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Piece-rate pay (payment by output)

Author: Jim Riley Last updated: Sunday 23 September, 2012

Financial motivation - piece rate pay

Piece-rate pay gives a payment for each item produced – it is therefore the easiest way for a business to ensure that employees are paid for the amount of work they do. Piece-rate pay is also sometimes referred to as a “payment by results system”.

Piece-rate pay encourages effort, but, it is argued, often at the expense of quality. From the employee’s perspective, there are some problems. What happens if production machinery breaks down? What happens if there is a problem with the delivery of raw materials that slows production? These factors are outside of the employee’s control – but could potentially affect their pay.

The answer to these problems is that piece-rate pay systems tend, in reality, to have two elements:

• A basic pay element – this is fixed (time-based)

• An output-related element (piece-rate). Often the piece-rate element is only triggered by the business exceeding a target output in a defined period of time

Case study: Piece-rate pay in practice in the UK – Home-based workers

In the UK many thousands of people engage in what is known as “home-based work”. This refers to work:

• In the home, or near the home in premises that are not those of an employer
• For a cash income (i.e. not unpaid household work)

Whilst there are many successful business people and well-paid professionals working from home, the use of piece-rate pay is focused is on those at the other end of the scale – home-based workers, mainly women, who earn only a subsistence level income.

Subsistence level home-based workers fall into two broad categories:

• Those who work for an employer, intermediary or subcontractor for a piece-rate, who are not responsible for designing or marketing the product, but simply contribute their labour. These workers are often called subcontracted or dependent home-workers

• Workers who design and market their own products, but who cannot be considered to be running small businesses - known as own-account workers.

The majority of home-based workers are women who do home based work in order to combine earning cash with other responsibilities, such as child-care and household management. Many earn well below the local minimum wage or average earnings. Most dependent workers work informally, without a proper employment contract. They are rarely organised or supported by formal trade unions.

Home-based work is found in most sectors of the economy, both modern and traditional industries. Good examples include:

• Production of garments and shoes
• Assembly of electronic, plastic and metal components
• Many kinds of packing work
• Weaving and dyeing of textiles in the traditional sectors
• Handicraft work
• Sewing and knitting garments
• Assembling toys
• Data-processing

It used to be thought that home-based work was an old-fashioned form of employment that would die out with the rise of modern industry. However, over the last 20 years much large-scale industry has reorganised its production, subcontracting work to smaller companies, often in other countries. At the end of the chain there are often informal workshops and home-based workers.

Subcontracted homework is a form of production which allows companies to reduce their costs by:

• Outsourcing production to lower-paid workers, usually without formal contracts, employment and social protection or even a regular supply of work

• Passing on some of the costs of heating, lighting and storage to the workers themselves

• Avoiding responsibility for health and safety for these workers

• Using home-based workers as a source of flexible labour

Some of the problems faced by home-based workers include:

• Irregular work – and therefore irregular income
• Earnings well below average
• No economic or social security for sickness, maternity or old age
• Long working hours
• Potential health problems caused by repetitive processes and inadequate health and safety

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Piece-rate pay (payment by output)

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