transportation line. Scientific buying precludes the possibility
of failure to obtain delivery of goods at the time required and
where required. The serious losses that might ensue if proper



PURCHASING SYSTEM 257

precautions were not observed are obvious, and provision must
be made for keeping records of the character, reliability and
financial responsibility of the concerns dealt with.

Another source of unnecessary expense to manufacturers and
wholesale houses caused entirely by inefficient buying methods
arises in those cases where requests for quotations are worded in
such an ambiguous manner that there is some perplexity on the
part of the bidders as to what is actually required. Sometimes
a size is incorrectly given or the careless specification can be in-
terpreted to cover two entirely distinct articles. This involves
requests for additional information by telephone or letter, or
sometimes salesmen are sent to make inquiries for the purpose
of clearing up uncertain points. This also happens with orders
when issued, and it is a fault which is entirely too common.

Any betterment of these conditions would tend to reduce the
selling expense and consequently lower the selling price. Thus
the buyer would be likely to derive a material benefit, but such a
benefit could only be brought about by scientific methods.
Scientific salesmanship cannot cope with certain phases of un-
scientific buying. The remedy lies with the buyer, and the
economic advantages will not only be secured for his own concern
but for all those with whom he does business. If one considers
the wide ramifications of business, and the successive buying and
selling from the raw material to the finished product, it will be
realized that this question of right buying has a broad significance
and that its influence on business is universal.



CHAPTER XIV
WAGE SYSTEMS

THE wage system of an industrial organization may have a
decided effect upon its general efficiency or the unit cost of pro-
duction. Before the introduction of scientific management, prac-
tically all attempts to decrease the cost of production were based
on some system of payment. Extra financial rewards have been
offered in different ways as an incentive for increasing the amount
of work done. When attempts have been made, however, to
obtain the higher rate of production without the payment of a
suitable reward, except during a short " speeding-up " period,
the resulting labor trouble has demonstrated in many cases that
the system is poor. A wage system cannot properly be classified
as good unless it is fair both to employer and employe, and this
principle has been generally recognized in the development of
modern wage systems. The two fundamental methods of paying
for labor are (i) to pay the workman according to the amount of
time expended or (2) to pay him according to the amount of work
that is done. All wage systems are either based directly upon
the time or amount of production, or they are combinations of
these two methods of payment. There are five well-known
methods of payment which may be defined as follows: i. The
day- wage system. 2. The piece-work system. 3. The pre-
mium system. 4. The differential system. 5. The bonus
system.

Day-wage System. The day- wage or day-rate system is
simpler than any of the others mentioned and is also very com-
mon. With this system, the workman is simply paid at a certain
rate per hour or per day. In other words, payment is made
entirely upon the amount of time expended on the work, but the
amount of work done bears no direct relation to the financial
reward, although it is assumed that a fair amount of work will be

258



WAGE SYSTEMS 259

done. Ordinarily, the pay is based on an hourly rate, which
varies according to the class of labor, with more or less additional
variation in different localities. If every employe worked dili-
gently and if it were possible to base the rate of pay upon the
actual productive value of each man's services, the day-wage
system would be fair to both the employe and employer. The
principal objection to this system, however, is that there is no
incentive for the employe to make any special effort to increase
production. On the contrary, many workmen try to accomplish
as little as possible, which not only decreases the efficiency of a
plant, but causes dissatisfaction among other men of the same
class receiving an equal rate of pay and making an honest attempt
to give a fair day's work in return for it. While the day- wage
system is in very general use at the present time, it has been re-
placed in many industrial organizations by other systems of pay-
ment to be described.

Piece-work System. The piece-work system is based upon
the plan of paying a workman who is producing or operating on
duplicate parts a certain amount for each piece of work that is
completed. The object, of course, is to pay each man for what
he actually accomplishes, the fast workman earning more than
one who produces less, either because he is naturally slower or
less inclined to exert himself. One not familiar with the actual
working of this system might consider it fair and just both to the
employe and employer. It has been the cause, however, of many
labor troubles and frequently has proved inadequate as a means
of increasing the efficiency of workmen or of justly rewarding
them for their services. One of the fundamental difficulties with
the piece-work system, as ordinarily installed, is in determining
how much should be paid for a given operation, or the price per
piece. The usual method of determining the piece-work rate
involves more or less guesswork, especially in the production of
new parts. Frequently the rate is entirely too high at first, in
which case the usual result has been that the workman made an
exceptionally high wage until the rate was reduced. On the con-
trary, a rate that is too low makes it impossible for the employe
to obtain a fair daily wage until an adjustment is made and this



260 SHOP MANAGEMENT

change may be delayed unnecessarily. If the rate enables the
workman to earn much more than he could under the day-wage
system, he may be allowed to do this temporarily or until the
management has definitely determined just how much it is
possible for the workman to produce; the rate per piece is then
reduced and, in many cases, the final result is that the workman
receives about as much as he did formerly, but produces a great
deal more ; consequently, this system of payment is not regarded
favorably by most workmen and its theoretical advantages as a
means of decreasing production cost are modified in practice
because many employes, instead of attempting to earn as much
as possible, aim to produce just enough to earn a moderate wage
in order to avoid a reduction of the piece rate. For instance,
if a piece rate, which has been established largely by guesswork,
enables an employe to earn seven dollars per day by working as
fast as possible, he may consider it wise to so regulate the pro-
duction that the daily wage is four dollars or whatever amount is
considered low enough to prevent a reduction of the piece rate.
The ordinary piece-rate system is opposed to modern or scientific
methods of management because it is not based on definite knowl-
edge as to what constitutes a fair amount of work. The cost of
inspection is also relatively high with the piece-work system, as a
general rule, because there is a tendency to slight the work, al-
though trouble from this source may not be very serious when
each man is held strictly accountable for rejected parts.

Premium System. The Towne-Halsey premium system was
developed to overcome the inherent defects of the piece-rate
system. It is based on the principle that a fixed daily wage
should be guaranteed and that extra payment should be given
whenever a job is finished in less than the alotted or standard
time, the amount of extra pay depending upon the amount of
time saved. The plan is to record the quickest time in which the
work has been done and use it as a standard. If the workman
succeeds in finishing the operation in less than the standard time
he receives, in addition to a regularly hourly rate, a premium,
which may vary from one-quarter to one-half the difference be-
tween the wages actually earned and what would have been



WAGE SYSTEMS 261

earned if the full time had been utilized. In order to illustrate
the practical working of this system, suppose an employe receives
thirty-five cents an hour, so that his minimum guaranteed wage
for an eight-hour day is two dollars and eighty cents, and that a
premium equal to 40 per cent of the difference between the actual
working tune and the standard time is given. If the standard
time for a given job is six hours and the work is finished in five
hours, the employe receives the regular hourly rate of thirty-five
cents for five hours, or one dollar and seventy-five cents, and, in
addition, 40 per cent of the difference between the pay for six
hours' work and the pay for the actual working time. The differ-
ence in this case is thirty-five cents (2.10 1.75 = $0.35) and
40 per cent of thirty-five equals fourteen cents, which represents
the premium. Therefore, the total wage for five hours equals
1.75 + 0.14 = $1.89, and during the three remaining hours of
the day the employe will earn, in addition, at least $1.05, and
more than this, if he continues to do the work in less than the
standard time.

One fundamental defect of this or any other wage system re-
quiring a standard time for a task, when applied in conjunction
with an ordinary system of management, is in determining with
accuracy just what the standard time should be. In one case,
the time may be based on favorable conditions or upon the per-
formance of a fast workman, whereas another standard time for a
task may be determined under less favorable conditions, unless
time studies are resorted to and the standard time is based on a
careful analysis of the conditions. The premium plan, however,
is simple and easily introduced and it has proved successful in a
great many shops and factories.

Rowan Modification of Premium Plan. With the premium
system previously described, it is to the advantage of the work-
man to have the standard time as large as possible, because the
greater the difference between the standard time and the actual
working time, the larger the premium; therefore, the tendency
of the workmen, when new work is being started, is to make the
standard time larger than is necessary. One method of meeting
this difficulty is to make the premium a percentage of the amount



262 SHOP MANAGEMENT

received for the actual working time at the regular day rate.
This percentage, according to the Rowan plan, is equivalent to
the percentage of standard time that is saved.

If A equals the amount received for the actual working time at
the regular day rate; B equals the standard time in which the
work should be completed; and C equals the amount of time
saved, the premium may be computed as follows: Premium =

C
Ax. For example, if the standard time is eight hours and

>

the actual working time, six hours at thirty cents an hour, the

2

premium equals 1 80 X - = 45 cents, and the total amount

o

received in this case equals 180 + 45 = $2.25.

With this system, the premium is decreased as the amount of
time saved increases, and if it were possible to save 90 per cent of
the standard tune, the premium would be the same as when the
saving was only equal to 10 per cent of the standard time. The
workman, however, receives a more liberal premium for a moder-
ate change in time than he does with the Towne-Halsey premium
system. The Rowan plan has been objected to on the ground
that it discourages honest efforts on the part of workmen to
obtain maximum production, but, on the other hand, there is less
tendency on the part of the employer to reduce the basic rate.
This system has been applied quite extensively in England.

Bonus System. The straight bonus system differs from the
previous system in that the workman receives, in addition to a
daily wage, a fixed amount or bonus whenever a piece of work is
finished within or less than the predetermined time. Assume
that the bonus is equal to one-third the amount that would be
earned in the time set for a given job; then, if the work is sup-
posed to require nine hours and it is done in eight hours, a bonus
equal to three hours' pay would be given in addition to the regu-
lar rate of pay for the actual working time. For instance, if in
this case the hourly rate were thirty cents, the total amount re-
ceived for the job would equal 2.40 + 0.90 = $3.30. If the work
had been done in seven hours, the total amount received would
equal 2.10 + 0.90 = $3.00. The time saved by doing the work



WAGE SYSTEMS 263

more quickly is, of course, expended on the next successive job.
In case the time set for the job is exceeded, the wage is then based
on the regular hourly rate.

Gantt Task and Bonus System. The task and bonus system,
introduced by H. L. Gantt, differs from the " straight bonus
system " previously referred to, in that the workman is paid the
full time allowed for the task and, in addition, a bonus equivalent
to one- third of the full task time, when work is finished within the
task time. For instance, if the task time is three hours; the
regular fixed rate, thirty cents per hour, and the work is done in
two hours, the workman would receive pay for the full time, or
ninety cents plus a bonus of thirty cents. Thus, in effect, the
hourly rate was increased from thirty to forty-five cents by doing
the work in less than the task time, in addition to the bonus re-
ceived. With the straight bonus system, he would receive thirty
cents an hour for the two hours of actual working tune (instead
of pay for the entire task time), and, in addition, a bonus. If the
bonus were one-third of the task time as before, the total amount
received would equal 60 + 30 = 90 cents, as compared with $1.20
under the Gantt system. If the work is not done within the task
time under the latter system, the regular hourly or daily rate is
received.

The Gantt system has been extensively applied, especially in
shops operating according to the Taylor system of scientific
management. It should properly be utilized in conjunction with
such a system of management, so that the task time can be based
on a careful study of the conditions. When this plan is followed,
what seems to be the best methods of performing each element or
detail of various operations are carefully determined and then the
minimum time that should be allowed for each detail is recorded.
The results of these numerous analytical observations are re-
corded for all kinds of work, so that it is possible to correctly
estimate the time that should be allowed for other jobs involving
the same general elements or details. In conjunction with this
work, it is necessary to have all the machines and appliances in
the proper order, and arrangements should be made for supplying
the necessary tools and materials. Specific instructions are also

I7B



264 SHOP MANAGEMENT

necessary so that the workman will know just how to proceed in
order to perform a given operation in the precise manner upon
which the standard or task time is based.

Almost every operation may be performed in several different
ways, but obviously these methods are not equally efficient; in
fact, some of them are so obviously inefficient that they would
not be considered, but it is often a difficult problem to determine
the best method and it is only by a scientific investigation of all
the controlling elements that even an approximate solution may
be obtained.

Differential Wage System. The differential wage system
introduced by F. W. Taylor depends upon accurate knowledge as
to the length of time required to do the work as determined by
the methods connected with scientific management, and it is in-
tended to reward liberally the efficient workmen and to penalize
the inefficient who produce less than the required standard, by
giving them a relatively low rate of pay. The important feature
of the original plan is that there are two piece rates, one being
high and the other low. The higher rate applies when the work
is completed within the prescribed time as determined by careful
observation and study, and the lower rate, when this standard
tune is exceeded. In order to illustrate this system by a practical
example, suppose a careful investigation has shown that ten
pieces per day represents a maximum number. Then, under the
differential system, if a workman finishes ten pieces per day and
all of these pieces pass inspection, he receives, say, 35 cents per
piece. On the other hand, if the work is done too slowly and
only eight pieces are finished, then, instead of receiving 35 cents
per piece, the rate might be reduced to say 30 cents per piece. If
ten pieces are finished but some of them are imperfect and will not
pass inspection, the low rate of 30 cents may be still further re-
duced, the amount of reduction depending upon the circumstances.

As the preceding example shows, whenever a workman is pro-
ducing the maximum amount, either for a day or a shorter period,
he receives the higher wage rate, but when there is a reduction,
either in quantity or quality, the pay is also reduced and becomes
less than the ordinary rate of pay.



WAGE SYSTEMS 265

One important principle upon which this system is based is that
men will not do an extraordinary amount of work for an ordinary
amount of pay. In Mr. Taylor's paper, " A Piece-rate System,"
the two following facts were given as the basis for harmonious
cooperation between employer and employe: First, that the
workmen in nearly every trade can and will increase their present
output per day providing they are assured of a permanent and
larger return for their time than they have received before;
second, that the employers can afford to pay higher wages per
piece, even permanently, providing each man and machine in the
plant turns out a proportionately larger amount of work. The
second statement is based upon the generally recognized fact that
in most lines of manufacture the indirect expenses equal or exceed
the wages paid directly to the workmen, and that these expenses
remain approximately constant whether the output of the estab-
lishment is large or small. From this it follows that it is always
cheaper to pay higher wages to workmen when the output is
proportionately increased, the diminution in the indirect portion
of the cost per piece being greater than the increase in wages.

Many manufacturers in considering the cost of production fail
to realize the effect that the volume of output has on the cost,
because they lose sight of the fact that taxes, insurance, deprecia-
tion, rent, interest, office expenses, sales expenses, and frequently
the cost of power remain about the same whether the output is
large or small. In the paper previously referred to, it was pointed
out that where large and expensive machines are used and a large
output is dependent upon severe manual labor as well as upon the
skill of the workmen (while the chief cost of production lies in the
expense of running the machines rather than in the wages paid),
it has been found of great advantage to establish two or three
differential rates offering a higher and higher price per piece or
per unit of production as the maximum possible output is ap-
proached. The differential piece-rate system was not intended
to be applied until thorough time studies have been made of all
the elements of the work and the other accompanying conditions
have been perfected and completely standardized. The differen-
tial system requires a high standard of management, and it is



266 SHOP MANAGEMENT

considered particularly useful where the same kind of work is com-
pleted day after day and the maximum possible output is desired.

The differential system and task and bonus system both give
the workman a large extra reward when he accomplishes his full
task within the given time. With the differential rate, if, for any
reason, the workman fails to do his full task, he not only loses the
extra large premium which is paid for complete success, but, in
addition, the direct loss of the piece price for each piece by which
he falls short. Failure under the task and bonus system involves
a corresponding loss of extra premium or bonus, but the workman
receives his ordinary day's pay. In principle, the two systems
appear to be almost identical, but the slightly milder nature of
the task and bonus system is sufficient to make it much more
flexible, and, therefore, applicable to a large number of cases to
which the differential system could not be applied.

Emerson Wage System. The plan of the Emerson system
of payment is to reward workmen who are reasonably efficient
and to increase the reward or bonus as the efficiency of the work-
man increases. Each workman is assured of a fixed daily wage
and has an opportunity of earning, in addition, a bonus depending
upon the relation of the actual production to a certain fixed
standard. The standard performance is first established by
making a careful study of all the controlling factors the same as
with the Taylor and Gantt systems. The workman receives a
bonus equivalent to 20 per cent of the daily wage for work done
in the standard time, as his efficiency would then be 100 per cent.
If the standard time were eighteen hours and the job were com-
pleted in twenty hours, the workman's efficiency, as compared
with the standard time, would be 90 per cent and he would re-
ceive a bonus of 10 per cent; if his efficiency were 80 per cent, the
bonus would be reduced to 3! per cent, and, if the efficiency were
less than 67 per cent, there would be no bonus at all. In case the
work were done in less than the standard time, so that the effi-
ciency were over 100 per cent, the bonus would increase until it
was equivalent to 60 per cent of the wages for an efficiency of 140
per cent. In the practical application of this system, the bonus
is calculated with reference to the work for some period such as a



WAGE SYSTEMS 267

week or a month, and not for individual jobs. For instance, if
the standard time on all the different jobs handled by one man in
a month amounted to 200 hours, and the actual working time had
been 220 hours, the efficiency of that particular workman would



equal =90 per cent, approximately; therefore, the bonus in
220

this case would be about 10 per cent. If the hourly rate were
thirty-five cents, the regular daily wage would equal 220 X 0.35
= $77.00 and as the bonus is 10 per cent of the wages, the total
amount would equal 77 +7.70 = $84.70.

This progressive method of rewarding efficiency is intended to
hold the interest of the workmen even when conditions for any
one job are not favorable, and it is apparent that the work cannot
be done within the standard time. The standards are estab-
lished after careful and reliable investigations have been made,
including time and motion studies. It may be necessary, of
course, to change the time standards to suit new conditions or
equipment, and the rate of pay may also be varied, but the time
standards should not be changed to affect wages as they are
based strictly upon analytical observations of the different factors
affecting production.

A modification of the Emerson system advocated by C. E.
Knoeppel differs from the former in the amount of bonus paid at
the beginning and also when an efficiency of 100 per cent has been
obtained. The workmen who are over 67 per cent efficient re-
ceive a larger bonus than with the Emerson system, especially
during the earlier stages from 67 to 85 per cent, and when an
efficiency of 100 per cent is exceeded, there is an additional bonus
of 5 per cent added to the 20 per cent received under the Emerson
system. This 5-per-cent premium is an extra incentive for in-
creasing production beyond the 100 per cent mark. With either
of these systems, the cost per piece decreases slightly instead of
remaining constant as with the straight piece-work plan.

Contract System. The contract system which has been
applied in quite a number of the larger industries, such as loco-
motive works, shipyards, etc., both in the United States and
abroad, differs from the other systems referred to in that the em-



268 SHOP MANAGEMENT

ployer does not deal directly with the workmen, but with con-
tracting foremen. The foreman agrees to do the work for a