There is a simple reason why piece-rate pay systems work in the pallet industry – nobody can make you work harder than yourself. While companies have to hire the right people because not everybody is naturally motivated to work hard, the proper incentive system can push people to reach their maximum potential. When you have hard-working people on your team, those working on piece-rate basis produce 50% more than those working on an hourly rate.
Let’s take a look at some of the advantages and challenges involved with a piece-rate and hourly pay structures as well as practical advice learned from years running a successful pallet recycling company.
The Advantages
Productivity: Here’s an example of how piece-rate employees will find ways to do things better and faster. When the stack of pallets got lower to the ground, one of the sorters would pull another one forward a few inches, step on the pallet, forcing it to come up so he could retrieve it for inspection. No one taught him to do that; he just figured out how to make more money doing it this way.
Even hourly employees working alongside piece-rate employees work a whole lot harder. When you’ve got four table workers with one forklift driver, that driver will have to work hard because the table worker is saying, “Hey, I need some pallets, get them over here!”
Piece-rate incentives also stimulate a culture of hard work. When everybody’s working really hard because they want to go home at 2:00, not 5:00, soon the whole company is saying, “Let’s work hard, we have more fun. It is more rewarding.”
Flexibility: The ability to have flexible work hours is a big non-financial reward that people love about piece-rate systems. Sure, employees have to meet customer deadlines and communicate with management. But they can also work at their own pace, rhythm and timetable as well. In exit interviews, we ask, “What did you like about working here?” And many people would say, “I can start early. I can leave early. I can go to my classes. I can come in and do a job and leave.”
Another benefit of flexibility is adjusting to varying needs. Perhaps a worker doesn’t feel good one day so he works a little slower. No one gets on his back. Another day he has twice his usual energy, he works harder, he goes home a little earlier. In essence the employees are their own boss. They love it.
Accuracy: When you pay a worker a piece rate, you know what the direct labor cost is for each pallet. This allows you to make more accurate price quotes when biding on potential business. Also, by capturing the data you need for piece rate, you acquire production information that can help boost productivity on the plant floor.
The Challenges
Setting a fair rate: Employers must find the sweet spot to effectively motivate employees while keeping costs competitive. Too high a piece rate is a give-away, but if it’s too low, nobody wants the job.
More paperwork: A time clock keeps track of whether or not a worker was really here You pay 40 hours times the hourly rate, and that’s it. By comparison, piece-rate calculations are more complicated. You need to track how much a worker produces, look for math errors, calculate various job rates, etc. Machinery suppliers have come up with some innovative ways to help pallet recyclers improve accuracy in terms of production and worker counts. Long before these systems came online, we developed a fairly rudimentary approach that we still use today. I will cover this process later in the article.
Quality: Through your supervision, quality checking or team meetings, you have to enforce the message that quality is very important. Even though it’s not on your piece-rate sheet, poor quality can cost you business. Some companies use inspectors and setup a system to penalize workers or shifts that have high-quality rejection rates.
In our plant, a pallet that’s sent back to the table has to be repaired again at no additional rate and at least one more has to be repaired at no rate. That tends to bring up quality, but it’s always a challenge. You have to monitor this concern and provide incentives that ensure workers will not sacrifice quality for reaching higher production levels.
Safety: Sometimes employees work so fast, they get back strains, nail gun wounds, shoulder strains, or do other activities that could be considered dangerous. Most pallet plants usually hire younger workers for a piece-rate job. But if you have some stocky workers and there’s a lot of lifting in your process, these employees can get worn out. You may want to consider engineering your worker stations to reduce unnecessary lifting or activity that could cause body strain. This can also keep employees more productive for longer.
Dishonesty: Because there’s a lot of paperwork, workers can be tempted to use unauthorized rates, overstate production, or “accidentally” make a little math error. Consider giving new hires a closer look, do spot checks from time-to-time, and look for anomalies that don’t fit usual patterns. In the end, it’s up to you how much time you want to spend double-checking pallet counts.
Pressures to increase rates: Everybody understands the concept of raises. This can lead to some sour grapes for people who are accustomed to hourly wages, which usually involve an occasional bump in the hourly rate. People who work piece rate need to be challenged to think a different way. They have to realize that in piece-rate systems, they have to find ways to be more efficient if they want to make more money. Instead of offering automatic raises, piece-rate rewards employees who find ways to do a better job and make more money for the company.
Promotion can mean less money: We have some really good production workers. They make so much money at piece-rate that when we want to move them into a leadership role, they have to take a pay cut. It’s a dilemma.
Those who do hard labor will wear out their body over many years. Appealing to health or prestige can persuade a good table worker to become a supervisor.
Resistance to mechanization: Our company tries to stay up with technology and institute labor-saving devices. But the piece-rate workers tend to worry about policy changes that necessitate a slower work pace.
Poor housekeeping: When you train workers on new tasks, make sure to explain any associated duty or requirement that is not directly related to producing finished products. For example, you cannot assume that they will know how their work area should look at the end of the day. Get a commitment that cleaning up the area is part of the piece-rate job.
Implementation
Rates: When calculating our base rates or quota, we ask a trusted employee who is not going to work extra slow to build some pallets. We then compare that experience with our daily payment target for each worker to come up with the price per pallet. If employees do extra-large pallets, the quota numbers are reduced to compensate for the added difficulty of larger pallet sizes.
The quota has to be weekly and not daily. Otherwise, someone will work really hard on Monday and call in sick on Tuesday. It’s important to have different rates for different efforts. That’s where the complexity arises. As the length of a pallet increases, the piece rate increases. And within a given length, as the width increases, the piece rate increases.
Employees building a pallet out of new wood can work much faster. If they have to watch where they’re shooting nails, it slows down the process. Consider adding two cents to the cost if workers are using used wood. Workers will not make wingtips for the same price as non-wingtip designs. They say it’s unfair. We have a special rate for non-standard designs, such as wingtips. All of these factors are incorporated into our computer system so it’s not a big challenge.
Some employees work on a team piece rate basis. For example, if you have a disassembly operation that immediately goes into a saw operation, all three people might get a team rate. That works out well. We’ve tried, wherever possible to get a forklift operator dedicated to one task and pay him on a piece-rate basis, because that enhances productivity at this critical spot as well.
Communicate rates to employees so they know what to expect. It’s important to post the rates publicly, such as in a lunch room. If you change the rate, write down the new ones with the effective date so that employees can easily tell when the change takes place.
Quantities: Everything in piece rate depends on how many pallets are produced to our quality spec per shift. Our system is so simple it doesn’t involve the computer at all. Each morning, the piece-rate worker gets a roll of gummed stickers on which to write sequential numbers. If he’s building pallets, he puts a sticker with the number on the stack and when the forklift driver removes it, he’ll put the sticker under the worker’s name on the clipboard. For example, Larry was building 32 x 30s and he put a sticker for 20 on the first stack. then 40 and then 60. By the end of the day, Larry hits his quota of 400. The driver and Larry agree and it eliminates quarreling about how many pieces were produced.
Jobs that don’t work well on a piece-rate system include forklift drivers, supervisors, quality checkers, truck drivers, and mechanics. For these jobs, we pay hourly based on an employee’s skill or experience level.
Overtime: Just because an employee is paid on a piece-rate basis, that doesn’t make them exempt from overtime provisions. The law requires that for overtime pay you compute what a person’s average hourly pay is over a week (not just Friday’s piece rate), and then pay 50% more than that figure for overtime. You can use the original calculation of the average for vacations, holidays, and team meetings as well. We do our calculations quarterly.
Speeding the process: Give sorters a little bit more incentive to keep a pallet that doesn’t need repair from going through the whole production process. If tablemen are removing boards and some can be used in another process, give them a little extra to put those boards in a different hopper.
Profit-sharing: This is how you can entice hourly employees to work and think like owners. If hourly employees retain good customers, increase profitability, or improve quality while keeping costs down, then the company makes more money. If some of that extra profit is distributed among employees, then hourly staff will tend to work harder.
Sick days: If you give people five sick days and say you’ll take them back if they don’t use them, then your employees will be sick five days. People tend to treat these as extra vacation days. If you give them extra vacation days for perfect attendance, you encourage perfect attendance. Always look at your policies to see what behaviors you are encouraging and how people will use your policies to their advantage.
Praise and encouragement: Proper motivation goes beyond just financial incentives. When workers do great jobs, give them a pat on the back. Provide good working conditions. When it’s really cold, one of our managers bakes a big pot of chili for the workers. It’s not compensation, but it’s a simple way to say, “We appreciate you.”
Administration: Our system was so complex that the first three information systems we tried failed. Now we use PalletTime, which was written years ago by Penninga Engineering. Since automating our records, we cut payroll processing time in half. And when payroll is tallied by a computer we find fewer mistakes.
Bill Zeilstra, MBA, CPA is controller of Kamps Inc. in Grand Rapids, Mich.
