Remuneration methods

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Remuneration methods

Labour remuneration methods have an effect on:

  1. The cost of finished products and services.

  2. The morale and efficiency of employees.

There are two basic methods:

  1. Time-based systems

  2. Piecework systems

Time-based systems

Employees are paid a basic rate per hour, day, week or month.

Total Wages = (hours worked x basic rate of pay per hour) + (overtime hours worked x overtime premium per hour)

Basic time-based systems do not provide an incentive for employees to improve productivity / efficiency. Therefore, close supervision is necessary.

Piecework systems

A piecework system pays a fixed amount per unit produced.  

Total wages = units produced x rate of pay per unit

There are two main piecework systems

  1. Straight piecework systems 

    Today, it is normal for pieceworkers to be offered a guaranteed minimum wage, so that they do not suffer loss of earnings when production is low through no fault of their own.

  2. Differential piecework systems 

    – these systems involve different piece rates for different levels of production.  

    They offer an incentive to employees to increase their output by paying higher rates for increased levels of production. 

    For example:
    up to 80 units per week, rate of pay per unit = $1.00
    80 to 90 units per week, rate of pay per unit = $1.20
    above 90 units per week, rate of pay per unit = $1.30

Incentive (bonus) schemes

The characteristics of such schemes are as follows:

  1. Employees are paid more for their efficiency.

  2. The profits arising from productivity improvements are shared between employer and employee.

  3. Morale of employees is likely to improve since they are seen to receive extra reward for extra effort.

Individual vs. group bonus schemes

An individual bonus scheme is a remuneration scheme whereby individual employees qualify for a bonus on top of their basic wage, with each person’s bonus being calculated separately.  

Hence, the bonus is unique to the individual and it gets higher if efficiency is improved.

A group bonus scheme is related to the output performance of an entire group of workers, a department or even the whole factory.  It increases co-operation between team members and is easier to administer.

Profit sharing schemes

A profit sharing scheme is a scheme in which employees receive a certain proportion of their company’s year-end profits (the size of their bonus being related to their position in the company and the length of their employment to date).

Value added incentive schemes

These incentive schemes exclude any bought-in costs and are affected only by costs incurred internally such as labour. 

Value added = sales – cost of bought-in materials and services.

For example, valued added should be treble the payroll costs and one third of any excess earned would be paid as a bonus.

Payroll costs                         $50,000
Value added  target  (x3)   $150,000
Value added achieved       $180,000
Excess value added            $30,000
Employee’s share                $10,000

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