1.

What are the pros and cons of switching from wage rates to piece-rate pay?
Satellite Company has always functioned under wage rate. While the CEO of the company believes
per piece rate to be best for this industry, this compensation package has its own pros and cons when
applied to the glass industry. Following are the cons of switching from wage rate to per piece rate:

 Pay per performance compensation system requires basic pay or the guaranteed pay to be
decreased. This might result in a high turnover rate of employees. Because of the high
demand for technicians and high pay scales offered in the glass industry, employees might
switch to other companies.
 The glass industry already has a well-established compensation system. Introducing a totally
new system well has its own challenges.
 The guaranteed rate is set for the first twelve weeks after which it is decreased in order to
further motivate employees. However, this decreases in basic pay after a particular level
might signal employees that the company wants to set a ceiling to wages. This will lower the
productivity and employees might not be willing to complete twelve weeks.
 There is a number of factors upon which the productivity of the technicians depends. Many of
these factors like customers demand weather and miscommunication are out of technicians to
own control. If basic pay is decreased, employees might have to lose commissions because of
factors that are beyond their control.

While yes, this system has its cons, there are many pros associated with it too. Following is the major
benefited of this compensation system:

 Many managers and technicians were slacking off their duties and were not providing quality
service to the customers. Through this system, Satellite aims to restore the quality service to
customers.
 Since this system makes sure pay is aligned with productivity; this is apparently the most
effective way to motivate employees to work. This system will also ensure that people putting
in an effort to get their fair share.
 The glass industry is highly competitive. Such a system is essential to introduce as it will
motivate technicians to use their time effectively. This will not only increase their
compensation but also the company’s profits. This will also help Satellite become a strong
company and provide employees with more opportunities.

2. Is Satellite a good candidate for switching from wage rates to piece rates?
Initially, the main aim of the satellite is to increase the number of stores in the country irrespective of
the vicinity. Stores were opened at almost every location without keeping an appropriate check of the
retail area. This resulted in cannibalization of sales. As a result, many technicians and managers
started slacking off their duties, which resulted in further decreased sales. At this point in time,
switching from wage rate to per piece rate is the best strategy for Satellite. This compensation strategy
will make sure that the pay output is aligned with the input or productivity of the employee. Through
this, the company can motivate its employees to start putting in their best effort again. Furthermore,
Staglin and Barlow already had their experience of working with this system. They can best execute it
among employees and can motivate them to install more pieces to earn more. Pay per piece should be
implemented not only at the technician level but also at the managerial level. As already mentioned in
the case, the best strategy for the managerial level is to make its output based on managers of small
stores and keep it fixed for managers of large stores. Large stores already have an established
customer base and require to be managed effectively in order to function smoothly. Therefore, large
stores manager already have to work properly in order to manage them. Smaller stores don’t require
effective management all the time; therefore, making them commission-based will help best to
motivate the small store managers.

Question – 1 why was the productivity of the safelite installers low?

The technicians were installing an average of 2.5 glass units a 8 hour working day, given the fact that
one windshield installation takes approx. 1 hour (excl. the travel time) following are the few reasons
which contributed to this underutilization of man hours: 1. No financial incentive to do an efficient
job, as an efficient worker would be loaded with additional work with no extra/variable financial
incentive – hence, the workers tend to be careless and inefficient with their work 2. Lack of accuracy
in the customer data collation from Dispatch Command Center (DCC) – which led to following
problems: a) Incorrect location reporting (of client) to the technician b) Bad directions to technicians
~ led to wastage of time in travel – hence, defeating the purpose of having a c) Wrong part allocation
to the technician ~ which led to rescheduling of the job and loss of customers

QUESTION – 2 DOES THE PROPOSED PPP PLAN ADDRESS THE PROBLEMS

DESCRIBED IN QUESTION 1? DOES IT INTRODUCE NEW PROBLEMS? EXPLAIN
The proposed PPP plan may address the problem in the remnant workers as, mentioned in the case it
is understood that the said industry is highly competitive in terms of labor workforce. It shall be noted
that the said line of work is labor intensive and a skilled labor can turnaround the job in a effective
and efficient manner. Hence, substantial amount of attrition is expected to the competitors because of
the following factors:
a. AA level managers not included in PPP plan, paid straight salary ~ hence, no motivation to amend
the system to make the process less cumbersome and error free for the installers

b. Other shops may provide hourly rate of wage ~ attracting the skilled technicians

c. Factors for low productivity is majorly a operational problem and miscommunication is not in
technician’s control

d. As per the mention in the case, the demand of windshield is seasonal ~ hence, the seasonal cycle
will directly impact the

livelihood of the technician without impacting the wages of the Mid & Senior Level management

Conclusion: The system of PPP plan is a very unstable bonus structure – which completely ignores
components other than technicians – who are the last mile in the whole chain of process

question – 3 what are pros and cons of switching from wage rate to piece rate pay? Are safelite
installer good candidates for piece pay? Why or why not?
1. Time efficient - Paying a worker by output encourages the worker to manage time so as to increase
the output. This also warrants less supervision, as the worker is already incentivized to work harder 2.
Cost Accountable - It's easier to calculate the cost per unit, because it's easier to factor in the cost of
labor. Calculate the time spent producing the product, which is the labor, and then add materials and
shipping, and you can see that it's easy to arrive at a transparent manufacturing cost 3. Production
Efficient - When paid per piece, workers tend to develop and adhere to the most efficient means of
production. Workers have a vested interest in achieving the company’s goals in the most efficient way
possible, because they're achieving more both for the company and for themselves

1. Sick or Injured Workers - Working for piece-rate pay means that workers might come to work
when they are ill, thereby risking the health of their coworkers 2. Reduced Quality - When the focus is
on quantity, the output the quality may suffer. Such a system requires dedicated employees who are
determined to learn their craft thoroughly and then to increase the output. Employees are human,
however, and it can be difficult to work at a rapid pace over a long duration. This can mean that
employees may continue to work at a rapid pace but that production may produce items of reduced
quality 3. Planning for the future becomes rather tough 4. Sometimes even more supervision is
required - sometimes in the attempt of trying to work quicker, the workers give up bad quality work
and even use inferior quality products. By this, the finished products require even more scrutiny and
most often many products get rejected because they are not fit to be sold to the customers
Proposition – 1 - Average ability rises because the ability of the lowest-quality worker does not
change as a result of the switch in compensation scheme, but the ability of the highest-quality worker
rises. Because a piece rate allows the more able to work harder and receive more from the job, and
because the hourly wage does not, more able workers prefer piece rates. The least-able worker is
indifferent between the two schemes. Switching to piece rates has the effect of changing the pool of
applicants to Safelite. Those who prefer to work at high levels of effort favor Safelite over other firms
in the industry after the switch.

• Proposition – 2- A sufficient condition for the range of worker ability and output to rise after the
switch to piece rates is that some workers choose to work enough to be in the piece-rate range. Even if
underlying ability levels did not change, variance in productivity would rise because workers choose
the same level of output under an hourly wage, but type-specific levelsof output under piece rates.
When it is recognized that the maximum ability level increases under a piece rate, the change in
output variance becomes even greater.
Piece rate pay is common in industries where the output is readily measurable and the work is
repetitive in nature whereas it is unusual in sectors where workers have multiple responsibilities.
Further, as per the analysis of the case we understood that the following challenges which make the
installers not a good candidate for piece pay:
a. AA level managers not included in PPP plan, paid straight salary ~ hence, no motivation to amend
the system to make the process less cumbersome and error free for the installers
b. Other shops may provide hourly rate of wage ~ attracting the skilled technicians
c. Factors for low productivity is majorly a operational problem and miscommunication is not in
technician’s control

d. As per the mention in the case, the demand of windshield is seasonal ~ hence, the seasonal cycle
will directly impact the livelihood of the technician without impacting the wages of the Mid & Senior
Level management

Piece rate will not be able to solve the problem of the Safelite as the decision of management is solely
based the personality bias where, the installers are being projected as a sole reason of problem ~ the
problem at management’s hand is multi – pronged which also involves the operational issues coupled
with no standard procedures of practice in the business – which has led to miscommunications etc.

Question – 4 should there be a guaranteed wage? If so, how should it be set?

Yes, there shall be a guaranteed wage which shall be determined on the following basis:
a. Remove the 12 week guarantee rate cut

b. Remove all levels of management form being eligible for the PPP so that they solely focus on
managing their location

c. Set goals based on busy and slow seasons

d. Incentives to be paid out bi – annually

e. Adjusted installation goals will be based on seasons for a 3 month period

Further, the Emmerson Efficiency Plan or Merric Differential wage multiple piece rate system shall
also followed : ❑ Features of Emerson Efficiency Plan – Highly recommended plan

a. Under this plan of incentive wages, the wages are paid at the standard rate and the amount of bonus
paid to the workers depends on the individual efficiency of the workers. Under this plan, the tools and
equipment are standardized and the standard time for completing the work is determined so that an
average worker of average efficiency may also complete the work within that standard time

b. The efficiency of the worker is determined in the ratio of actual time taken by the worker with
standard time of the work. Emerson was of the opinion that generally the worker produce only 67% of
the standard production, therefore, the workers who produce more than this, must be rewarded with
bonus. The rate of bonus increases with the increase inefficiency of the worker

❑ Features of Metric Differential Wage Multiple Piece Rate Plan: • This system is an improvement
over the differential wage plan as introduced by F.W. Taylor. • Under this plan, three rates of wages
are determined in place of two rates: •

Upto 80% of standard performance;

• Upto standard performance; and • Above standard performance. • Under this system, the workers
who complete 80% of standard production get minimum wages. They do not get any bonus. The
workers, who achieve the level of performance between 80% and 99%, get 10% bonus also in
addition to their wages. The workers, who achieve 100% of standard performance, get 10% additional
bonus.

QUESTION – 5 WHAT ARE THE LIKELY CONSEQUENCES OF A SWITCH FROM

WAGES RATE TO PIECE RATES FOR:
Turnover: The turnover is expected to increased for a shot run as the installers will try to acclimatize
to the new system of wages and incentives. Further, in long run the turnover would decrease as the
attrition of employees will also increase – after realization of the shortfalls of the wage system •
Recruitment: Recruitment activity has to go hand in hand with the training programs as the new
recruits shall be trained properly to aid them with the desired skill • Productivity: First, the gain in
productivity may result from incentive effects associated with the program. Second, the gain may
result from sorting. A different group of workers may be present after the switch to piece rates. Third,
the pattern of implementation may cause a spurious positive effect. Suppose that Safelite picked its
best workers to put on piece rates first. The PPP pick up an ability effect because high ability workers
would have more PPP months than low ability workers • Product quality: One defect of paying piece
rates is that quality may suffer. In the Safelite case, most quality problems show up rather quickly in
the form of broken windshields. Since the guilty installer can be easily identified, there is an efficient
solution to the quality problem: The installer is required to reinstall the windshield on his own time
and must pay the company for the replacement glass before any paying jobs are assigned to him. This
induces the installer to take the appropriate amount of care when installing the glass in the first place.
Workers shall not be paid for the re-do, but they are not charged for the wasted glass or for other costs
associated with the re-do, as a fully efficient system would require