Advantages and Disadvantages of Piece-Rate Pay
By Indeed Editorial Team
Updated January 3, 2023
Published June 8, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
In the piece-rate pay system, employers pay employees per creation unit. With effective design, this system can motivate employees and, in return, increase productivity. Piece-work pay has its advantages and disadvantages for both the employees and employers.
In this article, we discuss what piece rate is and the pros and cons of piece-rate pay.
What is piece-rate pay?
Popularly referred to as piece work, piece-rate pay is an employment system where the employers pay their employees per item of work completed, rather than per hour or at a fixed yearly salary. Employers base the rate and the pay on the amount of work done, whereby employee earnings are directly proportional to their output in terms of products and services.
To comply with minimum wage laws, employers keep a record of their employees' number of working hours. It ensures the employee gets paid at least the amount they might have received if they worked for hourly pay.
When to apply the piece-rate system
The piece-rate system applies to various employment settings, depending on the organization's methods of production. The following are some of the conditions that favor piece-rate systems:
When the tasks are repetitive
When the company measures output quantity
When the company measures output quality
For employers to use this payment method, they must adhere to the minimum wage and overtime requirements under the law. The following are two important considerations when applying piece-rate pay:
The results of the employee dictate the terms
The piece-rate system pays employees per unit of the work they do. Employees typically don't receive payment until they complete their tasks and deliver on quotas. Employers offering a piece-work payment option are hoping that the employees strive to finish their tasks in the shortest time possible. This efficiency helps them make as much money as possible to increase their wages.
Employees receive payments after completing the task
Piece-work pay depends on how many units the employee completes. If the employees don't complete the unit, in most cases, the employer may not pay them. For example, if an employee completes nine and a half units, the employee might receive a payment for the nine units, remaining unpaid for the half of a unit they created.
Advantages of piece-rate pay
Before an employee accepts the piece work pay, he or she has to compare the advantages of the terms over other payment methods. Employers can also consider the benefit of the payment system to determine if they can adapt it to their company or businesses. Here are the advantages of piece-work pay:
Increased production and efficiency: The piece-work system increases efficiency on the employee's part by ensuring they are busy working hard to achieve their set targets. The employees are aware they may get paid more if they perform their work efficiently and swiftly, so they put in more effort.
Minimal supervision: When using the piece-work system, the employees need minimal or no supervision while doing their work. Piece-work systems ensure employees are self-driven and work as fast as they can to increase their wages.
Easier wage calculation: Payment is easy to calculate as the employer has agreed to pay a certain amount per completed unit. The number of units is multiplied by the per-unit pay rate to arrive at the total pay for the completed work.
Less wasted time: The relationship between "idle time" and "active time" in piece-rate work is that, unlike in a time-based pay system, employers only pay for completed work, so if piece-rate employees aren't producing, they aren't earning any money.
Higher production rates: When the employees don't waste time and are always working harder to achieve their targets, production costs can go down, and the production rate may be higher. Employees may prefer to be in control of their earnings by adjusting their productivity levels.
More self-evaluation by the employees: When using the piece-rate system, the employees often set their own goals and strive to achieve them. They can self-evaluate and decide whether to maintain the same targets or raise them, depending on their capabilities without the employer's interference.
Greater equipment efficiency: Employees may use equipment and machinery more efficiently in a piece-rate system since their pay can depend on the equipment's functionality. This may also help reduce repair costs, since the employees may put more effort into maintenance to keep machines operating at maximum capacity.
More cost control: The increased output of a piece-rate system can help reduce overhead costs for the company. With fixed overhead costs, the company reduces the expenses used to produce a unit, reducing the product's price, which can also make the units more competitive.
Easier quantification of production: The employers and management in a piece-rate system know how exactly how many units each employee produces in a day and the cost of each unit. This can help make tracking production quantities simpler and make documentation more accurate, potentially reducing errors.
Easier planning and control: After observing and measuring the employee's capabilities, an employer can easily set and achieve targets of the quantity they aim at producing either per day, week or month. More control can make outcomes more predictable and help the company better meet the customer's needs.
Disadvantages of piece-rate pay
While piece-rate systems offer many advantages, here are some disadvantages to consider before committing to this style of payment and production:
Quality deterioration: When employees try to complete many units within a short time, they may not achieve the required product quality. This result may result in sub-standard products, which can bring losses to the organization or the employees having to redo the work, reducing their income.
Varying fixed piece costs: Companies may find it more difficult to agree on a per-unit cost for both the customer and the business that still pays a fair rate for the employees producing the units.
Pressure on the employees: When employees work on piece-work pay terms, they might try to overextend themselves to make more money or to meet goals. This can have a negative effect on morale and employee engagement, which may also affect work quality and consistency per unit.
Discontentment: Some employees may feel unsatisfied with their level of compensation per unit produced. High-performing employees may also feel discontented at receiving no extra reward for their better-than-average units.
Fear of losing revenue: Employees may fear missing work, as they receive no pay if they don't produce any units. This might cause stress or unreasonable circumstances where a sick or otherwise incapacitated employee tries to work despite their challenges, which can be dangerous.
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