Incentive Pay Boosts Output On Shop Floor
Pay-for-performance plans spread; $300 more a week for Jim Williams
BOSTON — For many, being paid by the piece conjures up images of turn-of-the-century sweatshops, long hours, low wages. But as another century rolls into view, piece-rate pay may be starting a comeback as part of a broad trend toward incentive-based compensation. And this time around, employees appear to be winning along with their bosses.
"It works for me," says Jim Williams, an auto glass installer in Cambridge, Mass., who now gets paid per unit installed rather than an hourly wage. "It adds an extra $300 a week to what I used to make."
The pay scheme also works for his employer, Safelite Glass Corp. Installers like Mr. Williams now put in 20 percent more windshields or other auto glass each week than they did before last year's switch to piece rates.
The changes at Safelite and elsewhere are slowly reshaping how Americans are paid. The rise of incentives is challenging the traditional notion that workers are entitled to their pay on the basis of hours and years served.
This year, 34 percent of of Fortune 1,000 companies offer bonus pay plans for hourly employees based on meeting or exceeding targets. In 1993, only one-fourth of the companies offered such bonuses to hourly workers, according to an annual survey by Buck Consultants, a benefits and compensation consulting firm in New York.
The average amount of these bonuses has also been growing: from 4.5 percent of base pay in 1993 to almost 7 percent this year.
The experimentation with incentive pay ranges from bonuses for individuals or teams to more dramatic shifts. Behind them all, however, is a growing recognition that the potential rewards in improved performance are huge.
The gains in productivity are much larger than employers had previously thought, says Canice Prendergast, an economist and pay expert at the University of Chicago.
That is certainly the case at Safelite, where 2,000 workers nationwide now are paid by unit of production.
"We are sharing the productivity gains with them," says John Barlow, president of the Columbus, Ohio, company. The firm's payroll costs have been lowered, meanwhile, as Safelite has had to hire fewer new "associates," as Mr. Barlow terms employees.
With higher pay possible, the job is attracting capable workers, boosting overall output at the company about 35 percent.
The trend toward new pay systems "is not something where employers are jumping on a fad," says Robert Heneman, a pay expert at Ohio State University in Columbus.
Corporate profit-sharing bonuses are a longstanding method of encouraging worker effort, cooperation, and sharing of ideas and information. Between one-sixth and one-fourth of US firms and employees participate in profit-sharing, says Douglas Kruse, an economist at Rutgers University in Newark, N.J. A smaller but significant number of firms have employee stock-ownership plans, where workers share in corporate success.
Some changes affect few workers. For example, when the pay of some jockeys at a British race track was directly related to performance - they got 20 percent of the winner's purse instead of a retainer - they won more races. Some made as much as L1 million ($1.6 million) a year.
The New York Jets experimented with performance pay by deducting $5,000 from the salary of a quarterback for each intercepted pass. But the plan didn't work. The player just threw fewer passes. Too financially risky.
The employer-worker contract is "perhaps the most important contractual relationship in the economy," Prendergast holds. "The way in which this relationship translates worker preferences and capabilities into production affects the daily lives of all parties concerned." It affects "our education decisions, our social lives, and our effort choices."
But economists have had difficulty measuring the effect of pay schemes on productivity, because it is rare to find situations where accurate comparisons can be made.
Safelite, the nation's largest installer of auto glass, was an exception. As new management gradually changed compensation, a sophisticated computer system tracked how many windows of each kind individual installers put into place. This provided good data for economist Edward Lazear of Stanford University to sift.
In addition to boosting individual productivity - expected under standard economic theory - the new pay system reduced turnover among the most productive workers. It also enabled Safelite to attract more-able workers as employees. Piece rates appeal to people who can work fast and efficiently. They are less attractive to others, and some workers left, increasing overall turnover. The company ended up with greater variety among workers in output and ability.
On average, Safelite glass installers are paid $20 per unit installed. But the new pay system includes a guaranteed wage of about $11 an hour if a worker's weekly pay on the basis of units installed falls below that guarantee. Many end up in the guarantee range.
Piece rates also reduced the amount of paid sick leave, probably because the system increased the cost to the worker of taking it.
Under the new system, the average worker earned $2,250 a month including benefits, up 9.6 percent, Mr. Lazear found.
But piece rates can be used only when output or performance is easily measurable and quality can be controlled. At Safelite, the effort to maintain quality provides that if an installer does a poor job, he must fix it on his own time or pay for the repair.
Packers of glass items aren't paid piece rates because their care drops as their speed rises and breakage increases, notes Claudia Goldin, a Harvard University economist. Nor do garmentmakers pay piece rates when they are using expensive materials or where poor-quality sewing shows up easily. She says "Piece rates are frequently a disaster."
When computer programmers were paid per line of code, programs stretched enormously, says Prendergast. "People would end up doing goofy things."