Piece Rate: Incentivising Efficiency

What is the best way to compensate your employees? Typically we either pay them an hourly rate or salary. But another model for compensation is called piece rate. Simply put, this is establishing a flat rate that is paid for the completion of some deliverable (roof, medical care, solar panel array, etc.).

What’s good about piece rate is there is a direct relationship between costs and revenue, incentive and outcome. The model is easy to understand. Complete more, get paid more. Because of that direct relationship, piece rate directly incentivizes employees to become more efficient. Since employees are paid by unit there is a direct incentive for your employees to produce more units in less time.

Depending on your workforce, the simplicity of piece rate can be a critical advantage. Employees quickly understand how to succeed and earn more. Produce more units in less time and your pay each week goes up. Crews are also incentivized to work together to become more efficient promoting teamwork and encouraging learning.

Piece rate also makes calculating profit per unit easier. Since the compensation model is fixed, labor costs are stable and unit profit and loss becomes price paid by the customer minus piece rate paid and materials.

The danger is poor quality. As we all know, one of the easiest ways to increase output is to cut corners. Therefore piece rate works best when the “unit of work” is well defined and standards of quality are clear.

At Dapt, we have worked with a number of companies that have successfully implemented a “piece rate” model. Here are some examples:

Solar Installation: Per Kilowatt

One of Dapt’s first customers was a solar installation company. They specialized in installing roof solar arrays, most in the range of 800KW - 1750KW. Each installation had a crew with a crew lead and 1 to 3 laborers. A typical installation took one day with the most complex taking three days.

The crew was paid for each installation based on the size of the array: the larger the array, the greater the compensation. The array size was set in a custom field on the job and the rate was set on the employee as a custom field on the user in the time tracking solution (Quickbooks Time, formerly TSheets). This calculated piece rate was paid out when the job was completed.

The crews would track their work on the job in the time-tracking solution. When the array was installed an inspector would come out and when they approved the installation, the job was marked as completed.

Dapt, reading the data from time tracking would then calculate the compensation by multiplying each employee's rate by the size of the array to get a piece rate amount. That amount would then be added to their paycheck.

Healthcare: Visits and Appointments

Another example of the use of piece rate for compensation is healthcare. The delivery of healthcare services often uses appointments or sessions. These are timed visits with patients during which care is provided or examinations are conducted.

Again, a fixed rate is established and the practitioner is paid this rate for each visit or session. Healthcare providers often perform a blend of work. So their compensation is often a mix of hourly, salary, and per session compensation. In healthcare, piece rate is often more complicated intermixing compensation for delivering sessions and hourly rates for other work. Another variant we have seen is where the employees are paid a salary and the piece rate is paid as a bonus.

For healthcare, the solution to automating compensation often requires synchronizing between the system where sessions are recorded and another time-tracking solution. The session tracking system (typically an electronic health record system) is used to count the number of sessions and the time tracking system is used to calculate the rest of their compensation. In this model it is critical to distinguish time spent in sessions and time on other tasks. Otherwise, employees can be paid twice for the same work.

Construction: Per House

The last example we will go over is a construction company that builds housing units for general contractors who specialize in building housing developments. The company specializes in framing and they are paid by unit. They therefore compensate their crews by unit as well. Each crew is paid a specific amount for the completion of the framing on a unit-by-unit basis. Complete the framing of a unit, get paid.

When crews are not working on these per unit projects they perform framing for other companies that do renovations and/or single family home construction. When the crews are working these jobs they are paid hourly.

Here, as before, the key is to distinguish between the per-unit work and hourly jobs. This is done using a custom field on the job. Dapt, thereby, is able to distinguish the type of job and apply the correct compensation model.

Different general contractors pay different rates per unit. The company therefore establishes different per-unit rates for its employees. This requires looking up the rate specific to the job and applying when calculating the compensation. Dapt maintains these rates and performs the rate lookup when calculating the per-unit compensation.

Compliance: Hourly Rate Translation

Under the federal Fair Labor Standards Act (FLSA), employers must pay non-exempt employees at least the minimum wage for each hour worked and overtime pay at a rate of one and a half times the employee's regular rate of pay for all hours worked in excess of 40 in a workweek. States may also have additional rules that must be followed and some explicitly prohibit piece rate in specific industries (CA prohibits piece rate pay for garment workers).

Since many of the regulations governing piece rate work require that this pay be compared to an hourly rate like minimum wage, all piece work pay must be converted to an hourly rate. This requires your employees to properly track their hours. Time tracking is also required since overtime regulations apply to all work, even piece rate work.

These requirements complicate payroll. Your pay stubs should clearly show the different forms of pay - hourly work vs piece rate work - and hourly rate for each hour of work should be included.

Therefore, as part of the process of submitting data for payroll, the total of the piece rate work should be calculated and then translated into an equivalent hourly rate. This information should be clearly displayed on the paystub, therefore avoiding confusion and adhering to the required regulations. Should you be audited the data that demonstrates compliance to regulations will be clearly included on the paystub. This will make auditing and demonstrating compliance simple.

Putting Piece Rate into Practice: An Example

Let’s use an example to break this down:

For this example, we will imagine a roofing company that pays its crews a set rate per roof based on the size of the roof in square feet. They pay $1.20 per square foot. For our example here are the details:

Roof size: 1,000 sq ft
Crew size: 3 EEs
Hours to complete: 8 hrs
Piece rate total: $1,200
Pay per crew member: $400
Effective hourly rate: $400/8hrs = $50/hr

Now, let’s see how to ensure that payroll is accurate, clear to employees, and compliant. The first requirement is to ensure that the pay for each roof is displayed separately and includes the size of the roof and total piece rate pay. The second is to calculate the hourly rate and use that to generate the pay for the work. That way during a compliance audit the hourly rate and total amount of pay is clear. The result is a pay stub with 2 entries:

A memo with the job number and the total piece rate pay
An earnings entry with the total pay for the job and the hourly rate used for the calculation

The amount in these two pay stub entries will be the same so the employee will be able to see for themselves that the calculations are correct. This data also provides all of the information needed to meet auditing and compliance requirements.

Automation is Key

For many businesses piece rate is an excellent method for incentivizing employees. The relationship between success and work is clear and employees are immediately and directly rewarded as they become more efficient. But if the process of administering is complicated and manual then piece rate compensation can quickly become a nightmare.

Since your employees can quickly do the calculations to determine what they should be paid, any mistakes can quickly become a morale problem. In addition, failing a compliance audit can be quite expensive. Therefore, it is important to automate the process.

Dapt successfully handles all of the calculations and properly configures the payroll entries to ensure that payroll is accurate. Dapt also takes care of managing the submission of information to your payroll processor to ensure both accuracy and transparency.

Are you ready to streamline your payroll? Learn how Dapt simplifies piece rate compensation - Contact Us Today!

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