Top 3 Methods of Wage Payment | Cost Accountancy

The following points highlight the top three methods of wage payment. The methods are: 1. Time Rate Plan 2. Piece Rate 3. Incentive Wage Plans.

Wage Payment: Method # 1.

Time Rate Plan:

The method which is related to the hours of work is known as Time Rate Plan. Under this method the worker is paid at an hourly, daily or weekly rate and his remuneration, thus, depends upon the time for which he is employed and not upon his contribution to production.

This method of wage payment is suitable where:

(1) The quality of the work is of paramount importance;

(2) The output of the individual workers cannot be measured;

(3) The speed of production cannot be influenced by the energy of the worker;

(4) Where close supervision of work is possible; and

(5) Where increased production and productivity do not commensurate with the incentive paid.

Calculation of Earnings:

Earnings = Clock hours worked ¥ Rate per hour. OR

Earnings = Number of days worked ¥ Rate per day

Time work is most suitable for the two extreme grades of workers, viz. the highly skilled and the unskilled including learners and apprentices.

Wage Payment: Method # 2.

Piece Rate:

This system is also known as payment by result. Under this system the payment of wages is based on performance. This system is the oldest and is widely applicable in many industries like garment manufacture, ancillaries of various kinds, plastic, footwear, printing etc. Payment of wages is based on the number of units of a product produced by a worker irrespective of the time taken.

The earning of a worker is calculated as:

E = N x R; where E = Earning, N = Number of units produced, R = Rate of wages per unit.

If a worker completes 100 units of product ‘X’ in a month and the rate per unit is Rs.2.75, then the worker’s earning will be Rs.275 per month (100 x Rs. 2.75). The piece rate system can advantageously be applied to work of a standard or repetitive nature, where fixation of piece rate is easier.

Under this system the employee, not the employer, stands to gain or lose as a result of his attained efficiency. In the words of Wheldon, the general principle underlying this system may be stated as “produce more, earn more; produce less —earn less”.

Advantages:

The following are the advantages of Piece Rate System of wage payment:

1. This system encourages the workers to produce more since their remuneration is proportionate to their efforts. Thus production is increased which leads to minimisation of cost per unit.

2. This system is more equitable since reward is related to effort.

3. There is an increase in productivity, more output is turned out in a shorter period of time. The overhead cost per unit of production is lowered.

4. Computation of labour cost in advance of production is possible since the fixed rate per unit has already been determined.

5. Calculation of wages is simple and easy.

Disadvantages:

1. Production is encouraged at the expense of quality.

2. Having earned a desirable amount which the workers might have fixed in their minds and to avoid incidence of taxation, they may frequently absent themselves from work, thereby disturbing the production flow of the factory.

3. Under this system of wage payment only the worker’s output is considered, his other qualities are ignored.

4. This system tends to develop the tendency of increasing imperfections, defectives and spoiled work and higher depreciation costs because of considerable wear and tear of plant and machinery.

Wage Payment: Method # 3.

Incentive Wage Plans:

Premium Bonus Systems are variations of the piece rate systems and they mainly differ in showing of bonus. The mechanism of this system is that the results of efficiency are shared by the employer and employee on some agreed basis.

The basic purpose of an incentive wage is to induce worker to produce more so that he can earn a higher wage. It aims at both increased productivity and production. The factory overhead cost per unit is reduced because of increased production i.e. greater number of units are produced.

Principles:

The principles of good incentive scheme are:

1. There must be full consultation with the various employees’ unions to ensure mutual agreement between the employer and employees. Any disagreement at a later stage may make the scheme futile.

2. Before reaching any agreement the objectives to be attained should be set out and clearly defined. There must not exist any ambiguity in the agreement.

3. No limits should be placed on additional earning under the scheme.

4. The scheme should be simple to administer.

5. The incentive system must be related closely to the efforts involved in the performance of the job.

6. The wage incentive system should be based upon standards of performance, time and motion studies, job evaluation and merit rating.

7. It is highly desirable that indirect personnel should be covered by the scheme, that is, they have a share in the scheme.

8. Performance above standard should be rewarded. For this reason there must be provision for higher wages for efficient workers whose efficiency goes beyond the standard.

9. The level of productivity required by the scheme must be attainable by the average employee. Performance levels should be in reach of the average worker.

10. Individual incentives should be used wherever possible.

Features:

The following features are common to all types of premium bonus plans:

(i) Minimum wage is guaranteed to every worker.

(ii) Savings arising out of employee’s higher efficiency are shared by both the employer and the employee

(iii) Labour cost decreases with the increase in production and productivity.

(iv) Employees are provided with modern facilities, equipment and latest techniques to increase productivity and production.

Incentive wage plans involve differential piece rates and bonus plans. The premium bonus plan may be individual or group.