There are only a few absolutes when it comes to lean but one of them is that there has never been a company that achieved true manufacturing excellence that paid its folks on a piecework system.  It can’t happen – ever. Period.  Either you want to make the right product at the right time … or you just want to make a whole lot of stuff.  You can’t have it both ways.

It is disappointing to see how many companies just don’t understand this fundamental point, but it all too common.  The reason many won’t abandon old piece work systems, of course, is a misguided belief in hare-brained accounting – the absurd notion that inventory is an asset.  Only in the world of debits and credits is a good thing to make stuff no one needs, build a big warehouse to keep it in, buy a bunch of racks and forklifts to handle it, then pay a small army of people to drive the forklifts and otherwise handle it, then buy a big computer to keep track of it, then pay people to cycle count it, and then hire high paid managers to keep track of all of those people.

In the world of common sense such thinking is insane.  Piecework, however, is part and parcel to this inane logic.  It is based on the idea that making more is always good – no matter that it exceeds demand.

The crux of the problem with piecework is that it is essentially a legally binding agreement with the folks in the factory that the company will subsidize the waste of over-production; but it will not pay for reducing costs anywhere else.  Asking people to participate in a kaizen event instead of work on their piece rate job is a cut in pay.  Asking them to stop producing in order to solve quality, machine performance or parts problems takes money from people’s pockets.  The message is loud, clear and easy to understand:  We will pay you more to over-produce, but we will not pay as much for eliminating waste.  The irrefutable conflict with lean lies in the old, undeniable adage that you get what you pay for.

Eliminating piecework and replacing it with a team based incentive scheme that includes such things as JIT with a high on time delivery rate, quality excellence, total cost reduction, great safety results, learning and input to problem solving and improvement efforts really is not that difficult or complicated.  It is simply a matter of deciding what you want, putting in a straightforward scheme to measuring it, then paying people for it.

Of course the real reason most companies hang onto piecework is a rather dim view of humanity on the part of management – a mortal fear that the people in the factory will revert to the inner-slacker when management stops dangling a big carrot in front of them..  How real that fear should be depends on what sort of folks you hired, I suppose.  For most companies this fear is unfounded, but for those which have tasked HR with scraping the bottom of the employment pool barrel I suppose it might be real.   There is no reason why the new scheme can’t include a healthy percentage of productivity in its math until management’s faith in the people is a bit higher.

The stories of companies experiencing the opposite of immediate, rampant slacking when piecework is eliminated are everywhere.  Most experience productivity gains.  The few companies I know of that lost productivity after eliminating piecework did so because of management – not the folks on the factory floor. In those cases management went a bit too hog wild in having people do everything other than make parts once the pressure of producing something just for the sake of producing was removed.

One company I worked with calculated the average hourly earnings for each employee for the quarter prior to changing from piecework to a holistic lean inventive scheme, then promised everyone that they would figure out how much, if any, they lost each quarter as a result of the new scheme and pay the difference; and they would do this for three years, allowing everyone ample time to learn how to make good money under the new rules.  No one needed the ‘make-up’ pay less than a year into the new scheme, which makes sense.  Everyone had a strong incentive to figure out how to maximize their contribution to the broader metrics.

However the company does it, piecework has to go if the company is going to achieve noteworthy results.  Hanging onto piecework is hanging onto mediocrity – no way to avoid that particular harsh reality.

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  • Bill,

    I remember that years ago Lincoln Electric was lauded for its business success and its employee policies — which include (if I recall correctly) piecework pay.

    What’s your opinion on how the company has done, particularly in light of its pay policies?



  • A couple points that could be added are:
    1. The administration of piece rates is expensive, because you not only have to develop, maintain and monitor rates for every single task but you have to do with caution as people’s livelihoods are at stake and it is easy to start a mutiny.
    2. Tensions inevitably arise between operators who do a manual task at a speed they can control and those who run machines with automatic cycles they cannot change.

    In the 1990s, I was surprised to learn that 2/3 of factory workers in Germany were still paid on a piece rate, which I learned after observing an operator getting furious at a machine that he couldn’t get to start because of a faulty safety latch. I also learned the piece rates are not set by the company directly but by an external organization called REFA that is accredited for this purpose by the unions. In that plant, everybody was producing to 140% of the standard, the performance that generated the maximum income for the operators.

  • Dan,

    I guess it all depends upon your definition of “true manufacturing excellence”. Lincoln Electric has certainly sustained and made money – been something of a darling of the Harvard Business School, too. Their Harris subsidiary is pretty lean – but does not participate in their vaunted ‘piecework in exchange for lifetime employment’ scheme. At a pretty thin 5 inventory turns a year and in light of their propensity to build factories everywhere but the USA – in countries where labor is the cheaper the better – in recent years they don’t meet my definition of true manufacturing excellence, but others may (and do) disagree.

  • Bill,

    Thanks for the background. I guess we’re back to the land of HBS professors and academic pontification.


  • James

    I’ve experienced one additional reason lean and piecework don’t mix. The employee working on piecework has the incentive to find the best way to produce, but also hide that way from management so the piecework rates don’t change. This natural piecework conflict creates a barrier between management and the pieceworker and they are constantly working against each other and don’t trust one another. That does not help with morale or respect for people and focuses energy on the conflict instead of focusing energy on adding value for the customer.