Question

What are the two ways that the productivity of a firm's employees may increase when a firm moves from straighttime pay to commission or piece-rate pay? If piece-rate or commission systems of compensating workers have important advantages for firms, why don't more firms use them?

Short answer

Productivity in a firm can increase when moving to commission or piece-rate pay because there's a direct link between employee's output and pay and it cultivates a performance-oriented culture. However, not all firms use them due to the potential of increased job stress, lack of financial security, and the potential encouragement of unethical behavior.

Step-by-step solution

Identifying the Benefits of Commission or Piece-Rate Pay

Commission or piece-rate pay systems base compensation on performance rather than on time spent working. There are two main ways that these systems can positively affect productivity. First is the direct relationship between output and pay. When pay is tied directly to productivity instead of hourly wages, employees are incentivized to work harder in order to earn more. The principle of 'more input, more income' becomes palpable. Second, in a piece-rate or commission system, top performers can make significantly more than they would under a fixed wage system. This rewards high-performing individuals, and also cultivates a performance-oriented culture in the company, which can further motivate employees to increase their productivity.

Understanding the Drawbacks of Commission or Piece-Rate Pay Systems

Despite the benefits, there are reasons why not all firms adopt commission or piece-rate pay systems. Firstly, these systems often come with higher levels of job stress due to the pressure to perform, which could potentially lead to employee dissatisfaction or turnover. Secondly, they don't offer much financial security to the employees as their income can't be guaranteed and it is directly affected by market fluctuations. Lastly, these systems might encourage unethical behavior or 'corner-cutting', since workers are so focused on achieving high output quantities.

Key concepts

Commission Pay

Commission pay is a compensation structure where employees earn based on their sales or services. Unlike fixed salaries, where pay is determined by the hours worked, commission pay directly ties an employee's earnings to their productivity. This system can significantly boost motivation since employees realize that increased sales equate to higher paychecks.

This type of system works particularly well in professions such as sales, where the value of an employee's contribution is relatively straightforward to measure. Benefits of commission pay include:

• Encouraging employees to excel and maximize their performance.
• Promoting a results-oriented culture that can drive overall company success.
• Offering employees the potential for higher income based on effort and success.

However, there are challenges too. Commission-based pay can introduce high levels of stress, as income varies with performance. Employees might feel immense pressure to constantly outperform, which can sometimes lead to burnout. Another downside is the risk of fostering competition among team members instead of teamwork. Companies may also worry about unethical behaviors, as employees might focus on short-term gains rather than the company's long-term health.

Piece-Rate Pay

Piece-rate pay is a system where workers are compensated for each unit they produce or task they complete, rather than the time they spend working. This creates a direct link between input and output, motivating employees to work efficiently and maximize productivity. Imagine a factory setting where workers are paid for each product assembled or each item packaged; the quicker and more accurate they are, the more they earn.

Advantages of piece-rate pay include:

• Rewarding efficiency, leading to faster work and potentially higher earnings for diligent employees.
• Reducing idle time, as there is little financial incentive for employees to slow down their work.
• Aligning employer and employee goals, as both parties benefit from increased output.

Nonetheless, piece-rate pay isn't without drawbacks. Employees might focus solely on increasing output, sometimes at the expense of quality. Moreover, it can lead to physical fatigue and injury in jobs requiring repetitive tasks. Employers also need to ensure fair rates to keep employees motivated and satisfied. Without proper oversight, there's a risk of reduced collaboration among workers, who may become more like individual competitors than team members.

Performance-Based Compensation

Performance-based compensation systems include commission and piece-rate pay, but can also encompass bonuses and incentives tied to an employee's specific achievements or contributions. These systems aim to align an employee's financial rewards with their output and efforts, thereby driving overall productivity. Performance-based compensation can take many forms in a workplace and serves to encourage maximum effort from employees.

Here's how performance-based systems can benefit organizations:

• Motivate employees by directly connecting rewards to performance metrics.
• Encourage continual improvement and innovation, as employees strive to meet and exceed goals.
• Facilitate clear, measurable performance standards for both employee and employer.

The main drawback lies in the pressure it can place on workers. Employees might experience anxiety from constantly needing to meet targets to earn rewards. Furthermore, competition might overshadow collaboration, leading to a less cohesive work environment. Issues can also arise if goals are not realistically set, potentially leading to employee dissatisfaction or decreased morale. Employers must balance incentives with support to ensure a healthy, competitive atmosphere.