Compensation Schemes and Their Effects on Output
A shift from compensation based on the time put into work to compensation based on the pieces produced (quantity) has significant overall output changes. The theory behind this is the wages that each type of compensation yields and the worker effort that each mode of compensation triggers. Recent research shows that the effort of a worker increases in piece-based compensation schemes than in a fixed time-based compensation scheme.
The explanation for this is due to the overall wage difference between the two compensation plans. Studies show that the two compensation schemes have a significant difference of a third of the total wage. A reward scheme of a company should motivate the workers to increase their production and subsequently increase the output. On the other hand, a reward scheme that is constant and insignificantly changes to motivate the workers, only a neutral productivity rate with minimal or no increase at all. This situation only sees the output remaining constant with minimal changes, and the changes likely to occur are negative, a fall in the volume of output.
The most consistent trend in the labor market is a recorded increase in productivity in compensation schemes where wages are a direct function of the worker’s individual output. These are the piece rates schemes. At these rates, the wages of an individual directly depend on the number of units of production that the character produces. The more the products produced, the higher the wage, and the lesser the units produced by a character, the lower the wage. This has a general effect of increasing the output per worker and the overall output volume in a company. Piece rates have an effect of reducing absenteeism among the workers.
Time rates compensation schemes have been associated with reduced performance of the employees. This observation has only set a record in easy-to-observe tasks in a company. Nevertheless, time rates and gain sharing also prove enhanced performance on the hard-to-observe tasks. Though history proves that an optimal compensation scheme pays for performance, technology has significantly affected the piece-rate method as the current upcoming technology has guaranteed high and quality products which are produced faster than before.
This becomes difficult to use the piece rate as all units produced by a company may demand different compensation rate. The use of piece rates has also been on the decline since it obstructs introducing new products other inventive manufacturing methods. Companies are no longer interested in the quantities. Rather the interest is in the quality that is in question and not the quantity. Manufacturers are looking forward to concentrating on the quality of their products to meet the required standards of the increasing demand.
The rapid changes in the manufacturing trends have significant effects on the optimal payment methods. The current trends have to increase in multi-tasking where the same workers do both the easy-to-observe tasks, for instance, production, and the hard–to–observe tasks, for instance, process improvement. Modern manufacturing requires that the quantities produced should be exact, not more or less keeping in check the effects of overproduction and under production. These factors have favored the payment schemes to be in time rates and a bonus normally linked to the productivity of the establishment or workgroup.