A Wage Payment System is a method used to calculate the wages of workers in the organization. It includes different types of wage payment system methods according to companies requirements like Time basis, per product or piece basis, Incentive basis etc. It varies upon the types and nature of business. It plays a major role in Cost Accounting.
Features of Wage Payment System
- Wage Payment System facilitates the preparation of plans for the future.
- It helps to determine the cost of production and the profitability of the production.
- It determines the number of earnings of the workers and their living standards.
- Wage Payment System enables to improve the union-management relations.
- It determines the level of satisfaction of the workers and the rate of labour turnover.
- Wage Payment System helps in recruiting the skilled, experienced and trained workers.
Essential Characteristics of Good Wage Payment System
- It should help in improving the performance and productivity of the employees.
- A Good Wage Payment System should be flexible enough to suit the needs of the organization.
- It should be fair and justifiable to the workers and organization.
- It should help with maximizing workers satisfaction and minimizing workers turnover.
- Wage Payment System should ensure minimum guaranteed wages to all the workers.
- It should ensure equal pay for equal work.
- Wage System should be simple and understandable to all the workers and employees.
Principles of Wage Payment System
- The difference in pay should be based on the difference in job requirements.
- The Wage Payment System should be based on work-study and the work content of various jobs should be stabilized.
- The Wage Payment System shouldn’t be costly in operation.
- It should be flexible according to the various conditions.
- It should encourage productivity.
- The Payment System should be sufficient to ensure reasonable standards of life of his workers and family.
Methods of Wage Payment System
There are basically three Methods of Wage Payment System that are-
- Time-Rate Method
- Piece Rate Method
- Incentive Plan Method
Time Rate Method
This Wage Payment System is used in those industries where the speed of work doesn’t play an important role. What matters is the quality of work. It is difficult to find out the value in quality, wages are computed on a timely basis.
The Formula of Time Rate Method = Hours Work × Rate per hour.
Advantages of Time Rate Method-
- This method is easy to calculate and understand.
- It avoids labour negotiation.
- It doesn’t give importance to the Speed of work. What matters is the Quality of work.
- It ensures the safety of wages to all kinds of workers.
- It gives a feeling of unity by bringing the equality of wages to all the workers who focus on speed or who focus on quality.
Disadvantages of Time Rate Method-
- This Wage Payment System Method holds out no inducement for the workers to increase the production of which they take the benefit.
- It requires constant supervision otherwise considerable wastage of time may be paid for.
- The slow worker receives the same wages as a quick worker. Thus, tending to cause discontent and increasing the labour cost per unit produced.
- As Speed is not the focus of this method, it leads to a slow production rate.
Piece Rate System
In this Wage Payment System Method, wages are paid on the basis of the output of the workers without considering the time task in performing the task. In this Method, Workers are paid on the basis of the quantity of work.
The Formula of Piece Rate System = No. Of Units produced × Rate per unit.
The Piece Rate System is also divided into three more methods-
Straight Piece Rate System-
This is the simplest method of piece-rate method which specifies the actual meaning of the piece-rate system. It considers the no. Of units produced and the rate per unit. In this, the wage rate per unit is already fixed. According to the no. Of units they made, workers get the wage.
The Formula of Piece Rate System= No. Of Units Produced × Rate per unit.
Differential Piece Rate System-
Under this method, the wages are given to the workers on the basis of their piece-rate along with the level of efficiency. It is determined by Time and Motion Study.
This Wage Payment System method provides high piece rate for more efficient workers and low piece rate for less efficient workers. A Normal Piece Rate is given to those workers whose work quality is up to the standard level of efficiency.
In this, a standard efficiency is fixed for the workers. If workers exceed the target gets high piece rate and vice- versa. This Method motivates the workers to increase the contribution of the workers.
Merrick Piece Rate System-
Under this Merrick Piece Rate System, piece rate system is based on the three-piece rates which distinguish between the Beginners, Average Workers and Superior Workers.
This Method will be better understood by the Example. In an Organization, there is a standard output of 50 units for the workers to produce.
If workers produce up to 50 units, standard piece rate of Rs.10 per piece will be paid to them. If they produce between 50-80 units, a piece rate of Rs.15 per product will be given to them and if more than 80 units, the piece rate of Rs.20 per product will be paid to them.
Advantages of Piece Rate System-
- It requires less inspection of workers because they are already motivated to do the work to earn high piece rate.
- It gives more salary to the speed workers and vice-versa.
- Workers always try to discover new methods for efficient production.
- It requires less supervision cost to incur.
Disadvantages of Piece Rate System-
- Speedy workers lead to a decrease in the quality to earn higher piece rate.
- Sometimes, It creates more wastage of raw material while working speedily.
- This Piece Rate System is difficult to calculate.
- It sometimes frustrates the less efficient workers.
Incentive Plan Method
Under this method of Wage Payment System, along with their wages, workers get the incentives according to their work performance which motivates them to do more work.
Objectives of the Incentive Plan Method
- To induce the workers to increase production and productivity.
- To provide the additional wages for their skills and efforts.
- Another objective is to increase the morale of the workers high.
- It is to reduce the cost of production.
- To retain the Services of good workers.
- It is to make better labour management relations.
- To induce the workers to serve the organization with loyalty and sincerity.
The Incentive Plan System is also divided into 5 more methods that are-
Halsey Premium Plan Method-
Under this method, along with the wages, some per cent of bonus is given to the workers if they complete their work before the standard time. Normally, the bonus rate is 50% but it arises between 33% to 60%
The Formula of Halsey Premium Plan Method= Time Taken × Rate + 50%( Standard Time- Time Taken) × Rate
Advantages of Halsey Premium Plan
- It is simple to understand and operate.
- It guarantees time wage to workers.
- The Benefits of time saved are shared by both employees and workers. It is helpful in reducing cost per unit.
- It makes a distinction between Efficient and Inefficient Workers by providing incentives to efficient workers and vice-versa.
Disadvantages of Halsey Premium Plan-
- This method affects the quality of work.
- Workers criticize this method because the benefit of time saved is shared between Employees and Workers.
- Extra Efficiency of workers is not fully rewarded.
Halsey Weir System Method
This Incentive Plan Method is same as the Halsey Method. In this, 30% of the save time bonus is given to the workers otherwise all the rest is the same with the various methods.
Rowan Plan Method
Under this method, the bonus is given in the proportion of their wages or the basis of the time saved.
The Formula of Rowan Plan Method= Time Wages + (Time Wages × Bonus Rate)
= Time Taken× Rate per hour + (Time Taken× Rate per hour × Time Saved / Allowances)
(i.e Time wages= Time Taken × Rate per hour, Bonus Rate= Time Saved/ Allowances)
- It guarantees time wage to the workers.
- The Quality of the workers doesn’t suffer so much.
- Labour Cost per unit is reduced because wages of time saved are shared by employees and workers.
This Method has not any Disadvantages.
Gantt’s Task and Bonus Plan
This Incentive Plan based on Motion Study, Time Study, Work-Study. The Day Wage rate under this method is guaranteed. Under this method, standard time is fixed for one task according to the Time and Motion Study.
According to that, workers performances are compared with the standard time to check their efficiency and set the wages accordingly.
- This Plan is not so harsh.
- It is simple to understand and calculate.
- This Incentive Plan Method ensures guaranteed time wages for below-average people.
- It divides the work into two competing characters- one who earns the bonus and one who doesn’t earn the bonus.
- The Time wages Guarantee doesn’t encourage efficiency if workers feel satisfied with the time wages.
Group Bonus Scheme
This Wage Payment System method is used where groups efficiency is required. In this method, the bonus doesn’t depend on the wages of only one worker. But It depends upon the group.
If the Group achieves the efficiency level, all the workers get the same bonus. This Method based upon the Pro-rata Basis.
- It encourages team spirit.
- This method reduces the wastage level of workers.
- This Wage Payment System method issues co-operation, lessons and supervisory work.
- It reduces overall costs.
- An Efficient work doesn’t get his due reward because the bonus is shared by the Inefficient workers as well.
- There is always the danger that Hard Working Agent reduces the work effort by seeing the Inefficient workers because, in the end, all get the same bonus.
So, this is all about the Wage Payment System Methods. I hope you like it. The ones who have any query may write it in the comment section or can reach me via mail.