Analyzing Compensation Methods in Manufacturing: Piece Rates, Time Rates, or Gain-Sharing?

54 Pages Posted: 22 Nov 2010 Last revised: 24 Nov 2010

See all articles by Susan Helper

Susan Helper

Case Western Reserve University - Department of Economics

Morris M. Kleiner

Humphrey School of Public Affairs; National Bureau of Economic Research (NBER)

Yingchun Wang

University of Houston - Downtown

Date Written: November 2010

Abstract

Economists have often argued that "pay for performance" is the optimal compensation scheme. However, use of the simplest form of pay for performance, the piece rate, has been in decline in manufacturing in recent decades. We show both theoretically and empirically that these changes are due to adoption of "modern manufacturing" in which firms produce a greater variety of products to a more demanding quality and delivery standard. We further develop a theory of the type of compensation system appropriate for this kind of production, in which there is a high return to "multi-tasking", where the same workers perform both easy-to-observe and hard-to-observe tasks and to "just-in-time" production, which entails a high cost of holding inventory. We test these predictions using detailed monthly information on firm outcomes and employee surveys from four plants in two companies that adopted modern manufacturing methods and changed their method of compensation from piece rates to either time rates or value-added gain-sharing. We find that time rates and gain-sharing are associated with reduced employee performance on easy-to-observe tasks, enhanced performance on hard-to-observe tasks, and improved firm profitability. Our analysis shows the importance of distinguishing types of incentive pay: we find that modern manufacturing is consistent with either group incentive pay (such as gain-sharing), or no incentives (such as hourly pay), but inconsistent with individual incentive pay (piece rates).

Suggested Citation

Helper, Susan and Kleiner, Morris M. and Wang, Yingchun, Analyzing Compensation Methods in Manufacturing: Piece Rates, Time Rates, or Gain-Sharing? (November 2010). NBER Working Paper No. w16540, Available at SSRN: https://ssrn.com/abstract=1711680

Susan Helper (Contact Author)

Case Western Reserve University - Department of Economics ( email )

Cleveland, OH 44106
United States
216-368-5541 (Phone)
216-368-5542 (Fax)

Morris M. Kleiner

Humphrey School of Public Affairs ( email )

Minneapolis, MN 55455
United States
612-625-2089 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yingchun Wang

University of Houston - Downtown ( email )

105 Main ST. Shea Building
Houston, TX 77005
United States

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