Time, Piecework and Premium Wages 

Incentive Wages is the generic term for systems of payment such as time, piecework and premium wages.

Time Wages

In Time Wages, remuneration is based on the time invested by the employee. The time required by an employee for a particular activity, the actual time, is valuated using the appropriate hourly wage or an average value from the previous month.

Piecework and Premium Wages

The quantity produced (or processed) is also taken into account for piecework and premium wages. The average time required by the employee for this quantity is calculated on the basis of the standard time and the yield. This is the target time. The ratio of target time to actual time is referred to as the Labor Utilization Rate.

If the employee requires less than the average time, that is, produces a greater quantity, the Labor Utilization Rate is greater than 100%. This is reflected in the rate of remuneration — the employee is paid according to the formula target time, which is Actual Time x Labor Utilization Rate.

The term target time should not be confused with the planned working time as stipulated in the daily work schedule.

Electric motors are to be assembled using prefabricated parts. An employee usually completes 10 motors per hour. The employee only works for 8 hours and completes 90 motors.

The specifications are as follows:

 

STANDARD TIME

=

1 hour / 10 motors,

 

ACTUAL TIME

=

8 hours,

 

TARGET TIME

=

90 motors * 1 hour / 10 motors = 9 hours.

Result:

 

LU RATE

=

9 hours / 8 hours = 112. 5%.

The employee’s hourly wage for the 8 hours worked is 12.5% higher than usual.

This elementary form of Incentive Wages is known as piecework wages.

The premium wage can be seen as a generalization of the piecework wage. The simplest form of the premium wage is the capping of the Labor Utilization Rate to calculate payment. It may be advisable to limit the rate to 130%, for example, thus also limiting the strain on man or machine.

Other information can be used to valuate performance: the setup time can be included in the Labor Utilization Rate, for instance. The rate of consumption of operating supplies or the quality of the products produced can also be factors.

In this case, the Labor Utilization Rate is no longer determined simply by the ratio of target time to actual time. It is calculated using a premium formula which includes all relevant specifications.

You can define premium formulas when you customize the system.