To Pay or Not to Pay, by Piece, THAT is the Question!

Hamlet, the lead character in the play of the same name by William Shakespeare, pondered the question of mortality in the famous soliloquy where he said “To be, or not to be, that is the question.” He was contemplating his future and struggled to make sense of the challenges he was facing in his life.

While it may seem a bit of a stretch to compare a business to a person’s mortality, in a real sense construction company owners contemplate the life of their business’ future in the same manner when it comes to compensating people. They take stock in every avenue of providing a quality service at a quality price while still covering overhead, labor and material costs. As a result, paying piece rate for work completed has been a fixture in the construction industry, because it is a unit cost and speaks loudly to cost accounting minds. But is piece rate really providing the perceived benefits that owners seek? Let’s take a deeper look and maybe we can make an educated decision on what works for you in your company.

The Dilemma: Piece rate versus hourly wage...which will result in the greatest bottom line?

If you take a moment to look at what the “world” has to say and search the internet, there are many differing opinions on this subject, but very few actually provide a definitive answer for which one will provide higher dividends.

Let’s consider that hourly wages are by and large predictable and in some respects can be viewed as fixed expenses. Dr. Eli Goldratt's Throughput Accounting has a detailed explanation, but in simple terms, if you factor that most employees work 40 hours in a week, the wage is fixed and therefore is not a factor in our discussion...at least not right now...I’m thinking we will come back to discuss this more in-depth in a different article.

Returning to piece rate, (our focus in this article) why don’t we check off the advantages and disadvantages, even delve into the “gotchas” that most companies don’t consider and finally move toward a decision point that really will help the bottom line.

Advantages to using piece rate:

Industry logic has maintained for decades that there are several advantages to using the piece rate frame of mind, and it’s easy to see why companies gravitate toward the lure of this kind of labor cost. To an organization that is focused on cost accounting, this just simply makes sense.

Time on task is improved due to the worker being paid for each completed unit
Companies don’t pay for time sitting
Cost accounting is made easier because the cost per unit is fixed
Production increases as a result of the time on task
Employees are motivated by higher wage if they complete more units in a shorter amount of time, so they look for ways to cut waste in the process.

Summarizing these advantages sounds like this: if you are paid by the square foot to hang sheetrock, you will find a way to hang more sheets in a day to increase your pay. (Say that last sentence in the voice of Jack Black in the movie “School of Rock” and it will sound even better.)

Disadvantages to using piece rate:

Before you run out and decide to adopt paying by the piece, consider the drawbacks to this method. Projects live or die on predictable operations and choosing to go this route may have more destructive consequences than you think.

Haste makes waste - when you focus on quantity, quality often takes a hit and rework becomes an issue. We discussed rework in our blog on Productivity.
Workers may be encouraged to work even when sick due to the lure of higher than average wages in piece work, risking the rest of the workforce to the potential of illness
Job safety is at risk when work is done in haste as employees look to find faster ways to get work completed, or worse still, cut corners (I’ve actually had a house where one of the HVAC vents was really just a vent cover. When you took the cover off, there was nothing there but wood. That’s cutting costs, making it “look” like the work was done)
Speed of work may vary from day to day so it becomes difficult to predict when the project will be completed. Again, logic says the labor force will work as fast as possible, but “how fast is fast?” and can it be sustained?

As we said before, the risk of rework or sacrificed quality can destroy a company’s bottom line. Cutting corners just to “get the job done” happens all the time and the construction industry of professionals who take pride in their name and their product suffer from this kind of result, not to mention the end consumer.

Things you may not have considered:

Too many companies find themselves at risk when they adopt a labor choice and don’t pay attention to the gotchas that should factor into the decision making.

FLSA labor laws require piece work to be at least the same as the minimum hourly wage. Lawyers say this part better than I could. In an article Piece Work: Pay Your Employees by the Task - Legally, Attorney, and Partner, Mike Thai from the office of Lang & Klain, P.C. quoted the Wage & Hour Division of the IRS to define Piece Rate as “regular rate of pay for an employee paid on a piece work basis ... obtained by dividing the total weekly earnings by the total number of hours worked in that week.” Now there’s a mouthful. The penalties of missing this part are HUGE. $10,000 for first offense and $1,100 civil penalty PER offense. That can add up quickly. The simple side of this one is if you don’t pay a decent rate, at the very least you will lose the employee, at the most, you could lose everything.
Calculating bonus or overtime pay is also something that is part of the greater IRS Wage & Hour division concerns and carry their own set of penalties
Silos of operation. Most companies don’t see this, but it does happen. Picture the cabinet industry, where workers are paid for assembly, install, and trim. The workers specialize in working on their silo of work. I’m an assembler and I’m going to knock out every piece of material that I have here. Pretty soon, you have a pile of cabinets stacked up waiting for install and they get in the way of production and job completion. Not to mention, they could be in the wrong location which requires additional work to move them where they belong. This is a real world situation, and as referenced earlier in this article regarding Throughput, these “bottlenecks” are productivity killers.
You have to track BOTH hours AND piece. What kind of administrative work goes into making this possible? The perceived benefits of piece rate coupled with the fair labor requirements, minus the administrative costs of dealing with payroll on a weekly basis and gathering of the needed data could negate any real profitability.
Are you using paper time cards? Make sure you document and keep everything for at least 3 years to make sure you satisfy the labor law requirements for documentation. How much time is spent chasing documentation? Tracking made easier is a solution to this “gotcha” as well.
Employees in a labor force get comfortable with a certain amount of effort and the carrot of funds is not enough to make them work harder. They work harder up to a certain point where they are comfortable and then piece rate doesn’t motivate any more. The result: there is a cap on the effectiveness of piece rate.

The lesson here is take the time to learn the laws behind operating a business (Business 101, I know, it’s stating the obvious, but you’d be surprised how many large companies don’t know the rules) to ensure compliance in your organization. Plus, take enough time to determine the right balance of wage versus cost. Gut instinct will not serve you well here. Use real data and create your business plan accordingly.

Conclusion

So what’s the answer to the question above? Is piece rate better, or is hourly better? The answer is neither. I know, I know, that’s not what you were expecting. After everything that has been discussed, there IS no one right answer to this question.

The real answer is you’re not asking the right question. One article I reviewed did ask the right question: "Does paying a piece rate lead to greater productivity?" In the article, the pros and cons were discussed just as we have here, but it didn’t really answer the question. The reason it couldn’t is because Productivity has to be measured in order to be realized and figuring out productivity in piece work requires help. If you want to know more about how we help discover this measurement, please give us a call. 888-326-1829

So, the right question references productivity. And the right answer is to focus on productivity. By doing this, you will have your answer regarding which is better, the wage or the piece; and you won’t have to “suffer the slings and arrows” as Hamlet, in your company.