Piece rate is good

Tyler Cowen of Marginal Revolution mentions the work of the economist Edward Lazear yesterday. Lazear argues that piece rate may boost productivity which brings me to another of my pet peeves: most people assume that piece rate is a nasty exploitive practice. I’d never be accused of being an apologist for the apparel industry but this myth is one that needed to die a long time ago. The truth is -at least in sewing factories- piece rate is popular -very popular! Why hasn’t anyone ever bothered to ask sewing operators what they think of piece rate? Sewing line operators prefer piece rate, they make more money -not less- and productivity increases. Everybody wins. What’s not to like?

From the Stanford Graduate School of Business magazine comes this example:

In his paper “Performance Pay and Productivity” Lazear writes: “When workers receive an hourly wage, the more able receive no reward for putting forth additional effort. As a result, they choose to reduce effort to the minimum required. When a piece rate is paid, workers who produce more, earn more. This provides an incentive to workers to put forth more effort.”

Workers at Safelite did put forth more effort: Their everyday output increased. Meanwhile, absenteeism dropped off sharply. The level of paid sick hours fell by 61 percent, and the company lost fewer of its most efficient workers. “People who like a piece rate are the most able; those who like an hourly rate are the least able,” says Lazear. “So when companies institute a piece rate plan, turnover among the most able goes down.”

The net result was that the cost of production for the company fell. While pay for the average employee rose 9 percent, productivity rose 24 percent. As Lazear writes, “The piece rate plan…made both capital and labor better off.”

There’s very little resistance from the labor force, including unions, says Lazear, because workers are guaranteed a minimum hourly rate. And while there’s more incentive to get work done quickly, quality doesn’t seem to suffer. In the case of Safelite, each windshield could be traced back to the employee who installed it, so there was the possibility of censure for doing slipshod work. This seems to have kept standards high.

Now, if you’re just starting an in-house sewing operation, I know it’s hard to figure out a fair compensation structure. For that reason, I don’t recommend you do that right away. At the outset you should pay hourly. Once your sewing operators have learned the job and you’ve seen a rough correlation of productivity (time per product completed), you can develop a piece rate structure based on completion time. Now, you must structure piece work so that nobody loses. By that I mean you have to make sure that your least productive worker can make the previously established hourly wage.

If you’re gravitating towards a team sewing structure (Toyota Sewing System), you may see some fall-out. By team sewing, I mean that a unit of stitchers will produce products jointly and the team’s pay is based on per unit completion. In these cases, you may be very surprised to learn that your most productive team workers will quickly become more intolerant of their under performing co-workers than you ever could. In these cases, it’s not unusual that teams will attempt to push co-workers out of their unit. In these cases, I’d suggest the first strategy would be to encourage the more productive workers to help the least productive workers to become more efficient. If under performers continue to lag, you may need to put them into another team. If the worker is pushed out of the second unit, they may well leave on their own. Otherwise, it’s likely you’ll find this person is in a job that’s not well-suited for their abilities. In this case, ask them what job they’d like or what job they feel they could be successful doing. You may be very surprised to find that what they’d really want to be doing could be a better fit for both of you and their subsequent productivity could soar.

There are two downsides to piece work that will require management and tact. The first downside is when you first implement the piece rate structure; you may find that you’ve mis-timed an operation and are in fact, paying double what you had been paying. In this case you have two choices. One, you can decide that the increase in production (greater capacity) is worth it and the price you’re paying is fair compensation. Second, you can adjust the pay rate. Exercising the second option will most likely result in some short term resentment. I’d recommend practicing an open-book strategy if you find that you’ve miscalculated the appropriate pay per operation. In this case, I’d think you could openly discuss this and negotiate to split the difference.

The second downside to piece rate is the barriers it can potentially create toward impeding incremental improvement (Kaizen). In becoming a lean manufacturer, I mentioned that an overly rigid piece rate structure will prevent workers from reporting problems if they lose money by speaking up. You must design your feedback system in such a way that employees don’t lose machine time (income). Perhaps one solution would be to pay a bonus for problem reporting.

I’d be interested in hearing about how all of you have used pay and incentive systems, the problems with each as well as any evolutionary pay strategies you’ve developed.

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19 Comments on "Piece rate is good"

4 years 29 days ago

I’ve worked as a sewing machine operator at several companies and I loved working piece-rate. I also was chosen to sew samples for an important client and set the rate on their products. In that situation, the machine operator can manipulate the system by setting the piece-rate lower so as to make it easier to overshoot that rate later, but it’s completely unnecessary (and it would eventually be reset to a higher rate). I would set the piece-rate for products by sewing at a comfortably quick pace, not trying to slow down and not trying to sew too quickly. When I started work as a machine operator, I was a rising senior in HS and minimum wage was about $4.25, IIRC. At 17, I was very pleased to be making $6 or more per hour. Much later in life, I was an electronics tech for a large, well-known corporation that makes very expensive music systems. Although the pay was much higher and the benefits were better, I faced much more discrimination (being one of the few women in that job) and worse working conditions than in the sewing jobs I’d had. It was a soulless and boring job.

Jim G
8 years 2 months ago

Was doing a search for piece rate and this site came up. I am the Production Manager for military supplier. We have pyrotechnic work, CNC machine work, welding, assembly and plating work. I’ve been with the Co. for 18 years, managing for 12. The biggest problem I’ve had is getting new supervisors (that come from other buisnesses) or assistants to ‘buy into’ the rate system.
We have always used the rate system and as I started out on the assembly floor, I love it. As long as the checks and balances are in place to assure quality, everybody does win. The problems begin when you lose those checks and balances.
Our Engineering dept sets our preliminary rates and then we adjust up or down as necessary. Our plant wide average is 140% give or take. We adjust rates anytime our average for the given job is either below 90% or above 200%, (we have around 250 different jobs). Generally the open book format for discussing rate changes has worked for me. I talk about the pay structure and how line works aren’t suposed to make more than their bosses.
We pay our overtime rated work by using 150% of the base wage and then use the ‘rate formula’ as normal.
I shy away from much of the new era lingo, whether it’s english or not. I find most of the time we over-complicate things. It’s true saying, “just get it done” or “what ever it takes” are the poorest examples of leadership, but I resist change for the sake of change and just trying something because it’s a new fad.
I disagree with the continuous improvement plans to the degree that does that mean perfection is the goal? As long as we have human workers (forever I hope) perfection can’t be achievied.

Nice blog to see others working the same things I do!

Alison Cummins
9 years 4 months ago

“As pricing pressure becomes difficult to abosorb, it is difficult for sewing line workers to accept the fact that their piece rate need to chage as well.”

Yes, but this goes for anybody. I work in telecom, and we’ve been subjected to huge pricing pressures over the last seven years. We’ve had layoffs, restructurings, and simply more work piled on our plates with the casual instruction to “work smarter, not harder.” But nobody has come to me and said “Oh, by the way, your salary is going to be cut 10%.” Because I would quit if they did.

Andy Chang
9 years 4 months ago

Piece Rate is good for motivation and quality can be easily tied into the system using a tier structure.

In my factory I think the pain is calculating the over time pc rate, it is very labor intensive and with over 2000 workers, it requires a team of people to calculate.

A second problem is as productivity is improved, it is more difficult for factory to re-adjust pc rate once it has been published. As pricing pressure becomes difficult to abosorb, it is difficult for sewing line workers to accept the fact that their piece rate need to chage as well

9 years 4 months ago

This results in increased cost thru inventory, movement, space, and the possibility of obsolesence and scrap.

Before I forget, read The genius of superfactory readers on evolving excellence blog. It’s a post that Bill Wadell wrote about me and the particular idea I’m about to explain to you.

This goes to the heart of my continual assertion in lean circles that not all industries are created equal. Due to inherent differences between classes of industries, they won’t be able to apply lean principles in the model most currently espoused and discussed. For example, agriculture. You cannot pull corn like cars. Does this mean agriculture can’t get leaner? Of course not.

I believe that industries that are “closer to the dirt” like agriculture, apparel and housing (echoing the primary needs as described by Maslov as food, clothing and shelter) will have facets of their businesses that cannot follow the model most currently depicted by Toyota. Lean looks different in different industries. Making single count units to order in apparel isn’t tenable anymore than producing one single serving of corn is. I argue that some industries can never totally eliminate batch production due to fundamental differences inherent to their products.

I’ve been trying to direct the discussion of lean -in this corner of manufacturing- toward exploring what concepts apply to us and which don’t. Some facets are already used by many firms, they just don’t know that’s what it is. We’ve done some of these things well before Lean became known. For example, before 1980, it was largely unheard of for a manufacturer to cut and sew a line without having secured the orders beforehand. That was “lean” and that’s the way manufacturers used to produce.

Rather than using the protocols established by Toyota -such as the disparity you mention with takt time- I think we need to explore what concepts apply to us, what concepts are a force in our industry but not in others, and what it is that we can reasonably accomplish, all while reducing waste. The fact remains, for most cut and sew businesses, at least some batch processing is unavoidable. Ask any farmer. He’ll tell you the same :)