Paying for Productivity.
Data suggest that during the 1970's and 1980's, the productivity of American workers dropped significantly. From 1947 to 1973, output per hour for all U.S. businesses increased by approximately 2.5 percent per year. This rate slowed considerably during the 1972-88 period, as the annual increase in output per hour averaged just over 1 percent a year. These data help to define the concerns addressed in Paying for Productivity, in which editor Alan Blinder compiles several essays on possible solutions to the slowdown in worker productivity. Five papers and Blinder's introduction offer insight by leading academics into a variety of incentive pay systems and data on the effect such systems have on worker productivity.
In the book's opening essay, Alternate Pay Systems, Firm Performance, and Productivity," Daniel J. Mitchell, David Lewin, and Edward E. Lawler Ill look at various pay systems, their history, and their possible effect on productivity. The merit of three types of alternate pay systems are discussed-incentive pay plans, profit-sharing plans, and gain-sharing plans. The authors also discuss recent trends in alternative pay and the forces behind these new trends.
This discussion provides the reader with a solid background into the range of available incentive pay systems. Piece rates essentially pay workers for each unit produced, a system long favored in the manufacturing industry and currently in small low-wage industries such as apparel manufacturing. More elaborate incentive plans, such as the Taylor Differential Piece Rate, the Gnatt Task and Bonus Plans, the Halsey and Rowan Premium Plans, and the Bedaux Point System, pay rewards for exceeding specified production quotas. These plans were popular during the early 1900's. An alternative pay system, commissions, differs from the others because pay is typically based on the amount of business generated rather than on physical output. Commissions are typically used in the sales field, and can be either a flat rate or a rate that increases with increased sales.
Two other forms of alternative pay are profit sharing and gain sharing. In profit sharing, the employer shares a portion of profits with the employee. This is discussed in detail in "Profit Sharing and Productivity," by Martin L. Weitzman and Donald Kruse. In gain sharing, the worker is rewarded on the basis of production. Scanlon plans and Rucker plans are typical forms of gain sharing. These plans give bonuses to workers based on reaching target ratios of payroll cost to production value. These plans encourage cooperation between management and workers through the use of committees responsible for planning and decision making. In a Scanlon plan, the employees vote on instituting the plans and on whether or not to continue the plan after the first year.
Mitchell and his colleagues also discuss recent increases in the use of other alternate pay systems, for example, lump-sum payments, two-tiered wages, and incentive pay programs. One explanation given for the increase in the use of certain alternative pay plans is the decline of the union sector, a group generally opposed to the use of certain alternate pay systems. However, in the early 1980's, a number of companies added alternate pay systems in exchange for wage concession in union contracts. The authors also point to evidence that new entrants to the work force are increasingly interested in monetary rewards in addition to regular salary and benefits.
Evidence is presented showing a possible link between pay systems and worker productivity. Problems arise, however, in measuring the effect of alternative pay systems on individual workers. The authors suggest that lack of accountability of the benefit of alternative pay systems is one reason they are not more common in U.S. businesses.
In "Profit Sharing and Productivity," Weitzman and Kruse discuss the use of profit sharing as a means to improve productivity. The authors analyzed the effects of profit sharing on productivity using economic theory and several case studies. While there is no conclusive evidence supporting the link between incentive pay and productivity, the volume of the evidence seems to lend support to the positive influence of profit sharing on productivity.
Many studies have been conducted to observe the effect of profit sharing on productivity. The authors have compiled a wealth of evidence in an attempt to prove the positive effect of profit sharing. Several of the studies revealed that the rate of employee participation has a significant effect on the success of a profit-sharing plan. The essay also discusses numerous attitudinal studies of both employees and employers. A 1987 survey revealed that employees believe profit sharing improved worker effectiveness. A majority of the employees also believed that profit sharing improved worker loyalty and the work environment. Several other employee studies discussed by the authors supported these conclusions.
Several studies of employer attitudes are also discussed; these tend to support the results of the employee studies. The employers also believed that profit sharing has an overall positive effect on company performance. Several studies showed that profit-sharing plans improved labor-management relations, and increased cooperation and communication in the workplace.
The authors also discuss several statistical studies that showed a possible link between profit sharing and productivity. In a majority of cases, profitsharing firms' performance in particular areas was superior to the performance of nonprofit-sharing firms. It is difficult, however, to determine the magnitude of profit-sharing's effect on the company's performance.
As the rate of growth of American productivity declines, businesses are attempting to reverse this trend using alternative pay systems. In the past, several alternatives, such as profit sharing, gain sharing, and incentive pay, have been used to promote productivity in the workplace. The authors in this volume call for further research into the link between pay and productivity so that alternative pay systems can be developed to increase productivity.
Edward M. Coates III
Division of Occupational Pay and
Employment Benefit Levels
Bureau of Labor Statistics
In "Productivity in industry and government, 1989," by Richard B. Carnes, Monthly Labor Review, May 1991, the fifth sentence of the second paragraph on page 29 should read (correction in italics):
As a result, manufacturers have been operating at a higher and more efficient level of capacity than that during the pre- 1984 period.
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|Author:||Coates, Edward M. III|
|Publication:||Monthly Labor Review|
|Article Type:||Book Review|
|Date:||Jul 1, 1991|
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