduction in absenteeism.