Piece Rate vs. Hourly Pay
“How many pieces do your guys do in a typical shift?” asks the person across from your table. The answer you offer at this moment in time will determine if you garner more interest or if the person begins to not-so-subtly disengage from the conversation. “1,000” I blurt out, trying to sound casual and confident. “Whoa! What machines do you run?” they respond. An inner sigh of relief takes over. I passed the test. Now the burden is on them. They need to ask questions to figure out how my number is better than theirs. I’ve stimulated their interest enough to continue into a back-and-forth that combines boasting and mutual betterment.
Welcome to the wonderful world of pallet manufacturing. If you stole a peak at the table of pallet leaders in your area, there would be a good chance you’d witness a conversation on piece rate. Most in the industry devote themselves to piece rate – the pay that correlates directly with production amounts. If you fix 200 pallets, you get paid your rate multiplied by the 200 pallets you fixed. If you cut 1,000 boards you get paid your rate multiplied by the 1,000 pieces you cut. Most of our history functioned the same way. Yet, my confidence in piece rate began to erode several years ago and I have swapped sides to the hourly perspective.
Hourly pay is straightforward. I pay an agreed amount of money for an agreed amount of your time. Pallet companies have leaned away from this because it is full of laziness. Piece rate was the grand solution. Over the years, when we converted hourly workers to piece rate, we harvested 30% productivity improvements. Dangling the carrot does work to compel higher effort and engagement. Yet, I fear we often stack piece-rate’s strength against the worst version of hourly. Take a look at four different structures to understand my conversation from piece rate to hourly.
#1: Piece Rate + Minimal Daily Management
I think this structure is most common in the pallet industry. When people are hard-working and driven, they get high production numbers. Management then appears less necessary and needed on an hourly basis to ensure the best outcomes in the plant. Individual numbers are good but you can become capped. You are in a classic high-floor and low-ceiling situation. Downsides began to eat away at your company in places you are not aware of. The discrepancy between management and operator grows wider. The culture becomes an “us vs. them” culture. Any time management wants to talk or work with the operators is difficult because it stops their production and therefore stops their pay from rising.
#2: Piece Rate + Daily Management
Turn the dial-up for daily management. Although this idea sounds great, it is tricky to accomplish in the real world. How do you manage someone who despises interruptions? How do you engage the person with ideas if engaging annoys them? I do not fault the piece rate worker. I understand the predicament. The best hope is to win the operator’s trust that your interruption will lead to short-term loss but long-term gain. You need to prove that delayed gratification is the better road. Unfortunately, none of us naturally prefer delayed gratification.
#3: Hourly + Minimal Daily Management
I will introduce you to the worst of all four options. You get neither the productivity boost of piece rate nor the long-term improvements of management. If you want to flush your profits down the drain and slowly degrade as a company, this path is viable. I suspect that many companies who “tried hourly” operated in this realm. They left people to themselves without structures, standards, and accountability and then grew frustrated that the worker didn’t act like an owner. The expectations were that an entry-level person working an hourly wage would invest and improve with the skill and care that you do. I assure you those expectations are unfair and will lead to demise.
#4: Hourly + Daily Management
Now to the option I have settled on. If you take an hourly worker and create a culture of improvement, you can build a manufacturing skyscraper that towers above the other options. The key is a culture of improvement. You will need a culture of trust and respect for people. No more trashing and complaining about the workforce. You will need an operating system that stabilizes processes so they are repeatable, standardizes them so they are universally understood and performed, and constantly improved. You will enter a new era where there is no “us vs. them” culture. The only culture remaining is one team trying to make one great company together. This entire approach is like the tortoise. It starts slowly but consistently takes steps forward. In the end, the hare will watch as you cross the finish line victorious.
Management can get too tunnel-focused. We want the big, individualized numbers to pat ourselves on the back. Our short-term returns on piece rate make us feel like champions. But we can’t turn a blind eye to the downside effects on teamwork, culture, and stagnant improvement. Now, when I sit at the table and share my numbers, I don’t care if I pass the test and impress people. I realize we are talking about different things entirely. I’m playing football. They are playing baseball. Naturally, my on-base percentage will be poor. However, my team is creating brand new ways for improvement and efficiency in the pallet industry. Individual numbers may be down but my overall numbers are vastly improved. It’s time to take a long-term and broad perspective on the impact of our pay structures, beyond the initial spike in output.
