Front Page Titles (by Subject) CHAPTER 20: METHODS OF INDUSTRIAL REMUNERATION - Economics, vol. 2: Modern Economic Problems
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CHAPTER 20: METHODS OF INDUSTRIAL REMUNERATION - Frank A. Fetter, Economics, vol. 2: Modern Economic Problems 
Economics, vol. 2: Modern Economic Problems, 2nd edition, revised (New York: The Century Co., 1923).
Part of: Economics, 2 vols.
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METHODS OF INDUSTRIAL REMUNERATION
§ 1. Workers subordinate in early societies. § 2. Workers in the Middle Ages. § 3. Growth of the wage system. § 4. Pros and cons of the wage system. § 5. Time work. § 6. Task work. § 7. Piece work. § 8. Premium plans. § 9. Aim of profit-sharing. § 10. Examples of profit-sharing. § 11. Difficulties in profit-sharing. § 12. Defective theory of profit-sharing. § 13. Purpose of producers’ coöperation. § 14. Limited success of producers, coöperation. § 15. Its main difficulty.
§ 1. Workers subordinate in early societies. As far back as the history of settled and populous communities can be traced, the masses of workers have been subordinate. Civilization began with direction, with obedience to superiors on the part of the mass of men. Even in the rudest tribes, the women and children were subject to the will of the stronger, the head of the family. Among the Aryan races the family system was widened, and the patriarch of the tribe secured personal obedience and economic services from all members of the community. Chattel slavery, the typical form of industrial organization in early tropical civilization, seems to have been one of the necessary steps to progress from rude conditions; students to-day incline to view it as an essential stage in the history of the race. But, as conditions changed with industrial development, chattel slavery became an inefficient form of industrial organization and a hindrance to progress. Slavery in the southern states of the American union was long a modern exception. The combination of racial difference between subject and master people, of warm climate, of special agricultural crops and of conditions in which slave labor could be employed with least disadvantage, combined to delay the disappearance of slavery from a community in which the life of the master people was in many respects on the highest plane of civilization.
§ 2. Workers in the Middle Ages. Serfdom for rural labor and many limitations of workman’s freedom in the towns were the prevailing conditions in medieval Europe. Serfdom was both a political and an economic relation. The serf was bound to the soil; the lord could command and control him; but the serf’s obligations were pretty well defined. He had to give services, but in return for them he got something definite in the form of protection and the use of land. Between the lord and the serf there continued an implied contract, which passed by inheritance from father to son, in the case both of the master and of the serf. In the towns conditions were better for the free master class of the artisans who owned their tools and often a little shop where they both made and sold their products. But the mass of the workers, shut out from special privileges, bore a heavy burden. There were strict rules of apprenticeship; gild regulations forbidding the free choice of a trade or a residence; laws against migration into the town; settlement laws making it impossible for poor men to remove from one place to another; arbitrary regulation of wages, either by the gilds in the towns or by national councils and parliaments, forbidding the workmen to take the competitive wages that economic conditions would have forced the employers to pay; combination laws forbidding laborers to combine in their own interest. These conditions prevailed even in the periods and in the countries often referred to as particularly favorable for the working classes (such as England in the fifteenth century).
§ 3. Growth of the wage system. Throughout the Middle Ages these conditions were gradually changing, and the changes were hastened by the discovery of America, by the social unrest accompanying the Reformation, and by other forces. Servile dues in the rural districts were, in England, by the sixteenth century, commuted for cash payments, and had begun to disappear in the other western countries of Europe. The agricultural work was done partly by the peasant landowners, partly by yeomen farmers on their own land, and partly by laborers hired by landowners or by tenant farmers (enterprisers with some capital for equipment). The growth of commerce and of the mechanical trades in the towns required larger ships, factories, and shops, and increasing investments. This required in the towns an increasing proportion of hired laborers having little or no capital invested in industry, and living on wages. This change went on more and more rapidly with the introduction of machinery in the eighteenth and nineteenth centuries, and “the wage system” grew steadily to be a more and more important part of the whole economic structure.1
§ 4. Pros and cons of the wage system. The wage system has certain practical merits of workableness which account for its progress and dominance. It keeps alive competitive motives among the wage workers to improve and advance by skill and industry; it brings the planning and management of business into the hands, in the main, of the provident and capable.2 Under the wage contract, the employer, as the one best prepared to do it, takes the risk as to the future selling price of the produce; the worker receives in a definite sum at once the market value of his services. This is of growing importance, for the larger the market and the longer the waiting period in industry, the greater the element of uncertainty and financial risk. Wage payment, therefore, is a form of insurance to the workingman; he gets something definite instead of taking chances he is ill prepared to take. Wage payment is a form of credit to the laborer whose labor is applied to producing the goods for customers distant in time and in place. The employer advances to the workman the present value of his labor, embodied in a product for future sale, discounted at the prevailing rate.
But the wage system has brought with it grave problems of inequality of incomes and of opportunity that at times threaten the very existence of democratic society. It means for the mass of men continuance throughout life in the position of hired workers, with no possibility of becoming self-directing enterprisers. In connection with increasing division of labor, it means for great numbers unvarying application to one narrow task, with little understanding of its relation to the whole and with less joy in workmanship than the old independent handicraftsmen had. Yet is it correct to say that the wage system causes these inequalities in ability and in variety and agreeableness of tasks? Is it not rather itself the result of the differences of ability, a way found through society’s long experience by which individuals may choose their occupations within the range of their abilities to gratify the desires of consumers, a way of attaining a high degree of efficiency in production?3 The problem for a wise political economy to solve is, and will be, to retain the best in the wage system, while remedying its evils or reducing them to a minimum.
§ 5. Time work. Wage payment implies a contract by which the employee on his part agrees to render service and the employer on his part agrees to pay for it. The methods of determining and measuring the amount of service of the employee are called “methods of industrial remuneration.” The many varieties may be grouped in two classes, time payment and piece payment, corresponding with the two modes of measuring labor, time work and piece work. Time work came first and was long almost the only method. In time work the employee is paid by the hour, day, week, month, or year, as the case may be. This is very satisfactory for small enterprises, where the master works with his own hands alongside of the employee, overseeing him, teaching him, and stimulating him by his own presence and example of industry. This method prevails still in nearly all farming work, in many kinds of manufacturing, in most transportation, in clerical positions in trade, and in general where the employee must perform a variety of tasks.
Considering a brief period, it might seem that in time work the worker is paid by time regardless of his effort or performance. However, in every industry there is a recognized, fairly definite standard of accomplishment for those getting the regular market rates of wages, so that the time standard implies some performance or piece standard also. But this is judged by the employer only in a general way, and very commonly men of different degrees of efficiency continue for some time to receive the same money wage. Still, where any differences become noticeable to the employer in quantity of work, quality of work, or personal qualities of honesty, reliability, and good temper, the better workman is likely to obtain a better position, higher pay, more regular employment, or some other form of reward. The employer is more likely, at the end of any period of employment, to discharge the man who falls short either in quantity or quality of work, and to retain and advance the better worker. The method of time payment does not directly tempt the workman to slight the quality of his work by haste. It does not keep constantly before the worker the thought of his own interest in rapid work, often with an accompanying nervous and mental strain. In most occupations, therefore, the workers prefer time work. In does not take exclusive account of the quantity of material product, but leaves place for estimating various personal qualities of the employee which are of value in a business.
§ 6. Task work. There are thus both advantages and disadvantages in time work, and their relative importance varies in different industries and industrial conditions. Especially is the difficulty of supervising workers and of insuring the performance of a certain standard, or minimum, amount and quality of work great in larger enterprises. Various methods of measuring the performance of the worker directly by some other than the time standard have been developed. All of these, in some measure, involve the piece-work principle.
Task work, also called “doing a stint,” is nominally time work, with a penalty if a certain amount of product is not turned out within a given period. The agreement may be that, if the specified task is not done within the regular time, it must be completed in overtime without additional pay. This method has been extensively used in the ready-made clothing business in America, and is to some extent involved in many cases of wage payment in manufacturing.
§ 7. Piece work. Piece work of the simpler or ordinary kind is that where the payment varies according to the amount of the product, by some physical measurement, as yards of cloth woven, number of pieces turned on a lathe, or amount of type set by a printer. Usually careful inspection by some agent of the employer serves to keep the quality up to a certain standard. The rejected pieces are not paid for, and sometimes also the workmen are required to pay for the materials wasted by their poor work. Piece payment is convenient for home work, such as that of rural peasants weaving cloth for commission merchants or as that of tenement workers in cities. It is also employed very widely in the larger factories in textile and mechanical industries. Selling on commission is a form of piece work.
In piece work the motive to activity is ever present to the worker, and generally the worker turns out a larger product when paid by the piece than when paid by time. The employer benefits by the more efficient use of his machinery and equipment, even when the price per piece is not reduced with the larger output per worker. The worker’s earnings may increase rapidly under this plan; but as the manual dexterity acquired is usually of a very special kind which can be used only on one particular machine, the worker has little opportunity to resist a cut in his wages. For this reason and because of the undue strain upon the worker that often occurs, piece work is in many trades not favored by the workers.4
§ 8. Premium plans. Various modifications of piece work have been developed of late, all involving the features of a minimum task and of a premium for performance beyond that point. These plans are called “premium plans,” “progressive wage systems,” and “gain sharing.” One of the first of these, Halsey’s premium plan, fixes a standard time for a job, and if the worker falls short of, or merely attains to, that standard he gets the regular pay; but if he takes less than the standard time he receives a fixed premium per hour equal to one third of the wage for the time saved. For example, if the standard time is 10 hours for a $3 job the premium for speed is ten cents per hour, and the worker would receive 20 cents premium if he did the work in 8 hours ($2.40 + 20, total $2.60), and 50 cents premium if he did it in 5 hours ($1.50 + 50, total $2.00). His average wage per hour thus rises as his speed increases; it becomes 32.5 cents per hour when the job is done in 8 hours, and 40 cents per hour when the job is done in 5 hours. The reduction of cost per job to the employer evidently would be 40 cents in the first case and $1 in the second. This is Halsey’s plan, by which the worker gets one-third and the employer two-thirds of the time saved.
The same plan has been applied (Weir’s method) with a premium that equally divides between the workman and the employer the time saved. By Rowan’s method the premium is not a fixed sum but a percentage of the standard rate per hour equal to the percentage of reduction in time consumed. If in the foregoing example the time were reduced 20 per cent (to 8 hours) the premium would be 20 per cent of 30 cents, and the workman would receive 36 cents per hour. By this plan the premium is larger for the earlier reductions in time and becomes less for the later reductions than in either of the other plans.
By Halsey’s plan the employer gets two thirds of the total saving in time, by Weir’s plan one half, and by Rowan’s a percentage varying directly in the ratio of the time saved.
A number of other variations have been worked out by the promoters of recent scientific management, notable ones being Taylor’s, Gantt’s, and Emerson’s plans. The authors of all these plans agree as to the importance of fixing the standard rate so that it will leave a possibility of considerable improvement with unusual effort, and of leaving the standard rate and premium unchanged as long as no new process or new machinery is introduced into the business. If this is not done the employees lose faith in the plan and refuse to make the necessary effort to earn the premium. Most of these plans of payment recently have been connected with experiments and studies in scientific management to reduce the time and increase the ease of the operations.
In a variety of ways a bonus or a premium may be paid for quality, or for economy in the use of materials (as to a fireman for using less coal), or for various other results. Every business has its peculiar conditions that make certain results especially desirable and certain methods of reward practicable. In some industries, for example, the various plans of piece work and of premium payment are applied to groups of workers (as in collective piece work), the total payment being then divided among the members of the group in some agreed proportion.
§ 9. Aim of profit-sharing.Profit-sharing is rewarding the laborer with a share of the profits in addition to his usual contract wages. Payments by the piece and premiums for output are solely dependent on the efforts of the particular workman (or collective group), but in the plan of profit-sharing a premium is given in addition to the regular wage if, at the end of the year, the business as a whole has yielded a profit above a certain amount. Profit-sharing is not merely a gift; it is done usually in accordance with a definite promise in advance. The employer adopting the plan does not intend to lose by it. His purpose is to stimulate the industry of the workers, thus reducing waste and cost of labor and supervision, and thereby increasing profits. He offers to divide with the workman the additional profits that are expected to result from their efforts. There is, in every factory, greater or less waste of materials, destruction of tools, and loss of time, that no rules or penalties can prevent. If the worker can be made to take a strong enough personal interest, he will use care when the eye of the foreman is not upon him. The product also can be slightly increased in many ways by the workman’s exertions or suggestions. In some cases the quality of the work cannot be insured by the closest inspection as well as it can be by a small degree of the worker’s interest. Either responsibility for the fault cannot be fixed, or the defect is one not measurable by any easily applied standard. Strikes may be averted, good feeling promoted, and contentment furthered if the interest of the worker can be made to approach, and in large measure to become in harmony with, that of the employer. The economic result of the plan, if it can be made to work, should be to reduce the costs of these establishments below what they are. The crucial question is whether profit-sharing alone in any particular case will insure that the costs will be less than those of competitors, thus giving a source out of which an increased amount, really a wage, can be paid to the laborer. For the amount of profits is affected not only by the amount of output, but also by a number of other things that are quite outside the control of the workmen.
§ 10. Examples of profit-sharing. The profit-sharing plan seems first to have been successfully tried in Paris, in 1842, by Leclaire, a house-painter. In house-painting there is often a great waste of materials and time by men working singly or in small groups in different parts of the city. By this new method Leclaire enlisted the aid of the workmen, reduced the costs, and increased the profits. It is a remarkable fact that the plan has been continued successfully by the same firm to the present time. It has been tried in many hundreds, possibly thousands, of cases, and is operating in some form or other, in more than a hundred firms in Europe and America. The most notable examples of profit-sharing in the United States are the Pillsbury Mills in Minnneapolis, Procter and Gamble’s soap-factories in Ivorydale, Ohio, the Nelson Manufacturing Company in Leclaire, Ill., and the Ford Automobile Works in Detroit. In some cases both manufacturer and workmen value the system highly. It probably has its greatest success when applied in prosperous establishments where profits are regular and large, and where a steady working force is especially desired. The proportion of business done in this way is not large. One hundred firms is a very small fraction of 1 per cent of the total number of firms in Germany, France, England, and America. A still more important fact is that true profit-sharing has spread little since 1890, though various practices have developed under that name. The most noteworthy of these is the selling of stock, usually at a somewhat lower price, to the employees of a corporation, so that, as stockholders, they may have a motive to work for the success of the company (e. g., the United States Steel Corporation). This method as applied to a select few of the employees, who are advanced to official positions in a corporation, is very widely adopted.
§ 11. Difficulties in profit-sharing. Many have found it hard to credit the evidence of this comparative failure of a plan that looks so attractive in spirit and for which so much was hoped. Yet objections come from the side both of the workman and of the employer. The workman lacks the knowledge of the business and is suspicious of the book-keeping. If at the end of the year the books show no profits, the workman loses confidence, considers the plan to be mere deception, and rejects it. The working of the plan remains in the employer’s hands, and the workman really is not a partner in the business. Moreover, the plan puts a limitation upon the workman’s freedom to compete for better wages by changing his place of work. It is indispensable to make length of service in some degree a condition to the sharing of profits. Workmen, coming and going, cannot be allowed to share; the percentage given to the others increases with length of employment. Whenever men are thus practically subject to a fine (equal to the amount of shared profits) if they accept a better position, there is danger of a covert lowering of wages. The plan tends to break up the trade-unions, which is one of the reasons that the employers like it and is the main reason that organized labor opposes it.
The employer, on his part, objects to the interference with his management, the troublesome inspection of the books, and the constant complaints of the workmen. He dislikes to have the profits known; if they are large, the advertisement of success invites competition; if they are small, publicity may injure credit and depress the value of the enterprise. In view of all these difficulties, it is not surprising that, while the plan often starts promisingly, it usually fails after a short trial. Business methods are severely subject to the principle of the survival of the fittest. Through competition and the survival of the firms that adopt improvements, better methods must eventually supplant poorer ones. If a method fails to spread when it has been tried for seventy-five years and all are free to adopt it, the strong probability is that it has serious defects inherent in it.
§ 12. Defective theory of profit-sharing. It is usually better to make wages depend on the worker’s efficiency rather than on the profits of the whole business. The strongest motive to efficiency is present when reward is connected immediately and directly with effort, not with some result only slightly under the worker’s control. Any change in the amount of profits is only partially and indirectly related to increased effort of the worker. The “profits” may be nothing, though all the manual workers may be exerting themselves to the utmost. The wage bill is but one of the group of costs. Profits are the net result of many influences, and chief among these is the skill in planning and conducting the business. This function of management is either performed by the same person who is carrying the financial risk, or by some salaried employee selected by him. It is this management function the reward of which should, in theory, be made to vary with the amount of profits; and in fact such an arrangement (managerial profit-sharing, so to speak) is undoubtedly in operation in thousands of cases, but is not included in the usual conception of profit-sharing. Many salaried managers are in receipt of a share of profits and are gradually acquiring an interest in partnerships or a larger share of ownership in the enterprises for which they work. But ordinary profit-sharing is not in accord with the general trend toward the centralization of responsibility in the hands of competent managers, insuring to the worker a definite amount in advance, as high as conditions make possible. The system of premiums, or bonus payments, for output, where it can be safeguarded against abuses, gives in most cases better results and is rapidly spreading. It is sounder in conception and works better in practice as a method of remuneration for most of the workers.
Likewise the pretty general participation in ownership of stock by the employees of a corporation may exert an influence distinctly steadying upon labor conditions in the industry, and may increase the personal interest of the workers in the efficiency of the factory operations. It may, in the plan of partial payments, help to develop a spirit of thrift in the employees, a result beneficial alike to them, to the corporation, and to the civic community in which they live. But this is not truly profit-sharing; and wage-earners generally should be encouraged to invest in government and corporation bonds of a conservative sort rather than in the common stock of a manufacturing corporation.
§ 13. Purpose of producers’ coöperation. Since the early part of the nineteenth century many well-wishers of humanity have cherished high hopes that the whole wage system might gradually be replaced by the plan of producers’ coöperation among workingmen. Producers’ coöperation is the union of workers in a self-employing group, performing for themselves the enterpriser’s function. The workers hope to get what seems to them to be a needless drain of profits into the pockets of the employer and unnecessarily high salaries to managers. To do this they must perform the enterpriser’s function as to investment and risk. Collectively or through their representatives, they must undertake to furnish capital and management as well as hand-work. The capital may be supplied either by the members, individually or collectively, or may be borrowed from outsiders, who are thus merely passive investors. Usually the return to capital invested by members is limited to 5 or 6 per cent, so that this part of the capital likewise is treated as a passive investment, and all the real variable profits are distributed to the members as wages. The hope has been, as in profit-sharing, to increase the amount of profits through the stimulus the plan might give to the workers and by saving in friction, disputes, and strikes.
§ 14. Limited success of producers’ coöperation. Practically, the plan has been made to work in a comparatively few simple industries. A much cited example of successful coöperation in America is that in the cooper-shops in Minneapolis. There were few and uniform materials, patterns, and qualities of product, few machines and much hand-labor, simple well-known processes, a simple problem of costs, a sure local market. At its largest development the enterprise was small compared with the typical manufacturing enterprises in America. After more than thirty years the main shop, when visited by the writer, was still in operation, but with a membership of the older men and with no growth. A number of the less skilled workers received ordinary wages, and there had recently been labor troubles of quite an ordinary kind.
In America a few of the productive coöperative companies are found operating small factories. In England there have been numerous successful societies, but all in small enterprises, mostly connected with agriculture. Within the whole field of industry, this method of organization makes little if any progress. Most experiments have failed, and the successful ones have become or are tending to become ordinary stock companies with most of the stock in the hands of a few men. Therefore, whether losing or making money, they nearly all cease to exist as coöperative enterprises. This result has disappointed the hopes and prophecies of many well-wishers of the working-classes.
§ 15. Its main difficulty. The main difficulty in producers’ coöperation is to get and retain managerial ability of a high order. Failure to do this results in inability to maintain and keep in repair the equipment and to pay the ordinary returns to the passive investment, and financial failure follows. There is no touchstone for business talent, no way of selecting it with any certainty in advance of trial. This selection is made hard in coöperative shops by jealousies and rivalries, and by politics among the workmen. A man selected by his fellows finds it difficult to enforce discipline. In coöperation there is occasionally developed good business ability that might have remained dormant under the wage system; some workmen showing unusual capacity cease to be handicraftsmen. But the unwillingness on the part of the workers to pay high salaries results in the loss of able managers. Having demonstrated their ability, the leaders go to competing establishments where their function is not in such poor repute, and where they are given higher salaries, or they go into business independently, being able easily to get the needed backing from passive capitalists.
Coöperative schemes thus suffer from the workers’ inability to appreciate the functions of enterprise and management. Most men make a very imperfect analysis of the productive process. They see that a large part of the product does not go to the workmen; they see the gross amount going to the enterpriser; and they ignore the fact that this contains the cost of materials, interest on capital, and incidental expenses. Further, they fail to see that the investment function is an essential one. The theory of exploitation, as explaining profits, is very commonly held in a more or less vague way by workmen. With a body of intelligent and thoroughly honest workmen, keenly alive to the truth, the dangers, and the risks of the enterprise, coöperation would be possible in many industries where now it is not. Producers’ coöperative schemes usually stumble into unsuspected pitfalls. When a heedless and over-confident army ventures into an enemy’s country without a knowledge of its geography, without a map, and without leaders that have been tested on the field of battle, the result can easily be foreseen.
The coöperative principle has been embodied much more successfully and on a larger scale in America in the form of producers’ selling organizations or of consumers’ coöperative stores. As, however, both of these forms of organization have been developed in America more largely by farmers than by wage-workers, the discussion of them may better be undertaken in connection with problems of rural organization rather than with those of labor.
[1 ]See Vol. I, pp. 227, 318, 322.
[2 ]See Vol. I, p. 329, on selection of managed and managers.
[3 ]See Vol. I, chs. 16-19.
[4 ]See ch. 21, § 6.