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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