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vol.I. No. 2.
THE ADJUSTMENT OF WAGES TO EFFICIENCY
T H R E E papers
ON: - .
GAIN-SHARANG
THE PREMIUM PLAN
A PIECE RATE systEM
BY
HENRY R. TOWNE
F. A. HALSEY
F. W. TAYLOR
JUNE, 1896
PUBLISHED toR the
AMERICAN ECONOMIC ASSOCIATION
BY THE MACMILLAN COMPANY
NEW YORK
LONDON : SVAN SONNEN SCHEIN & CO.
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AMERI can Econo Mic Associatio N

ECONOMIC STUDIES
PUBLISHED BI-MONTHLY.
VOL. I. NO. 2. - , PRICE, $2.50 PER YEAR.
THE ADJUSTMENT OF WAGES TO EFFICIENCY
T H R E E PA PERS
g ON
GAIN=SHARING
THE PREMIUM PLAN
A PIECE RATE SYSTEM
BY
HENRY R. TOWNE
F. A. HALSEY
F. W. TAYLOR
JUNE, 1896
sº PUBLISHED FOR THE
AMERICAN ECONOMIC ASSOCIATION
BY THE MACMILLAN COMPANY
NEW YORK º
LONDON : SWAN SONNENSCEIEIN & CO.
Copyright 1896 by
AMERICAN ECONOMIC ASSOCIATION
PRESS OF
ANDRUS & CHURCH,
ITHACA, N. Y.
THE ADJUSTMENT OF WAGES TO
EFFICIENCY
NOT. E.
HE three papers here reprinted were read before the American
Society of Mechanical Engineers, at the meetings of 1889, 1891,
and 1895. Though printed in the Proceedings of that Society for
the years mentioned, they are not easily accessible to economic
students. The accounts which they give of the various methods by
which it has been attempted to adjust wages to efficiency, and
to devise methods of payment which shall secure the advantages
of piece-work and of profit-sharing, are of interest and of impor-
tance, and the Publication Committee of the Economic Association
believes that a service will be done to members of the Association
and to the public by adding them to the Studies. They are re-
published with the kind permission of the authors and of the So-
ciety of Mechanical Engineers.
GAIN–SHARING.
BY HENRY R. TOWNE.
Webster defines proft as the eaccess of zalue ozer cost,
and gazz as meaning that zwhich is obtained as azz ad-
zanfage. I have availed of this well-expressed though
delicate distinction between the two terms, to coin a
a name for the system herein described, whereby to
differentiate it from profit-sharing as ordinarily under-
stood and practiced.
Profit-sharing, as the term is now commonly used,
implies a voluntary agreement, on the part of the prin-
cipal in business, to set aside some portion of the profits
of his business for division among all or certain of his
employees, as a stimulus to their zeal and industry.
Thus understood, profit-sharing involves the participa-
tion of the employee in all the complex factors that
affect the final result, or profit, of a business, including
necessarily its losses, since these tend to impair, or may
even extinguish, the profit. He thus becomes practi.
cally a partner, except that his participation in losses is
limited to the surrender of his share in anticipated
profits, and does not involve any impairment of his per-
Sonal capital.
It follows, therefore, in most cases of profit-sharing,
that the interest of each participator in the profit fund is
largely affected by the actions of others whom he
cannot control or influence, and that what he may earn
52 Aconomic Studies.
Or Save for the common good may be lost by the mis-
management or extravagance of others. For example,
let us suppose the case of a trader who buys and sells a
certain staple, such as cotton, and who, having two
clerks, entrusts to one of them the purchasing of the
staple, and to the other the business of selling it to the
customers of the house. Obviously here the amount of
profit will depend partly upon the ability of the buyer
to purchase material of the proper quality at the low-
est market rate, and partly upon the ability of the seller
to dispose of it promptly at the highest obtainable
prices. If each does his share well, a large profit may
result; while if either fails in his part there may be no
profit, and even a loss, no matter how well the other
may have performed his part. But it does not follow
that the work of either or both will determine the ques-
tion of profit, for unexpected changes in the market may
neutralize the best plans and cause loss, or may result
in large profit in spite of unskilful management.
Let us now suppose the case of a manufacturer who,
in addition to buying the raw material, converts it into
a finished product before selling it, and who voluntarily
concedes to the operatives of the manufacturing depart-
ment of his business, as well as to his chief assistants, a
participation in its profits. The factors affecting the
profit fund 11ow become more complex, and may be di-
vided into several distinct groups, as follows:
I. Those contributed or controlled by the owner or
principal,—such as capital, plant, character of buildings,
machinery and organization; and, to a greater or less
Gain-Sharing. 53
degree, the skill, experience, industry, and ability of the
Owner so far as he personally manages the business.
2. Those influenced by the mercantile staff, the
buyer and the selling agent in the case supposed.
3. Those determined by causes beyond the control of
the principal and his agents; such as fluctuations in
cost of raw material or in the market value of the fin-
ished product, the rate of interest, losses by bad debts,
etc.
4. Those influenced by the workmen or operatives;
Such as care of property, economy in the use of material
and supplies, and, chiefly, efficiency in the use of ma-
chinery and employment of labor.
Now it is obvious that while the operatives may in-
fluence the items in the fourth or last group to an ex-
tent which may be large, or even controlling, in deter-
mining the question of profit or loss, they have little
control—and in most cases none whatever—over the
items specified in the other three groups; and that to
admit them to participation in the net results of the
whole business, while commendable as an act of gener-
osity, is not defensible either as an equitable adjustment
of the complex and often conflicting interests involved,
nor as a theoretically correct solution of an economic
problem.
The right solution of this problem will manifestly
consist in allotting to each member of the organization
an interest in that portion of the profit fund which is or
may be affected by his individual efforts or skill, and in
protecting this interest against diminution resulting from
54. Aconomic Studies.
the errors, of others, or from extraneous causes not under
his control. Such a solution, while not simple, is attain-
able under many circumstances, and attainable by meth-
ods which experience has shown to be both practical
and successful.
This resolution of the profit fund into component
parts obviates many of the crudities in, and objections
to, profit-sharing in its common form, but still leaves
untouched another feature which is wrong in theory and
often objectionable in practice, namely, the surrender by
the principal of any portion of his legitimate profits
without the assurance of an equivalent return from those
on whom he bestows it. This, as said above, may be
commendable as an act of charity, but as a solution of
the problem in question it is neither complete nor accu-
rate. Moreover, mere charity to those who do not need
it is a doubtful good, and among intelligent and self-
respecting men is not always relished. Certainly the
problem we are considering will be best solved if it can
be so formulated that the element of gratuity or charity,
of giving without tangible consideration, can be elimi-
nated, and that, as presented to the employee, it becomes
an invitation from the principal that they should enter
into an industrial partnership, wherein each will retain,
unimpaired, his existing equitable rights, but will share
with the other the benefits, if any are realized, of certain
new contributions made by each to the common interest.
For example, to recur to our former case, let us suppose
that the wages of the operatives are already fairly ad-
justed according to the prevailing scale, so that for the
Gain-Sharing. 55
employer to offer them a portion of his profits without a
guaranty of return would be equivalent to his giving
them more than the fair market value of their services;
while if, under this inducement, they gave him better
or more work than before, they would not receive fair
recompense in case, by reason of causes beyond their
control, his business yielded no profit. But let us sup-
pose, further, that the principal, wishing to enlist the
self-interest of, his employees to augment the profits of
the business, should offer to the operatives a proposition
somewhat as follows:
“I have already ascertained the cost of our product in
1abor, supplies, economy of Imaterial, and such other
items as you can influence. I will undertake to organize
and pay for a system whereby the cost of product in
these same items will be periodically ascertained, and
will agree to divide among you a certain portion (re-
taining myself the remainder) of any gain or reduction
of cost, which you may affect by reason of increased ef-
ficiency of labor, or increased economy in the use of ma-
terial, or both ; this arrangement not to disturb your
rates of wages, which are to continue, as at present,
those generally paid for similar services.”
Can there be any question as to the inherent fairness
and accuracy of this solution of our problem, or any doubt
as to its cheerful acceptance by intelligent labor? As to
the latter point an emphatic answer has already been
given by actual experience; as to the former a reply will
be attempted in what follows.
The system for which I have adopted the designation
56 Aconomic Studies.
of “Gain-sharing ” aims to recognize and provide for the
conditions typified by the foregoing suppositious case,
and to afford a basis for allotting to the employees in a
business a share in the gain or benefit accruing from
their own efforts, without involving in the account the
general profits or losses of the business. The system is
now in actual use as affecting some 300 employees, has
been in operation more than two years and is demon-
strated to be practical and beneficial. It has been applied
to nearly one-half the divisions of a large and unusually
varied industry, and will ultimately be extended to
nearly all. As soon as understood by the employees, it is
liked, and those not working under it in the instance re-
ferred to are desirous that it should be extended to in-
clude them. Its most obvious application is to produc-
tive industries, especially those whose product is of a
simple or uniform kind; but it may be adapted to many
others, and also to the business of large mercantile
houses. It is equally applicable to cases where labor is
employed either by the piece, by the day, or by contract,
and in no way impairs the existing freedom of the rela-
tion between employer and employee, but tends to confer
substantial benefit on both sides.
The basis or starting-point of the system is an accu-
rate knowledge of the present cost of product (or, in the
case of mercantile business, the cost of operating it),
stated in terms which include the desired factors, that is,
those which can be influenced or controlled by the em-
ployees who are to participate in the result, and which
exclude all other factors. In some cases the previous
Gain-Sharing. 57
method of accounting or book-keeping may have been
such as to supply this information, in which case the
gain-sharing system can be easily and promptly organ-
ized. In others the existing books may contain the
record from which the desired information can be di-
gested and compiled. When no such record exists, how-
ever, the only safe method consists in devising and put-
ting into action a system of accounts which will furnish
the desired data, and in awaiting the accumulation there-
by of information which, being based upon the opera-
tions of a reasonably long period—usually from six to
twelve months—will constitute a fair mean of average.
The factors which should be included in, and those
which should be excluded from, the account will vary
with circumstances, each particular case having to be
considered by itself. As a general rule it may be stated
that, in the case of an account affecting the operatives
in a producing or manufacturing business, the following
items should be included, viz.: labor at cost, raw mate-
rial, measured by quantity only (for which purpose an
arbitrary fixed price may be assumed); incidental sup-
plies, such as oil, waste, tools, and implements at cost ;
cost of power, light, and water, where means exist for
correctly measuring them (for which purpose it often
pays to provide local meters); cost of renewals and re-
pairs of plant; and, finally, the cost of superintendence,
clerk hire, etc., incident to the department covered by
the system. In like manner the following items should
be excluded, viz.: market values of raw material (which
are liable to fluctuation); general expenses, whether re-
58 FConomic Studies.
lating to management of works or to commercial admin-
istration, and, in general, all items over which the oper-
atives can exercise no control or economy. Finally, the
credit side of the account should be determined by the
amount or volume of product measured by a scale of
values fixed in advance, and based upon facts previously
ascertained. For example, if, in a given case, it has
been determined by the experience of several years that
the present cost of product, measured by such items as
are covered by the inclusive list above stated, is, say,
one dollar ($1) per unit of product, then the gain-shar-
ing proposition might be formulated as follows : the
principal would say to the employees in substance, “I
will organize the system, will assume the cost of book-
l:eeping and other expenses incident to it, and will pro-
vide all the facilities reasonably required to assist you in
reducing the cost of product; I will credit the account
with the output at the cost price heretofore obtaining,
namely $1 per unit, and will charge it with the items in
the inclusive list; if at the end of the year the credits
exceed the charges, I will divide the resulting gain, or
reduction in cost, with you, retaining myself one portion
—say one-half—and distributing the other portion
among you pro rada on the basis of the wages earned by
each during the year.” Suppose, then, that at the end
of the year it was found that the cost per unit of product
had been reduced from $1 to 95 cents, that the total gain
thus resulting was $800, and that the aggregate wages
paid during the year had been $10,000. One-half of the
gain would be $400, which would equal 4 per cent. On
Gainz-Sharing. 59
the wages fund, so that each operative would be entitled
to a dividend of 4 per cent. On his earnings during the
year. This is equivalent to two weeks' extra wages, no
mean addition to any income, and amounting, even in
the case of a laborer earning $1.50 per day, to a cash
dividend of $18 at the end of the year.
In the practical application of the system several im-
portant details have to be determined, for which no
general rule can be laid down. Of these the most im-
portant is the question of the division of the gain or
profit between employer and employees. In each of the
twenty-One gain-sharing contracts which I have thus far
instituted, it has seemed proper to make this division an
equal one,—one-half to the principal and one-half to the
operatives, and the results thus far have justified the
rule and proved generally satisfactory to both parties to
the contract. Obviously, however, different circum-
stances may justify or require a different basis of division.
Another important question is the share of the profit
fund or gaziz apportioned to the foreman, overseer, or
contractor having immediate control of the operatives
interested under the system. Where such person is em-
ployed under salary he may share pro rata with the
operatives, but as this would tend to diminish his share
with any increase of responsibility due to the need of
an increased number of subordinates, I prefer to allot to
him a definite part of the profit fund. Assuming fifty
to be the average 11umber of employees under one fore-
man, I regard ten to fifteen per cent. of the profit fund
as about the proper allotment to the foreman, leaving
6O Bconomic Studies.
forty to thirty-five per cent. for his subordinates, where
fifty per cent is retained by the employer.
As the foreman has more power and control than any
subordinate, it is proper that his interest should be larger,
and it is expedient, also, in adjusting his total compen-
sation, to make a considerable fraction of it contingent
upon the results of his work. Where the “contract
system” of work prevails, I have adopted the rule of
paying the contractor, like his helpers, by the hour ; his
“basis rate,” or rate per hour, being determined by
adding together the three following factors, viz: (1) his
value as a workman, usually that of his best helpers;
(2) one half cent per hour for each completed year of
service as contractor, in recognition of increased value
due to experience; and (3) a figure representing a very
small but definite percentage on the aggregate amount
of his contract earnings, in recognition of the fact that
his responsibility varies somewhat with the volume of
work under his control. The first of these items is
usually constant; the second causes a slight annual
increase in the “basis rate;” while the third tends to
increase the rate when the volume of business is large,
and to reduce it when business falls off. The percentage
of the profit fund or “gain” alloted to a contractor may
be larger, proportionately, than to a salaried foreman,
depending upon his duties, his liability for quality of
product, and the amount of his “basis rate” or hourly
wages. As in the former case, however, it is desirable
that a considerable fraction of his total compensation
should be derived from the profit fund, and thus be con-
tingent upon the results of his work.
Gain-Sharing. 6I
A third point to be considered is the basis of partici-
pation on which the dividend to the operatives shall be
- apportioned among them. The simplest plan, and the
one which I have adopted in practice, is to distribute
the total profit fund allotted to the operatives on the
basis of the actual wages earned by each during the
year, including in the account everyone employed dur-
ing that time, even if for one day only. If a dividend
is earned it is not payable until the year is closed, when
it is paid in cash, in the same manner as the regular
wages, but enclosed in a special “dividend envelope,”
on which is stated the total annual wages of the recipi-
ent, and the rate and amount of his dividend. The
rules should provide for the disposition of unclaimed
dividends, which may very properly go into the treasury
of a mutual benefit fund, if such an organization exists,
and should also be carefully framed with reference to
local laws, in order to avoid unforeseen liabilities and
complications. . - -
It has been found feasible, and very beneficial, to have
posted in each room or department where the gain-shar-
ing system is in force, a suitable blank, preferably under
glass, on which can be entered each month the net re-
sults of the system during the preceding month, and in-
cluding a statement of the rate of dividend earned since
the beginning of the contract year. The stimulus thus
given to the interest of the employees is very marked.
Another point of much importance is the question of
the length of time during which a contract for “gain-
sharing” shall continue without modification. Its in-
62 Aconomic S£zºdies.
ception is voluntary with the employer, and he may im-
pose on the contract any conditions he sees fit, since its
whole purport is to tender to the employee an interest
in excess of his stipulated wages, from which it is ex-
pected that he will gain an increase of his compensation
but under which he cannot possibly suffer loss. Such
a contract, however, when once definitely entered into
is, like other contracts, only amenable to revision by the
joint consent of both parties to it. It is important,
therefore, that its provisions be carefully considered in
advance.
The length of time which it is desirable to adopt for
a gain-sharing contract depends greatly upon the con-
ditions of the case. As already explained, the starting-
point of the system is a knowledge of the previous cost
of product, the “gain” or increased economy in this
constituting the fund out of which the increased com-
pensation to labor is to be paid. When, therefore, the
cost of product is already accurately known, a gain-
sharing contract may safely be made for a considerable
length of time, whereas, when the cost is not well
known, it is better to fix its terms for a shorter period,
in order that they may be revised when the necessary
information has been obtained. The best results will be
obtained, however, when the contract is definitely fixed
for a reasonably long period, say from three to five years,
or even longer. A necessary element in the case is the
adoption of a “contract price” for each article to be
produced, by which, as previously explained the credit
side of the account may be determined. At the begin-
Gain-Sharing. 63
ning of a contract the employer obviously has the right
to adopt whatever “contract prices” he pleases, since
their purpose is merely to serve as a basis from which
to compute the “gain” in which he voluntarily tenders
participation to the employees, and since the contract
does not diminish the obligation of the employer to pay
each employee his stipulated wages. Presumably the
employer will adopt reasonably low contract prices, that
is, closely approximating to previous cost; because to
do otherwise would be prejudicial to his own interests,
although to fix them on too low a scale would defeat the
object of the system by 1eaving no opportunity for
“gain,” and hence no stimulus to increased efficiency of
the employee. In 1ike manner, at the expiration of a
contract, the option and right reverts to the employer
of revising the “contract prices” before offering a re-
newal of the contract; in which event, if during the
previous term the cost of product has been considerably
reduced, he will presumably (although this is not always
the wisest course) proportionately reduce the contract
prices. If, therefore, the contract period be short, the
employee will naturally ask himself whether it is to his
interest, for the sake of a small increase of compensa-
tion during that period, to make increased exertion in
view of the fact that, at the end of the period, the em-
ployer will probably again reduce prices to a point
where, in order to increase his earnings, the employee
would have to exert himself even more than at first.
If, however, the contract price be definitely fixed for a
long period, the employee can afford, for the sake of
2
64 Economic Studies.
present gain, to disregard this question as one only
affecting a somewhat remote future, and to use his best
efforts and intelligence to effect a reduction in the cost
of product. As a result of this the employer will be
able, when the opportunity for a revision of prices arises,
to make a larger reduction than he would probably attain
in the same time under the plan of frequent revisions,
and can also then afford to act more liberally toward the
employees in the matter. In my judgment, therefore,
both parties will usually be benefitted by having a long
contract period in all cases where the previous cost of
product is well known, and where no radical change of
product or methods is likely to occur.
The simplest application of the gain-sharing system
is to cases where work has already been done by con-
tract, that is, where one person employed for the pur-
pose, is paid for the finished product by the piece, the
wages of his helpers being charged against his account;
and it can be readily organized in any case where the
nature of the product is such as to adapt it to being thus
done “by contract.” In this connection it is proper to
note that the contract method, whether under the gain-
sharing system or not, is entirely compatible with “piece-
work,” that is, an arrangement whereby each operative
is paid for his individual product by the piece instead of
by day's wages. In this case the amount of piece-work
earnings is charged against the contract account in the
same manner as the wages of persons employed by the
day or hour, and is treated in the same manner as other
earnings in computing the dividend of each operative
Gain-Sharing. 65
under a gain-sharing contract. In corroboration of this
statement I may mention that I have already adopted
gain-sharing in several cases where the work was pre-
viously and is still done under the “contract” system,
and in which, also, the piece-work system has since been
largely applied. We thus have the three systems of
gain-sharing, contract work, and piece-work, all co-
existing harmoniously, and all contributing to a com-
mon result.
Again, in the case of a foundry, the gain-sharing sys-
tem can be easily and advantageously applied. Here
economy of material as well as efficiency of labor is
largely under control of the operatives, and should be
made a factor in the account. This can be accomplished
by basing the “cost of product” upon the ascertained
results of a previous period, labor and miscellaneous
items of small supplies being charged up at actual cost,
and fuel and metal being charged according to an arbi-
trary scale of fixed prices, which may conveniently be
determined by adopting the average market rate during
the previous year, or at its close. The arbitrary values
for material which are thus adopted are then incorpora-
ted in the gain-sharing contract, and remain unchanged
during its period. The “contract prices” for finished
product are deduced from the actual results of the pre-
liminary period, the cost of material being calculated
by extending the actual quantities at the arbitrary prices
per pound or other unit which may have been adopted
for the proposed contract, the employer using his dis-
cretion as to how close the contract prices should be to
66 - Aconomic Studies.
previous actual costs. Where the foundry product is of
varied character, a separate price is fixed for each class
of castings, and a record kept of the Output of each.
Gain-sharing may thus be adapted to industries of
almost any kind in which it is feasible, by reasonable
expenditure, to differentiate those elements of cost
which can be influenced by the persons who are to par-
ticipate in the resulting gain from those which are be-
yond such influence or control. Careful and intelligent
consideration must be given to properly adapting the
system to the varied circumstances and details of each
case; and the experience of several renewals of a gain-
sharing contract, each accompanied by the modifications
and improvements which are the outcome of experience,
may be needed to attain the highest results. In my own
experience I have failed, in a few cases, properly to
adjust the conditions, and hence have seen the first year
close with an apparent loss instead of a gain. In such
cases a careful analysis of the operations of the year
will usually explain the cause of disappointment and
indicate the remedy. The first year of a contract for
gain-sharing is apt to be disappointing to its promoter,
owing to lack of interest, faith, and comprehension on
the part of the employees. These all vanish, however,
under the convincing argument of a cash dividend, and
after the first of these has been paid there is usually a
marked increase of interest in the plan.
Appended hereto are several papers illustrative of
the working of the system in actual practice. The first
of these—Appendix A–gives the results obtained in
Gain-Sharing. - 67
the case of a number of the contracts to which I have
applied the gain-sharing system, two of these covering
a period of two years each. All of the others are now
running on the second year, but only the results of the
first year are here stated. The “contract prices” adopted
for these gain-sharing accounts were in some cases the
actual previous costs, but in a majority of cases the con-
tract prices were fixed at rates which were a reduction
of from ten to twenty per cent, and in one case of thirty
per cent., from previous costs. These reductions were
made advisedly, and only in cases where there was good
reason to believe that increased effort would result in
very considerable reductions of costs. In most cases
the results have justified the reductions, and even on the
basis of the new prices the contracts have yielded fair
profits or dividends. ' .” :
Appendix B is a transcript of one of the monthly
exhibits mentioned above as being posted in the room
or shop where the system is in force. These figures
were inserted in the blank, month by month during the
year, and gave information to the employees of the re-
sults of their work as affecting their interests under the
gain-sharing contract. In this case the proportion of
gain alloted to helpers was twenty-five per cent., and the
net result of the operations for the year yielded a divi-
dend to them of 5.7 per cent on their wages or earnings
during the year.
Appendix C shows the rules governing the applica-
tion of the gain-sharing system to the iron foundry in
the works of the Yale & Towne Manufacturing Com-
68
Aconomic Studies.
pany, at Stamford, Connecticut.
Where the system is
applied to a shop or department in which contract work
obtains, the rules require modification in certain details,
but are substantially the same in principle as those given
In all cases the rules will require careful
adaptation to the details of the particular work to which
they relate, and to the methods of shop management
and organization which are in use.

berewith.
APPENDIX A.
} * y R - t
** twº jº, eason Loºs. º º
I 5 years. $13,080 43 $3,388 53 $850 18 .O65
2 5 “ 9,216 87 *37 59 * & Gº: tº e
3 5 “ 3,666 34 840 O5 208 98 . O57
4 3 “ 4,936 54 573 58 I48 O9 .O3
5 5 “ 9IO 22 *48 52 tº w tº s e
7 3 “ 3,861 28 537 72 I34 43 .O.35
8 3 “ I, OI2 92 447 59 III 42 . I I
9 3 “ 4I9 55 IO9 O4 27 27 .O65
IO 5 “ 17,696 47 I,256 37 318 53 .OI8
I5 5 “ 728 53 358 20 89 62 . I23
SECOND YEAR.
I $14,096 O5 $3,251 O4 $817 56 .058
3 3,732 2 I I,027 20 26I I5 .O7
* Losses.
Gazz-Sharing. 69
APPENDIX B.
THE YALE & TOWNE MANUFACTURING CO.
Monthly Accounts Relating to Contract No. 3—1887.
PROFITS FROM BEGINNING º
TOTAL OF YEAR. MONTHLY MONTHLY
PROFIT CHARGES, CHARGES
MONTHS. FOR Total 25 er Ct. Percent- FOR FOR
MONTH. A mount. º, §. TOOLs. SUPPLIES.
January . . . . *$45 52 $55 84 $3 95
February . . . . 85 72 $40 20 $IO OS . of 7 46 85 2 97
March . 115 53 15573 38 93 | . O39 78 13 7 62
April . . . . . 98 48 254 2 I 63 55 | . O46 35 57 5 98
May *5I 46 202 75 5O 69 .O3O7 37 I6 I 75
June . . . . 182 90 || 385 65 96 4I .0505 26 66 2 O4
July . . . . 9 I2 394 77 | 98 69 .O46 I7 25 2 74
August . . . . . 76 I2 470 89 || II7 72 . O49 27 Io 2 O2
September . . 8 64 || 479 53 I 19 88 .O44 44 20 3 I4
October . . . . II4 76 594 29 I48 57 | . O499 56 96 6 27
November . . . *94 72 499 57 I24 89 . O378 58 3O 75
December . . . 34o 48 | 84o OS 2 IO or .o57 27 30 4 56
Totals for year, 84o OS | 840 OS 2 Io oo .oS7 5II 32 43 79
* Losses.
APPENDIX C.
THE YALE & Town E MFG. COMPANY, STAMFORD,
CONN. RULES FOR “GAIN-SHARING '' SYSTEM IN
IRON FOUNDRY, DECEMBER, 1887.
I.—CONTRACT PERIOD.
The present contract between the company and the
employees of the Foundry will cover a period from De-
cember Ist, 1887, to December 1st, 1888, and will be
subject to revision after the latter date.
70 Economic Studies.
2.—THE SYSTEM.
The “gain-sharing system ’’ has been in operation
during 1887 throughout the greater part of Dept. A,
where some 200 men are now at work under it. Its es-
sential principle is this : that out of each $100 of savings
or “gain '' in the cost of product, in labor and supplies,
the Company retains only $50, the other $50 being di-
vided among the employees in the Department. To ac-
complish this the Company agrees to organize the method
of operation, to keep the necessary accounts, and in gen-
eral to facilitate matters so far as it reasonably can ; the
employees, on the other hand, agree to use their best ef-
forts to increase the efficiency of their work, to economize
in the use of supplies and material, and in general to do
their share toward reducing the cost of finished products.
3.—CONTRACT PRICES.
To establish a basis by which to measure the saving or
gain effected, the following plan has been adopted. The
average prices for metal and fuel which prevailed during
the past six months have been carefully ascertained, and
these prices have been adopted for the contract period;
applying these prices to the product of the Foundry for
the past six months, all other items of labor and supplies
being extended at their actual amounts, the cost per
pound of castings of each class during the past six
months has been ascertained ; the prices thus ascertained
are adopted as the basis prices for the contract period.
Gain-Sharing. 71
4.—CONTRACT PROFIT OR GAIN.
At the close of each month of the contract period the
cost of castings produced during the month will be ascer-
tained by charging up the metal and fuel at the ſized
Žºržces adopted as above, and charging all other items,
including wages and supplies, at actual cost. If the cost
of castings thus ascertained is less than the basis cost de-
termined as above, the difference between the two will
be the saving or gain for the month. The result of each
month's operations will be posted in the Foundry for the
information of the employees.
5.—DIVISION OF PROFITS.
Within thirty days after the close of the contract year
the total amount of saving or gain will be divided as fol-
lows:
Fifty per cent. will be retained by the Company.
Ten per cent. will be allotted to the Foreman of the
Foundry. -
Forty per cent. will be distributed among the employ-
ees of the Foundry in the proportion of the actual wages
earned by each during the contract year.
6.—WAGES RATES.
The wages of each employee will be fixed, as hereto-
fore, by the Foreman of the Foundry, who will continue
to have full discretion in the employment and discharge
of the help required, and in the direction of their work.
72 Aconomic Studies.
7.—PAYMENT OF PROFITs.
Each employee will be entitled to his pro rata share of
the profits, whether he has worked during the whole
year or only a portion thereof. Any share of profits be-
longing to those who may honorably leave the Company's
Service during the year will be forwarded to them, pro-
vided they shall have given proper information as to
their address. Any profits due to employees, and not
claimed within three months after the close of any yearly
contract period, will thereby become forfeited : all sums
thus forfeited will be paid over by the Company to the
Yale & Towne Mutual Benefit Society.
8.—PIECE WORK.
Wherever feasible the system of piece work will be
employed, the piece rates being fixed by the Foreman
subject to approval by the Company. All employees,
whether working by the day or by the piece, will be en-
titled to their proportionate share of the annual profits
On the basis of the actual wages earned by each.
9.—FOUNDRY SUPPLIES.
The Foundry account will be charged with all
supplies furnished by the Company. The items so
charged will include metals, fuel, sand, sieves, files,
shovels, oil, waste, brooms, repairs, and, in general,
everything consumed in the Foundry.
The supplies on hand at the beginning of the contract
period will be charged to the Foundry account, and those
on hand at the end of the year will be credited to the
Sanle a CCOLI11t.
Gain-Sharing. 73
IO.—GUARANTY.
The Company guarantees the payment to the employ-
ees of the Foundry of the regular wages earned by each,
on day work or piece work, irrespective of whether this
contract shows a profit or not.
II.-CONDITIONS.
The effect of the system being to give every workman
employed under this contract a participation in the
profits resulting from it, it is hereby stipulated as a coll-
dition of the employment of each and every person en-
gaged under this system, that, in consideration of the in-
terest assigned him in the profits of the contract, all claim
thereto shall be forfeited by him in the event of his dis-
charge by reason of misconduct or incompetency, or in
the event of his combining with others in any way to
disturb or affect the relations between the Company and
its employees. This provision in no way curtails the
right of each employee to negotiate with the Company,
through the Foreman, in regard to his own rate of wages,
nor does it in any way impair the title of each employee
to his proportionate share of the profits in the event of
his honorably leaving the Company’s service, whether
at its desire or his own.
I2.—SHOP RULES.
All employees will continue to be governed by the
Shop Rules of the Company, which are hereby referred
to and made a part of this contract and agreement.
THE PREMIUM PLAN OF PAYING FOR LABOR.
BY F. A. HALSEx.
This plan has been devised in order to overcome the
objections inherent in the other plans in general use.
It accomplishes this purpose without introducing cor-
responding objections of its own. Its merits are best
shown by contrasting it with the other plans in com-
mon use, and it will be discussed with them in the fol-
lowing order: +.
I. The day's-work plan.
II. The piece-work plan.
III. The profit-sharing plan.
IV. The premium plan.
I. THE DAY'S-WORK PLAN.
Under this method the workman is paid for and in
proportion to the time spent upon his work. The ob-
jections to the plan are well known. Analyzed to their
final cause, they spring from the fact that any increase
of effort by the workman redounds solely to the benefit
of the employer, the workman having no share in the
consequent increase of production. He has conse-
quently no inducement to exert himself and does not
exert himself. Under this system, especially in a manu-
facturing business, matters naturally settle down to an
easy-going pace, in which the workmen have little
interest in their work, and the employer pays extrava-
gantly for his product.
76 Aconomic Studies.
II. THE PIECE–WORK PLAN.
Under this plan the workman is paid for and in pro-
portion to the amount of work done. It is a natural
attempt to overcome the objections to the day's-work
plan. It has the appearance of being just and of being
based upon correct principles. Nevertheless, extended
inquiry has convinced the writer that it seldom works
smoothly, and never produces the results which it should.
An employer who has become dissatisfied with the
results of the day's-work plan, and decides to adopt
piece-work, usually reasons that work which is costing
in wages, say One dollar per piece, could, with some ex-
tra effort be produced on the existing scale of wages for
about eighty cents; and desiring to give the workman
some inducement offers him ninety cents per piece,
thereby dividing the expected saving with him. The
trouble begins at once. The workman does not believe
that he can “make wages” at the rate offered, and ob-
jects. He is, however, finally induced or compelled to
try it, and immediately proceeds to astonish himself and
all others by increasing his output far beyond the ex-
pected 25%. His earnings increase with startling
rapidity, but the cost of zwork remains z0/iere set, at
ninety cents per piece, and the employer soon finds that
instead of a substantially equal division of the savings
he is getting but little, and the workman practically all
of it. He accordingly proceeds to cut the piece price,
and the fatal defect of the system appears. This cut is
in appearance and in fact an announcement to the work-
man that his earnings will not be allowed to exceed a
The Premium Plan of Paying for Zabor. 77
certain amount, and that should he push them above
that amount he will be met with another cut. Cutting
the piece price is simply killing the goose that lays the
golden egg. Nevertheless, the goose must be killed.
Without it the employer will continue to pay extrava-
gantly for his work; with it he will stifle the rising
ambition of his men. The difficulties of the day’s-work
and piece-work plans are thus seen to be the exact an-
titheses of one another. Analyzed to their final cause,
the difficulties with the piece-work plan spring from the
fact that the piece price once set, any increase of effort
by the workman redounds to his own benefit alone—
the employer having no share in the consequent saving
of time. To obtain a share he cuts the piece price, with
the consequences stated. Under this system matters
gradually settle down as before to an easy-going pace in
which the workmen approach the limit of wages as
nearly as they consider prudent. Their earnings are
somewhat more and the cost of the work is somewhat
less than under the day's-work plan, but there is no
more spirit of progress than under the older method.
The employer is constantly on the 10okout for a chance
to cut the piece prices, that being his only method of
reducing cost; and the men are constantly on the look-
out to defeat the employer's well understood plan,
knowing, as they do, that any one who is so unwise or
so unfortunate as to do an increased amount of work
will be in effect punished for it by having his piece
price cut and himself thereby compelled to work harder
in the future for the old amount of income. The sys-
78 Aºconomic Studies.
tem makes the interest of the employer and employee
antagonistic, and hence of concerted effort toward a pro-
gressive reduction of cost there is none. This I believe
to be the usual and natural history of the piece-work
plan. I know it to represent the situation in some of
the foremost machine shops of the country. An addi-
tional objection to the plan grows out of the fact that it
requires a knowledge and record of the cost of each
piece of a complicated machine, and oftentimes of each
Operation on each piece. This limits its range of appli-
cation to products which are produced in considerable
quantities.
III. THE PROFIT-SHARING ! PLAN.
This plan was originally devised in the effort to avoid
the objections to the two former plans. Under it, in
addition to regular wages, the employees are offered
a certain percentage of the final profits of the business.
It thus divides the savings due to increased production
between employer and employee, and at first sight ap-
pears to meet the difficulties of the plans thus far dis-
cussed ; but, nevertheless, on analysis, will be found to
be as defective as they, both in principle and applica-
tion. The leading objections to the plan are the fol-
lowing: • ‘
Aºrst. The workmen are given a share in what they
do not earn. Increased profits may arise from more sys-
tematic shop management, decreased expenses of the
sales department, or many other causes with which the
workmen have nothing to do. Anything given them
The Premium Plan of Paying for Labor. - 79
from such sources becomes simply a gift, the result of
which is wholly pernicious—in fact the entire system
Savors of patronage and paternalism.
Second. The workmen share, regardless of individual
deserts. An active, energetic workman cannot have the
same incentive to increased exertion under a system
which divides the results of his efforts among a dozen
lazy fellows at his side that he would have under one in
which his earnings depend on himself alone; on the
Other hand, a lazy workman would naturally consider it
much easier to take his portion of the earnings of his
fellows than to exert himself and then divide the results
with all the others of the force.
Third. The promised rewards are remote. The in-
centive cannot be as great under a system which com-
putes and divides the savings once or twice a year as
under one which pays out the extra earnings week by
week. * -
Aourth. The plan makes no provision for bad years,
We hear much of profit sharing, but nothing of loss
sharing. And yet the workman cannot expect to share
the profits while others assume the losses; and Žer
contra, those who assume the risk of loss cannot be ex-
pected to share the profits with those who have nothing
at stake.
Fifth. The workmen have no means of knowing if the
agreement is carried out. With their exaggerated ideas
of the profits of business, the results must be in many
cases disappointingly small, and they will doubt the
Honesty of the division. What is to be done in such a
3
8O Boonomic Studies.
case? Invite the workmen to appoint a committee to
examine the books, and report? Most employers will
demur at this, and yet without it the employees can
have no assurance of good faith ; and were it done, what
good could result? How Imany workmen's committees
are there who are sufficiently versed in modern accounts
to form any idea of the proceeds of the year's business
from an examination of the books? In this light the
profit-sharing plan is seen to be an agreement between
two parties, the first of whom has every temptation and
opportunity to cheat the second, while the second has
no means of knowing if he has been cheated, and no re-
drcss in any case. In the present state of human nature
this cannot be expected to be satisfactory to the second
party. The fact that the plan has worked with appar-
ent success in some instances and for considerable peri-
ods of time proves nothing. The most disastrous boiler
explosions and bridge failures have been preceded by
long periods of apparent safety. Even the Conemaugh
dam held water for many years. It is a truism that the
most rickety and unsafe devices often serve their pur-
pose for long periods. At the beginning the workmen
look on the amount received at the annual division as a
bonus, and anything is better than nothing; but later
on they will look on it as theirs by right of having
earned it, and the above situation is certain to arise.
The fact is, that the profit-sharing plan is wrong in prin-
ciple, and cannot be in any large sense a solution of the
wages problem. • *
The Premium Plan of Paying for Labor. 8 I
Iv. THE PREMIUM PLAN.
Taking up now the subject proper of this paper, it
aims at a division of the savings due to increased pro-
duction between the employer and employee, but by a
direct method instead of the circuitous one of the profit-
sharing plan. The plan assumes two slightly different
forms, according to the nature of the work; one form
being suited to work produced in such quantities as to
be reducible to a strictly manufacturing basis, and the
other form to the more limited production of average
practice. In both forms the essential principle is the
same, as follows: The time required to do a given piece
of work is determined from previous experience, and the
workman, in addition to his usual daily wages, is offered
a premium for every hour by which he reduces that
time on future work, the amount of the premium being
less than his rate of wages. Making the hourly pre-
mium less than the hourly wages is the foundation stone
on which rest all the merits of the system, since by it if
an hour is saved on a given product the cost of the work
is less and the earnings of the workman are greater than
if the hour is not saved, the workman being in effect
paid for saving time. Assume a case in detail: Under
the old plan a piece of work requires ten hours for its
production, and the wages paid is thirty cents per hour.
Under the new plan a premium of ten cents is offered
the workman for each hour which he saves over the ten
previously required. If the time be reduced successively
to five hours the results will be as follows:
82 .* BComomic Studies.

I 2 3 4. 5
Workinlan’s
* Wages e Total cost of work earnings per
Time consumed. per piece. Premium. = Col. 2 + col. 3. Hour =
col. 4.-- Col. I.
Hours. $ $ $ $
IO 3.OO O 3. OO . 3O
9 2.7O ... [O 2.8o . 3 II
2.4O . 2C) 2. OO . 32
8 6 J
7 2. IO .3O 2.4O .343
6 I.8o .40 2. 2C) .366
5 I.5O .5O 2. OO .4O
This table illustrates the mailner in which the cost of
the work diminishes and the workman’s earnings in-
crease together until, to cite the extreme case of the last
line, if the output be doubled, the wages paid per piece
will be reduced 33% ſº, but the workman's earnings per
hour will be increased 33% A. Were the premium less
than ten cents per hour, the reduction in cost for each
hour saved would be greater, and the workman's earn-
ings less. On the other hand, the workman would have
a smaller incentive, and the time would not be reduced
so much. The output would be less, and the net result
might be worse for both employer and employee. This
raises the inevitable question : What should be the rate
of the premium ? Nothing but good sense and judg-
ment can decide in any case. In certain classes of work
an increase of production is accompanied with a propor-
tionate increase of muscular exertion, and if the work is
already laborious a liberal premium will be required to
produce results. In other classes of work increased pro-
The Premium Plan of Paying for Labor. 83
duction requires only increased attention to speeds and
feeds with an increase of manual dexterity and an avoid-
ance of lost time. In such cases a more moderate pre-
mium will suffice. Any attempt, however, on the part
of the employer to be greedy and squeeze the lemon too
dry will defeat its own object, since if a trifling premium
be offered, the workman will not consider it worth while
to exert himself for so small a reward, and the expected
increase of output will not take place. On the other
hand, if the premium offered be too high, the employer
will simply pay more than necessary for his work,
though less than he has been paying. If the rate of
premium is decided upon judiciously, it may and should
be made permanent. No cutting down of the rate should
ever be made unless, indeed, improved processes destroy
the significance of the first time base. Every increase
of earnings is necessarily accompanied by a correspond-
ing decrease of cost, and if the premium be such as to
give these a satisfactory relation, the workman may be
assured that there will be no limit set to his earnings;
that the greater they are the more satisfactory they will
be to the employer. The importance of this cannot be
too strongly insisted upon. If the premiums be cut the
workmen will rightly understand it to mean, as under
the piece-work plan, that their earnings are not to be
permitted to pass a certain limit, and that too much
exertion is unsafe. The very purpose of the plan is to
avoid this by so dividing the savings between employer
and employee as to remove the necessity for cutting the
rate, and hence enable the workman's earnings to be
84 Aconomic Studies.
limited only by his own ability and activity. The bane-
ful feature of the piece-work plan is thus completely ob-
viated, and instead of periodical cuts with their result-
ing ill-feeling, the premiums lead the workman to
greater and greater effort, resulting in a constant in-
crease of output, decrease of cost, and increase of earn-
ings.
The broad-minded employer will not fail to recognize
that his own gain from the system comes largely from
the increased production from a given plant, since not
only does the system reduce the wages cost of the piece
of work in hand, but in so doing it increases the
capacity of the plant for other work to follow. The
advantages from this source are so great as to render
unnecessary any refined hair-splitting as to the rate of
the premium.
Such is the premium plan, and the writer confidently
predicts that the more it is studied the more perfect will
appear its adaptation to the requirements of industrial
enterprise and human nature. Surely, a system which
increases output, decreases cost, and increases workman's
earnings simultaneously, without friction, and by the
silent force of its appeal to every man’s desire for a
larger income, is worthy of attention. In addition to
the commanding features noted it has others of lesser
note. The transition to it from the day's-work plan is
easy and natural. It does not involve a reorganization
of the system of book-keeping, but only an addition, and
a small One, to the existing system. No opposition to
it, organized or otherwise, is possible, since there is
The Premium Plan of Paying for Labor. 85
nothing compulsory about it, and nothing tangible to
oppose. It is simply an offer to gratify one of the strong-
est passions of human nature, and the difficulty often
found in introducing piece-work cannot occur with this.
In carrying out the plan in connection with work
which has been reduced to a manufacturing basis, the
writer finds the form of time ticket shown on the fol-
lowing page convenient.
This ticket is issued by the foreman, the blanks at the
top being filled up by him. If desired as a check he
punches a hole on the line, indicating the hour when
the work is given out, repeating the same when the
work and ticket are returned. The record of the time is
kept by drawing a line between various hour marks, an
operation which the most illiterate can perform." The
ticket provides for several days’ work, and is not returned
until the work is completed, when it contains the record
of the entire job.” On the back of the ticket is printed
the following:
“According to previous experience this work should
require . . . hours. If completed in 1ess time than that
a premium of . . . cents will be paid for each hour
saved.”
* Attention was called to this form of time ticket by Professor
Hutton in Vol. IX. of the Transactions of the American Society of
Mechanical Engineers, page 386.
*This rule holds, even when the job after being partly finished is
interrupted by something more pressing. In such a case the ticket
is taken up by the foreman in order to insure that the entries have
been made for the completed work. He issues the ticket again when
the work is resumed, and when all is completed this ticket goes to
the office, where a single entry in the cost book records what, under
the usual method, might require a half dozen or even more entries.
TIME TICLCET.
Name of Part... * * * * * * * * = & e a No. of Pieces..........................................
0peration.............................. - - Workman.............…. …" * * * * * * * * * * * * * * * * * * * * * * *
H O U R S- -
- OVER
DATE. 7 7% 8 8% 9 9% IO IO; II II; I2 I2; I I# 2 2; 3 3% 4 4; 5 5%. 6 TrME.
Machine set Öv................................................................. 7?me ............................. hours.
y
g

The Premium Plan of Paying for Labor. 87
When the ticket is returned, a comparison of the back
with the front shows the premium earned. This is
entered opposite the workman's name, in a book kept
for the purpose, which is a companion to the usual time
book or pay roll. On pay day the accrued premiums
are paid to each workman along with the regular wages.
The cost book is written up from the ticket in the usual
way, except that as the ticket usually contains the record
of several days’ work, the labor of keeping the cost book
is much abridged. -
On work which, while produced as a regular product,
is still not produced in sufficient quantity to justify re-
cording the cost of each part, the premium offer is made
to the group of men who carry out the work. The
proposition is made as a posted notice, or otherwise in
the following form :
“According to previous experience this work should
require . . . hours. If completed in 1ess time than that
a premium of . . . cents per hour saved will be divided
among those working on the machine, division to be in
proportion to time spent on the work.”
In this form the system loses the advantage of dealing
directly with the individual, and the second objection to
the profit-sharing plan is introduced, though in a modi-
fied degree, as a small group of men is dealt with instead
of the entire force. The remaining objections to the
profit-sharing plan are not introduced, and on such work
the plan proposed is distinctly superior, though lacking
theoretical perfection. The piece-work plan does not
apply to work of this kind, and hence there can be no
comparison between it and the plan under discussion. .
88 Aconomic Studies.
On contract work undertaken for the first time the
method is the same, except that the premium is based
on the estimated time for the execution of the work.
The system is thus applicable to all classes of machine-
shop work except “jobbing ” or work done by the hour,
and there is no very vociferous demand from the shops
for a method of reducing the time on that class of work.
The writer believes that, judiciously administered, the
plan proposed will produce a larger output and cheaper
work, and at the same time pay higher wages than any
other whatsoever.
A PIECE–RATE SYSTEM
BEING A STEP TOWARD PARTIAL SOLUTION OF THE LABOR PROBLEM.
BY FRED W, TAYLOR.
The ordinary piece-work system involves a permanent
antagonism between employers and men, and a certainty
of punishment for each workman who reaches a high
rate of efficiency. The demoralizing effect of this sys-
tem is most serious. Under it, even the best workmen
are forced continually to act the part of hypocrites, to
hold their own in the struggle against the encroachments
of their employers.
The system introduced by the writer, however, is di-
rectly the opposite, both in theory and in its results. It
makes each workinan's interests the same as that of his
employer, pays a premium for high efficiency, and soon
convinces each man that it is for his permanent advan-
tage to turn out each day the best quality and maximum
quantity of work. -
The writer has endeavored in the following pages to
describe the system of management introduced by him
in the works of the Midvale Steel Company, of Philadel-
phia, which has been employed by them during the past
ten years with the most satisfactory results.
The system consists of three principal elements:
(I) An elementary rate-fixing department.
(2) The differential rate system of piece-work.
(3) What he believes to be the best method of man-
aging men who work by the day.
90 Bconomic Studies.
Elementary rate-fixing differs from other methods of
making piece-work prices in that a careful study is made
of the time required to do each of the many elementary
operations into which the manufacturing of an estab-
lishment may be analyzed or divided. These elemen-
tary operations are then classified, recorded, and indexed,
and when a piece-work price is wanted for work the
job is first divided into its elementary operations, the
time required to do each elementary operation is found
from the records, and the total time for the job is summed
up from these data. While this method seems compli-
cated at the first glance, it is, in fact, far simpler and
more effective than the old method of recording the time
required to do whole jobs of work, and then, after look-
ing over the records of similar jobs, guessing at the time
required for any new piece of work.
The differential rate system of piece-work consists,
briefly, in offering two different rates for the same job, a
high price per piece in case the work is finished in the
shortest possible time and in perfect condition, and a low
price if it takes a longer time to do the job, or if there
are any imperfections in the work. (The high rate
should be such that the workman can earn more per day
than is usually paid in similar establishments.) This is
directly the opposite of the ordinary plan of piece-work
in which the wages of the workmen are reduced when
they increase their productivity.
The system by which the writer proposes managing
the men who are on day-work consists in paying mezz
and not positions. Each man’s wages, as far as possible,
A Piece-Rate System. 9 I
are fixed according to the skill and energy with which
he performs his work, and not according to the position
which he fills. Every endeavor is made to stimulate
each man's personal ambition. This involves keeping
systematic and careful records of the performance of
each man, as to his punctuality, attendance, integrity,
rapidity, skill, and accuracy, and a readjustment from
time to time of the wages paid him, in accordance with
this record.
The advantages of this system of management are:
First. That the manufactures are produced cheaper
under it, while at the same time the workmen earn
higher wages than are usually paid.
Second. Since the rate-fixing is done from accurate
knowledge instead of more or less by guess-work, the mo-
tive for holding back on work, or “soldiering ”, and en-
deavoring to deceive the employers as to the time re-
quired to do work, is entirely removed, and with it the
greatest cause for hard feelings and war between the
management and the men.
Third. Since the basis from which piece-work as well
as day rates are fixed is that of exact observation, in-
stead of being founded upon accident or deception, as is
too frequently the case under ordinary systems, the men
are treated with greater uniformity and justice, and re-
spond by doing more and better work.
Pourth. It is for the common interest of both the
management and the men to coöperate in every way, so
as to turn out each day the Imaximum quantity and best *
quality of work.
92 Economic Studies.
Fifth. The system is rapid, while other systems are
slow, in attaining the maximum productivity of each
machine and man ; and when this maximum is once
reached, it is automatically maintained by the differen-
tial rate. *
Szacáž. It automatically selects and attracts the best
men for each class of work, and it develops many first-
class men who would otherwise remain slow or inaccu-
rate, while at the same time it discourages and sifts out
men who are incurably lazy or inferior.
Finally. One of the chief advantages derived from the
above effects of the system is, that it promotes a most
friendly feeling between the men and their employers,
and so renders labor unions and strikes unnecessary.
There has never been a strike under the differential
rate system of piece-work, although it has been in oper-
ation for the past ten years in the steel business, which
has been during this period more subject to strikes and
labor troubles than almost any other industry. In de-
scribing the above system of management the writer has
been obliged to refer to other piece-work methods, and
to indicate briefly what he believes to be their short-
comings.
As but few will care to read the whole paper, the fol-
lowing index to its contents is given :
INDEX.
PARA GRAPH
1 NEED OF SYSTEM AND METHOD IN MANAGING MEN . . . I-9
ºn SystEM of MANAGING MEN who ARE PAID BY THE DAY.
•- . Ordinary system of paying men by the position they oc-
cupy instead of by individual merit . . . . . . . . IO
A Piece-Rate Systemz. 93
PARAGRAPH
Bad effects of this system . . . . . . . . . . . . II, I2
Proper method of handling men working by the day is
to study each man and fix his rate of pay according
to his individual merit, not to pay them by classes
I3–15, 84–87
Necessity for clerk in 111anaging men . . . . . . . . . I4, 15
Defects in even the best managed day-work . . . . . . 16, 17
177. METHODS OF FIXING PIECE-work PRICEs or RATEs.
TV ORDINARY PLAN OF FIXING RATES . . . . . . . . . . . 4I, 42
Y DESCRIPTION OF ELEMENTARY RATE-FIXING . . . . . . . 39-43
Description of the starting and development of the first
elementary rate-fixing department. . . . . . . . 44–48
Illustration of elementary rate-fixing . . . . . . . . . 48
Size and scope of rate fixing department. 69, 70
Indirect benefits of elementary rate-fixing almost as great
as the direct . . . . . . . * * * * * * * * * * * 74–76
A hand-book on the speed with which different kinds of
e--" " work can be done badly needed . . . . . . . . . . 67, 68
y! SystEMs of PIECE-work IN COMMON USE.
y1, ORDINARY PIEcE-work SystEM . . . . . . . . . . . . . I9
Defects in this system. . . . . . . . . . . . . . . . . 20–24
Slight improvement in ordinary piece-work system. . . . 26
"Nº." GAIN-SHARING "PLAN. . . . . . . . . . . . . . . . . 27, 29
1% “PREMIUM PLAN of PAYING FOR LABOR.". . . . . . . . 28, 29
Benefits and defects of these two systems . tº º e
The relation of trades unions to other systems of manage-
ment. . . . . . . . . . . . . . . . . . . . . . . 92
Ty CoöPERATION OR PROFIT SHARING . . . . . .
3O
. . . . . . 3 I-34
Antagonism of interests of employers and workmen in all
ordinary piece-work systems . . . . 35
Fundamental basis for harmonious coöperation between
workmen and employers . . . . . . 36, 37, 53–55, 59, 61, 65
Obstacles to be overcome before both sides can coöperate
harmoniously . . . . . . . . . . . . . . 38, 39, 49
...~~ And principles underlying true coöperation . . . 53–55, 59, 61, 65
} | DEscRIPTION OF DIFFERENTIAL RATE SystEM of PIECE-
WORK . . . . . . . . . . . . . . . . . . . . . . 5O-52
Advantages of this system . . . . . . . . . . . . 53–65
Description of first application of differential rate, with
results attained . . . . . . . . . . . . . . . 7I, 79-82
Modification of the differential rate . . . . . . . . . . 72, 73
94. Æconomic Studies.
P.A.R.A.G.R.APPH
Illustrations of the possibility of increasing the daily out-
put of men and machines . . . . . . . . . . . . . 78, 79
Relative importance of elementary rate-fixing depart-
ment and differential rate . . . . . . . . . . . . . 66
There have never been any strikes under the differential
rate systern of piece-work . . . . . . . . . . . . . 83
Moral effect of the various piece-work systems on the
filed . . . . . . . . . . . . . . . . . . . . . . . 2O–24
Ordinary systems, differential rate . . . . . . . . . . . 88
Probable future development of this system . . . . . . 89–91
I. Capital demands fully twice the return for money
placed in manufacturing enterprises that it does for real
estate or transportation ventures. And this probably
represents the difference in the risk between these classes
of investments.
2. Among the risks of a manufacturing business, by
far the greatest is that of bad management; and of the
three managing departments, the commercial, the finan-
ciering, and the productive, the latter, in most cases, re-
ceives the least attention from those that have invested
their money in the business, and contains the greatest
elements of risk. This risk arises not so much from
the evident mismanagement, which plainly discloses
itself through occasional strikes and similar troubles, as
from the daily more insidious and fatal failure on the
part of the superintendents to secure anything even ap-
proaching the maximum work from their men and
machines. -
3. It is not unusual for the manager of a manufactur-
ing business to go most minutely into every detail of
the buying and selling and financiering, and arrange
A Piece-A’afe System. 95
every element of these branches in the most systematic
manner and according to principles that have been care-
fully planned to insure the business against almost any
contingency which may arise, while the manufacturing
is turned over to a superintendent or foreman, with little
or no restrictions as to the principles and methods which
he is to pursue, either in the management of his men or
the care of the company’s plant.
4. Such managers belong distinctly to the old school
of manufacturers; and among them are to be found, in
spite of their lack of system, many of the best and
most successful men of the country. They believe in
men, not in methods, in the management of their shops;
and what they would call system in the office and sales
departments, would be called red tape by them in the
factory. Through their keen insight and knowledge of
character they are able to select and train good superin-
tendents, who in turn secure good workmen ; and fre-
quently the business prospers under this system (or
rather, lack of system) for a term of years. -
5. The modern manufacturer, however, seeks not only
to secure the best superintendents and workmen, but to
surround each department of his manufacture with the
most carefully woven net-work of system and method,
which should render the business, for a considerable
period at least, independent of the loss of any one man,
and frequently of any combination of men.
6. It is the lack of this system and method which, in
the judgment of the writer, constitutes the greatest risk
in manufacturing ; placing, as it frequently does, the
4
96 Economic Studies.
success of the business at the hazard of the health or
whims of a few employees.
7. Even after fully realizing the importance of adopt-
ing the best possible system and methods of manage-
ment for Securing a proper return from employees, and
as an insurance against Strikes and the carelessness and
laziness of men, there are difficulties in the problem of
Selecting methods of management which shall be ade-
quate to the purpose, and yet be free from red tape, and
inexpensive.
8. The literature on the subject is meagre, especially
that which comes from men of practical experience and
observation. And the problem is usually solved, after
but little investigation, by the adoption of the system
with which the managers are most familiar, or by taking
a system which has worked well in similar lines of
manufacture.
9. Now, among the methods of management in com-
mon use there is certainly a great choice; and before
describing the “differential rate” system it is desirable
to briefly consider the more important of the other
methods. ** •
* Io. The simplest of all systems is the “day-work”
plan, in which the employees are divided into certain
classes, and a standard rate of wages is paid to each class
of men ; the laborers all receiving one rate of pay, the
machinists all another rate, and the engineers all another,
etc. The men are paid according to the position which
they fill, and not according to their individual character,
energy, skill, and reliability.
A Piece-Rate SSystem. 97
II. The effect of this system is distinctly demoraliz-
ing and levelling; even the ambitious men soon con-
clude that since there is no profit to them in working
hard, the best thing for them to do is to work just as
little as they can and still keep their position. And
under these conditions the invariable tendency is to drag
them all down even below the level of the medium.
12. The proper and legitimate answer to this herding
of men together into classes, regardless of personal
character and performance, is the formation of the labor
union, and the strike, either to increase the rate of pay
and improve conditions of employment, or to resist the
lowering of wages and other encroachments on the part
of employers. -
I3. The necessity for the labor union, however, dis-
appears when men are paid, and not positions; that is,
when the employers take pains to study the character
and performance of each of their employees and pay
them accordingly, when accurate records are kept of
each man’s attendance, punctuality, the amount and
quality of work done by him, and his attitude towards
his employers and fellow-workmen.
As soon as the men recognize that they have free scope
for the exercise of their proper ambition, that as they
work harder and better their wages are from time to
time increased, and that they are given a better class of
work to do—when they recognize this, the best of them
have no use for the labor union.
I4. Every manufacturer must from necessity employ
a certain amount of day-labor which cannot come under
98 . Acozzomic Studies.
the piece-work system ; and yet how few employers are
willing to go to the trouble and expense of the slight
organization necessary to handle their men in this way 2
How few of them realize that, by the employment of an
extra clerk and foreman, and a simple system of labor
returns, to record the performance and readjust the
wages of their men so as to stimulate their personal
ambition, the output of a gang of twenty or thirty men
can be readily doubled in many cases, and at a compara-
tively slight increase of wages per capital
15. The clerk in the factory is the particular horror
of the old-style manufacturer. He realizes the expense
each time that he looks at him, and fails to see any ade-
quate return ; yet by the plan here described the clerk
becomes one of the most valuable agents of the
Company.
I6. If the plan of grading labor and recording each
man’s performance is so much superior to the old day-
work method of handling men, why is it not all that
is required? Because no foreman can watch and study
all of his men all of the time, and because any system
of laying out and apportioning work, and of returns and
records, which is sufficiently elaborate to keep proper
account of the performance of each workman, is more
complicated than piece-work. It is evident that that
system is the best which, in attaining the desired result,
presents in the long run the course of least resistance.
17. The inherent and most serious defect of even the
best managed day-work lies in the fact that there is
nothing about the system that is self-sustaining. When
A Piece-Rate System. 99
once the men are working at a rapid pace there is
nothing but the constant, unremitting watchfulness and
energy of the management to keep them there; while
with every form of piece-work each new rate that is
fixed insures a given speed for another section of work,
and to that extent relieves the foreman from worry.
* 18. From the best type of day-work to ordinary piece-
work, the step is a short one. With good day-work the
various operations of manufacturing should have been
divided into small sections or jobs, in order to properly
gauge the efficiency of the men; and the quickest time
should have been recorded in which each operation has
been performed. The change from paying by the hour
to paying by the job is then readily accomplished.
19. The theory upon which the ordinary system of
piece-work operates to the benefit of the manufacturer
is exceedingly simple. Each workman, with a definite
price for each job before him, contrives a way of doing
it in a shorter time, either by working harder or by im-
proving his method; and he thus makes a larger profit.
After the job has been repeated a number of times at the
more rapid rate, the manufacturer thinks that he should
also begin to share in the gain, and therefore reduces
the price of the job to a figure at which the workman,
although working harder, earns, perhaps, but little more
than he originally did when on day-work.
2O. The actual working of the system, however, is far
different. Even the most stupid man, after receiving
two or three piece-work “cuts" as a reward for his hav-
ing worked harder, resents this treatment and seeks a
"IOO Acozomic Studies.
remedy for it in the future. Thus begins a war, gener-
ally an amicable war, but none the 1ess a war, between
the workmen and the management. The latter endeav-
ors by every means to induce the workmen to increase
the output, and the men gauge the rapidity with which
they work, so as never to earn over a certain rate of
wages, knowing that if they exceed this amount the
piece-work price will surely be cut sooner or later.
2I. But the war is by no means restricted to piece-
work. Every intelligent workman realizes the impor-
tance, to his own interest, of starting in on each new job
as slowly as possible. There are few foremen or super-
intendents who have anything but a general idea as to
how long it should take to do a piece of work that is
new to them. Therefore, before fixing a piece-work
price, they prefer to have the job done for the first time
by the day. They watch the progress of the work as
closely as their other duties will permit, and make up
their minds how quickly it can be done. It becomes
the workman’s interest then to go just as slowly as pos-
sible and still convince his foreman that he is working
well.
22. The extent to which, even in our largest and best
managed establishments, this plan of holding back on
the work,+*marking time ’’, or “soldiering ”, as it is
called—is carried on by the men, can scarcely be under-
stood by one who has not worked among them. It is
by no means uncommon for men to work at the rate of
one-third, or even one-quarter, their maximum speed,
and still preserve the appearance of working hard. And
* , • * * e
. . . * * * * * * * ~ *
$ * * &
s g * *
' e s r. "
& § • *
A Piece-Rate System. IOI
when a rate has once been fixed on such a false basis it
is easy for the men to nurse successfully “a soft snap' of
this sort through a term of years, earning in the mean-
while just as much wages as they think they can with-
out having the rate cut.
23. Thus arises a system of hypocrisy and deceit on the
part of the men which is thoroughly demoralizing and
which has led many workmen to regard their employers
as their natural enemies, to be opposed in whatever they
want, believing that whatever is for the interest of the
management must necessarily be to their detriment.
24. The effect of this system of piece-work on the
character of the men is, in many cases, so serious as to
make it doubtful whether, on the whole, well managed
day-work is not preferable.
25. There are several modifications of the ordinary
method of piece-work which tend to lessen the evils of the
system, but I know of none that can eradicate the fun-
damental causes for war, and enable the managers and
the men to heartily coöperate in obtaining the maximum
product from the establishment. It is the writer's opin-
ion, however, that the differential rate system of piece-
work, which will be described later, in most cases en-
tirely harmonizes the interests of both parties.
26. One method of temporarily relieving the strain
between workmen and employers consists in reducing
the price paid for work, and at the same time guaran-
teeing the men against further reduction for a definite
period. If this period be made sufficiently long, the men
are tempted to let themselves out and earn as much
IO2 Aconomic Studies.
money as they can, thus “spoiling ” their own job by
another “cut” in rates when the period has expired.
27. Perhaps the most successful modification of the
ordinary system of piece-work is the “gain-sharing ”
plan. This was invented by Mr. Henry R. Towne, in
I886, and has since been extensively and successfully
applied by him in the Yale & Towne Manufacturing
Co., at Stamford, Conn. It was admirably described in
a paper which he read before this Society in 1888. This
system of paying men is, however, subject to the serious,
and I think fatal, defect that it does not recognize the
personal merit of each workman; the tendency being
rather to herd men together and promote trades-unionism,
than to develop each man’s individuality.
28. A still further improvement of this method was
made by Mr. F. A. Halsey, and described by him in a
paper entitled “The Premium Plan of Paying for
Labor,” and presented to this Society in 1891. Mr.
Halsey’s plan allows free scope for each man’s personal
ambition, which Mr. Towne's does not. -
29. Messrs. Towne and Halsey’s plans consist briefly
in recording the cost of each job as a starting-point at a
certain time; then, if, through the effort of the work-
men in the future, the job is done in a shorter time and
at a lower cost, the gain is divided among the workmen
and the employer in a definite ratio, the workmen re-
ceiving, say, one-half, and the employer one-half.
30. Under this plan, if the employer lives up to his
promise, and the workman has confidence in his integ-
rity, there is the proper basis for coöperation to secure
A Piece-A’ate System. IO3
sooner or later a large increase in the output of the
establishment.
Yet there still remains the temptation for the work-
man to “soldier” or hold back while on day-work, which
is the most difficult thing to overcome. And in this as
well as in all the systems heretofore referred to, there is
the common defect that the starting-point from which
the first rate is fixed is unequal and unjust. Some of
the rates may have resulted from records obtained when
a good man was working close to his maximum speed,
while others are based on the performance of a medium
man at one-third or one-quarter speed. From this fol-
1ows a great inequality and injustice in the reward even
of the same man when at work on different jobs. The
result is far from a realization of the ideal condition in
which the same return is uniformly received for a given
expenditure of brains and energy. Other defects in the
gain-sharing plan, and which are corrected by the differ-
ential rate system, are:
(1) That it is slow and irregular in its operation in
reducing costs, being dependent upon the whims of the
men working under it.
(2) That it fails to especially attract first-class men
and discourage inferior men.
(3) That it does not automatically insure the maxi-
mum output of the establishment per man and machine.
3I. Coöperation, or profit sharing, has entered the
mind of every student of the subject as one of the pos-
sible and most attractive solutions of the problem ; and
there have been certain instances, both in England and
IO4. Boonomic Studies.
France, of at least a partial success of coöperative experi-
ments.
So far as I know, however, these trials have been
made either in small towns, remote from the manufact-
uring centres, or in industries which in many respects
are not subject to ordinary manufacturing conditions.
32. Coöperative experiments have failed, and, I think,
are generally destined to fail, for several reasons, the
first and most important of which is, that no form of co-
öperation has yet been devised in which each individual
is allowed free scope for his personal ambition. This
always has been and will remain a more powerful incen-
tive to exertion than a desire for the general welfare.
The few misplaced drones, who do the loafing and share
equally in the profits with the rest, under coöperation
are sure to drag the better men down toward their level.
33. The second and almost equally strong reason for
failure lies in the remoteness of the reward. The aver-
age workman (I don’t say all men) cannot look forward
to a profit which is six months or a year away. The
nice time which they are sure to have to-day if they
take things easily, proves more attractive than hard
work with a possible reward to be shared with others
six months later.
34. Other and formidable difficulties in the path of
coöperation are, the equitable division of the profits, and
the fact that, while workmen are always ready to share
the profits, they are neither able nor willing to share the
1osses. Further than this, in many cases it is neither
right nor just that they should share either in the profits
or the losses, since these may be due in great part to
U’
A Piece-A’afe System. IO5
causes entirely beyond their influence or control, and to
which they do not contribute.
35. When we recognize the real antagonism that
exists between the interests of the men and their em-
ployers under all of the systems of piece-work in com-
mon use, and when we remember the apparently ir-
reconcilable conflict implied in the fundamental and per-
fectly legitimate aims of the two, namely, on the part
of the men,
'THE UNIVERSAL DESIRE TO RECEIVE THE LARGEST
POSSIBLE waGES FOR THEIR TIME ; }
And on the part of the employers,
THE DESIRE TO RECEIVE THE LARGEST POSSIBLE RE-
TURN FOR THE WAGES PAID ;
What wonder that most of us arrive at the conclusion
that no system of piece-work can be devised which will
enable the two to coöperate without antagonism, and to
their mutual benefit?
36. Yet it is the opinion of the writer that even if a
system has not already been found which harmonizes
the interests of the two, still the basis for harmonious
coöperation lies in the two following facts:
First. That the workmen in nearly every trade can
* The writer's knowledge of the speed attained in the manufacture
of textile goods is very limited. It is his opinion, however, that ow-
ing to the comparative uniformity of this class of work, and the ,
enormous number of machines and men engaged on similar opera-
tions, the maximum output per man and machine is more nearly real-
ized in this class of Inanufactures than in any other. If this is the
case, the opportunity for improvement does not exist to the same ex-
tent here as in other trades. Some illustrations of the possible in-
crease in the daily output of men and machines are given in para-
graphs 78 to 82.
IO6 Acozzomºc Sázzdźes.
and zwill materia//y increase their present output per
day, providing they are assured of a permanent and
Żarger return for their time than they haze heretofore
7"ecezzyed.
Secondſ. 7%ał żhe employers can zwell afford to ſay
higher wages Żer Žiece ezerz Żermazeſzály, frozza'zing
each maſz and machiue in the establishment turns out a
Żroportionately larger amozzzzz of work.
37. The truth of the latter statement arises from the
well recognized fact that, in most lines of manufacture,
the indirect expenses equal or exceed the wages paid di-
rectly to the workmen, and that these expenses remain
approximately constant, whether the output of the es-
tablishment is great or small.
From this it follows that it is always cheaper to pay
higher wages to the workmen when the output is pro-
portionately increased : the diminution in the indirect
portion of the cost per piece being greater than the in-
crease in wages. Many manufacturers, in considering
the cost of production, fail to realize the effect that the
zolume of output has on the cost. They lose sight of the
fact that taxes, insurance, depreciation, rent, interest,
salaries, office expenses, miscellaneous labor, Sales ex-
penses, and frequently the cost of power (which in the
aggregate amount to as much as wages paid to work-
men), remain about the same whether the output of the
establishment is great or small. t
38. In our endeavor to solve the piece-work problem
by the application of the two fundamental facts above
referred to, let us consider the obstacles in the path of
A Aiece-A’afe System. Io'7
harmonious coöperation, and suggest a method for their
removal.
39. The most formidable obstacle is the lack of
knowledge on the part of both the men and the man-
agement (but chiefly the latter) of the quickest time in
which each piece of work can be done; or, briefly, the
lack of accurate time-tables for the work of the place.
40. The remedy for this trouble lies in the establish-
ment in every factory of a proper rate-fixing department;
a department which shall have equal dignity and com-
mand equal respect with the engineering and managing
departments, which shall be organized and conducted in
an equally scientific and practical manner.
41. The rate-fixing, as at present conducted, even in
our best managed establishments, is very similar to the
mechanical engineering of fifty or sixty years ago.
Mechanical engineering at that time consisted in imitat-
ing machines which were in more or less successful use,
or in guessing at the dimensions and strength of the
parts of a new machine; and as the parts broke down
or gave out, in replacing them with the stronger ones.
Thus each new machine presented a problem almost in-
dependent of former designs, and one which could only
be solved by months or years of practical experience and
a series of break-downs.
Modern engineering, however, has become a study,
not of individual machines, but of the resistance of ma-
terials, the fundamental principles of mechanics, and of
the elements of design.
42. On the other hand, the ordinary rate-fixing (even
IO8 Aconomic Studies.
the best of it), like the old-style engineering, is done by
a foreman or superintendent who, with the aid of a
clerk, 1ooks over the record of the time in which a whole
job was done as nearly like the new one as can be found,
and then guesses at the time required to do the new job.
No attempt is made to analyze and time each of the
classes of work, or elements of which a job is composed ;
although it is a far simpler task to resolve each job into
its elements, to make a careful study of the quickest
time in which each of the elementary operations can be
done, and then to properly classify, tabulate, and index
this information, and use it when required for rate-fix-
ing, than it is to fix rates, with even an approximation
to justice, under the common system of guessing.
43. In fact, it has never occurred to most superin-
tendents that the work of their establishments consists
of various combinations of elementary operations which
can be timed in this way; and a suggestion that this is
a practical way of dealing with the piece-work problem
usually meets with derision, or, at the best, with the
answer that “It might do for some simple business, but
my work is entirely too complicated.”
44. Yet this elementary system of fixing rates has
been in successful operation for the past ten years, on
work complicated in its nature and covering almost as
wide a range of variety as any manufacturing that the
writer knows of. In 1883, while foreman of the ma-
chine shop of the Midvale Steel Company of Philadel-
phia, it occurred to the writer that it was simpler to
time each of the elements of the various kinds of work
A Piece-Rate System. IO9
done in the place, and then find the quickest time in
which each job could be done, by summing up the total
times of its component parts, than it was to search
through the records of former jobs and guess at the
proper price. After practising this method of rate-fixing
Himself for about a year as well as circumstances would
permit, it became evident that the system was a success.
The writer then established the rate-fixing department,
which has given out piece-work prices in the place ever
since. -
45. This department far more than paid for itself
from the very start; but it was several years before the
full benefits of the system were felt, owing to the fact
that the best methods of making and recording time ob-
servations of work done by the men, as well as of deter-
mining the maximum capacity of each of the machines
in the place, and of making working-tables and time-
tables, were not at first adopted.
46. Before the best results were finally attained in the
case of work done by metal-cutting tools, such as lathes,
planers, boring mills, etc., a long and expensive series of
experiments was made, to determine, formulate, and
finally practically apply to each machine the 1aw gov-
erming the proper cutting speed of tools, namely, the
effect on the cutting speed of altering any one of the
following variables: the shape of the tool (i.e., lip an-
gle, clearance angle, and the line of the cutting edge),
the duration of the cut, the quality or hardness of the
metal being cut, the depth of the cut, and the thickness
of the feed or shaving.
I IO Aconomic Studies.
47. It is the writer's opinion that a more complicated
and difficult piece of rate-fixing could not be found than
that of determining the proper price for doing all kinds
of machine work on miscellaneous steel and iron cast-
ings and forgings, which vary in their chemical compo-
sition from the softest iron to the hardest tool steel.
Yet this problem was solved through the rate-fixing de-
partment and the “differential rate,” with the final re-
sult of completely harmonizing the men and the man-
agement, in place of the constant war that existed under
the old system. At the same time the quality of the
work was improved and the output of the machinery
and the men was doubled, and in many cases trebled. At
the start there was naturally great opposition to the rate-
fixing department, particularly to the man who was tak-
ing time observations of the various elements of the
work; but when the men found that the rates were fixed
without regard to the records of the quickest time in
which they had actually done each job, and that the
knowledge of the department was more accurate than
their own, the motive for hanging back or “soldiering”
on this work ceased, and with it the greatest cause for
antagonism and war between the men and the manage-
1ment. *
48. As an illustration of the great variety of work to
which elementary rate-fixing has already been success-
fully applied, the writer would state that while acting
as general manager of two large Sulphite pulp mills he
directed the application of piece-work to all of the com-
plicated operations of manufacturing throughout one of
A Piece-Rate System. I 11
these mills, by means of elementary rate-fixing, with the
result, within eighteen months, of more than doubling
the output of the mill.
The difference between elementary rate-fixing and the
ordinary plan can perhaps be best explained by a simple
illustration. Suppose the work to be planing a surface
on a piece of cast iron. In the ordinary system the rate-
fixer would look through his records of work done by
the planing machine, until he found a piece of work as
nearly as possible similar to the proposed job, and then
guess at the time required to do the new piece of work.
Under the elementary system, however, some such analy-
sis as the following would be made:
Work dome by Man. Minutes.
Time to lift piece from floor to planer table . . . . . . . .
Time to level and set work true on table . . . . . . . . . .
Time to put on stops and bolts . . . . . . . . . . . ... • * *
Time to remove stops and bolts . . . . . . . . . . . . . .
Time to remove piece to floor. . . . . . . . . . . . . . .
Time to clean machine . . . . . . . . . . . . . . . . . .
=
Work done by Machine. MŽnaties.
Time to rough off cut 34 in. thick, 4 feet long, 2% in. wide.
Time to rough off cut 3% in. thick, 3 feet long, I2 in. wide etc.
Time to finish cut 4 feet long, 2% in. wide . . . . . . . .
Time to finish cut 3 feet long, I2 in. wide, etc . . . . . . .
=
It is evident that this job consists of a combination
of elementary operations, the time required to do each of
which can be readily determined by observation.
5
II 2 FConomic Studies.
This exact combination of operations may never occur
again, but elementary operations similar to these will be
performed in differing combinations almost every day in
the same shop.
A man whose business it is to fix rates soon becomes
so familiar with the time required to do each kind of
elementary work performed by the men, that he can
write down the time from memory. -
In the case of that part of the work which is done by
the machine, the rate-fixer refers to tables which are
made out for each machine, and from which he takes the
time required for any combination of breadth, depth, and
length of cut.
49. While, however, the accurate knowledge of the
quickest time in which work can be done, obtained by
the rate-fixing department and accepted by the men as
standard, is the greatest and most important step toward
obtaining the maximum output of the establishment,
it is one thing to know how much work, can be done in
a day and an entirely different matter to get even the best
men to work at their fastest speed or anywhere near it.
50. The means which the writer has found to be by
far the most effective in obtaining the maximum output
of a shop, and which, so far as he can see, satisfies the
legitimate requirements, both of the men and manage-
ment, is the differential rate system of piece-work.
This consists briefly in paying a higher price per
piece, or per unit, or per job, if the work is done in the
shortest possible time and without imperfections, than is
paid if the work takes a longer time or is imperfectly
done.
A Piece-Rate System. II.3
51. To illustrate: Suppose 20 units or pieces to be
the largest amount of work of a certain kind that can be
done in a day. Under the differential rate system, if a
workman finishes 20 pieces per day, and all of these
pieces are perfect, he receives, say, 15 cents per piece,
making his pay for the day 15 × 20 = $3. If, how-
ever, he works too slowly and turns out, say, only IQ
pieces, then, instead of receiving I5 cents per piece he
gets only I2 cents per piece, making his pay for the day
I2 × 19 = $2.28, instead of $3 per day.
If he succeeds in finishing 20 pieces, some of which
are imperfect, then he should receive a still lower rate
of pay, say IO cents or 5 cents per piece, according to
circumstances, making his pay for the day $2, or only $1,
instead of $3.
It will be observed that this style of piece-work is di-
rectly the opposite of the ordinary plan. To make the
difference between the two methods more clear : Sup-
posing under the ordinary system of piece-work that the
workman has been turning out I6 pieces per day, and
has received 15 cents per piece; then his day's wages
would be 15 × 16 =$2.40. Through extra exertion he
succeeds in increasing his output to 20 pieces per day,
and thereby increases his pay to I5 × 20 =$3. The
employer, under the old system, however, concludes that
$3 is too much for the man to earn per day, since other
men are only getting from $2.25 to $2.50, and therefore
cuts the price from I5 cents per piece to I2 cents, and the
man finds himself working at a more rapid pace and yet
earning only the same old wages, 12 × 20 = $2.40 per
II4 Aconomic Statalies.
day. What wonder that men do not cape to repeat
this performance many times 2 =f
53. Whether coöperation, the differential plan, or
some other form of piece-work be chosen in connection
with elementary rate-fixing, as the best method of work-
ing, there are certain fundamental facts and principles
which must be recognized and incorporated in any sys-
tem of management before true and lasting success can
be attained ; and most of these facts and principles will
be found to be not far removed from what the strictest
moralists would call justice.
54. The most important of these facts is, that MEN
WILL NOT DO AN EXTRAORDINARY DAY'S WORK FOR AN
oRDINARY DAY's PAy; and any attempt on the part of
employers to get the best work out of their men and
give them the standard wages paid by their neighbors
will surely be, and ought to be, doomed to failure.
55. Justice, however, not only demands for the work-
man an increased reward for a large day’s work, but
should compel him to suffer an appropriate loss in case
his work falls off either in quantity or quality. It is
quite as important that the deductions for bad work
should be just, and graded in proportion to the short-
comings of the workman, as that the reward should be
proportional to the work done. .*
The fear of being discharged, which is practically the
only penalty applied in many establishments, is entirely
inadequate to producing the best quantity and quality of
work; since the workmen find that they can take many
liberties before the management makes up its mind to
apply this extreme penalty.
A Piece-A’ate System. II.5
56. It is clear that the differential rate satisfies auto-
matically, as it were, the above condition of properly
graded rewards and deductions. Whenever a workman
works for a day (or even a shorter period) at his maxi-
mum, he receives under this system unusually high
wages; but when he falls off either in quantity or
quality from the highest rate of efficiency his pay falls
below even the ordinary.
57. The lower differential rate should be fixed at a
figure which will allow the workman to earn scarcely
an ordinary day's pay when he falls off from his maxi-
mum pace, so as to give him every inducement to work
hard and well. d
58. The exact percentage beyond the usual standard
which must be paid to induce men to work to their
Imaximum varies with different trades and with different
sections of the country, And there are places in the
United States where the men (generally speaking) are
so lazy and demoralized that no sufficient inducement
can be offered to make them do a full day’s work.
59. It is 11ot, however, sufficient that each workman's
ambition should be aroused by the prospect of larger
pay at the end of even a comparatively short period of
time. The stimulus to maximum exertion should be a
daily one.
This involves such vigorous and rapid inspection and
returns as to enable each workman in most cases to
1<now each day the exact result of his previous day’s
work—i. e., whether he has succeeded in earning his
maximum pay, and exactly what his losses are for care-
J I6 Aconomic Studies.
less or defective work. Two-thirds of the moral effect,
either of a reward or penalty, is lost by even a short
postponement.
60. It will again be noted that the differential rate
system forces this condition both upon the management
and the workmen, since the men while, working under
it are above all anxious to know at the earliest possible
minute whether they have earned their high rate or not.
And it is equally important for the management to know
whether the work has been properly done.
6I. As far as possible each man’s work should be in-
spected and measured separately, and his pay and losses
should depend upon his individual efforts alone. It is,
of course, a necessity that much of the work of manu-
facturing—such, for instance, as running roll-trains,
hammers, or paper machines—should be done by gangs
of men who coöperate to turn out a common product,
and that each gang of men should be paid a definite
price for the work turned out, just as if they were a
single man.
In the distribution of the earnings of a gang among
its members, the percentage which each man receives
should, however, depend not only upon the kind of
work which each man performs, but upon the accuracy
and energy with which he fills his position.
In this way the personal ambition of each of a gang
of men may be given its proper scope.
62. Again, we find the differential rate acting as a
Imost powerful lever to force each man in a gang of
workmen to do his best ; since if, through the careless-
A Piece-Rate SSystemz. II 7
ness or laziness of any one man, the gang fails to earn
its high rate, the drone will surely be obliged by his
companions to do his best the next time or else get out.
63. A great advantage of the differential rate system
is that it quickly drives away all inferior workmen and
attracts the men best suited to the class of work to
which it is applied, since none but really good men can
work fast enough and accurately enough to earn the
high rate ; and the low rate should be made so small as
to be unattractive even to an inferior man.
64. If for no other reason that it secures to an estab-
lishment a quick and active set of workmen, the differ-
ential rate is a valuable aid, since men are largely
creatures of habit, and if the piece-workers of a place
are forced to move quickly and work hard the day-
workers soon get into the same way, and the whole shop
takes on a more rapid pace.
65. The greatest advantage, however, of the differen-
tial rate for piece-work, in connection with a proper rate-
fixing department, is that together they produce the
proper mental attitude on the part of the men and the
management toward each other. In place of the in-
dolence and indifference which characterize the work-
men of many day-work establishments and to a consid-
erable extent also their employers, and in place of the
constant watchfulness, suspicion, and even antagonism
with which too frequently the men and the management
regard each other under the ordinary piece-work plan,
both sides soon appreciate the fact that with the differ-
ential rate it is their common interest to coöperate to the
II.8 Aconomic Studies.
fullest extent, and to devote every energy to turning
out daily the largest possible output. This common in-
terest quickly replaces antagonism and establishes a
most friendly feeling.
66. Of the two devices for increasing the output of a
shop, the differential rate and the scientific rate-fixing
department, the latter is by far the more important.
The differential rate is invaluable at the start as a means
of convincing men that the management is in earnest in
its intention of paying a premium for hard work, and it
at all times furnishes the best means of maintaining the
top notch of production ; but when, through its applica-
tion, the men and the management have come to appre-
ciate the mutual benefit of harmonious coöperation and
respect for each other's rights, it ceases to be an absolute
necessity. On the other hand, the rate-fixing depart-
ment, for an establishment doing a large variety of work,
becomes absolutely indispensable. The longer it is in
operation the more necessary it becomes.
67. Practically, the greatest need felt in an establish-
ment wishing to start a rate-fixing department is the lack
of data as to the proper rate of speed at which work
should be done.
There are hundreds of operations which are common
to most large establishments; yet each concern studies
the speed problem for itself, and days of labor are wasted
in what should be settled once for all and recorded in a
form which is available to all manufacturers.
68. What is needed is a hand-book on the speed with
which work can be done, similar to the elementary en-
A Piece-A’ate System. I IQ
gineering hand-books. And the writer ventures to pre-
dict that such a book will, before long, be forthcoming.
Such a book should describe the best method of making,
recording, tabulating, and indexing time-observations,
since much time and effort are wasted by the adoption
of inferior methods.
69. The term “rate-fixing department,” has rather a
formidable sound. In fact, however, that department
should consist in most establishments of one man, who
in many cases need give only a part of his time to the
work.
70. When the manufacturing operations are uniform
in character and repeat themselves day after day—as,
for instance, in paper or pulp mills—the whole work of
the place can be put upon piece-work in a comparatively
short time; and when once proper rates are fixed the
rate-fixing department can be dispensed with, at any
rate until some new line of manufacture is taken up.
71. The system of differential rates was first applied
py the writer to a part of the work in the machine shop
of the Midvale Steel Company, in 1884. Its effect in
increasing and then maintaining the Output of each
machine to which it was applied was almost immediate,
and so remarkable that it soon came into high favor
with both the men and the management. It was grad-
ually applied to a great part of the work of the establish-
ment, with the result, in combination with the rate-
fixing department, of doubling and in many cases treb-
ling the output, and at the same time increasing instead
of diminishing the accuracy of the work.
&
I2O Aſcozomic Studies.
72. In some cases it was applied by the rate-fixing de-
partment without an elementary analysis of the time re-
quired to do the work, simply offering a higher price
per piece providing the maximum output before attained
was increased to a given extent. Even this system met
with success although it is by no means correct, since
there is no certainty that the reward is in just propor-
tion to the efforts of the workmen.
73. In cases where large and expensive machines are
used, such as paper machines, steam hammers, or rolling
mills, in which a large output is dependent upon the
severe manual labor as well as 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 ton as the maximum possible
Output is approached.
74. As before stated, not the least of the benefits of
elementary rate-fixing are the indirect results.
The careful study of the capabilities of the machines
and the analysis of the speeds at which they must run,
before differential rates can be fixed which will insure
their maximum output, almost invariably result in first
indicating and then correcting the defects in their de-
sign and in the method of running and caring for them.
75. In the case of the Midvale Steel Company, to
which I have already referred, the machine shop was
equipped with standard tools furnished by the best
makers, and the study of these machines, such as lathes,
A Piece-A’ate System. I2 I
planers, boring mills, etc., which was made in fixing
rates, developed the fact that they were none of them
designed and speeded so as to cut steel to the best ad-
vantage. As a result, this company has demanded alter-
ations from the standard in almost every machine which
they have bought during the past eight years. They
have themselves been obliged to superintend the design
of many special tools which would not have been thought
of had it not been for elementary rate-fixing.
76. But what is perhaps of more importance still, the
rate-fixing department has shown the necessity of care-
fully systematizing all of the small details in the running
of each shop, such as the care of belting, the proper
shape for cutting tools, and the dressing, grinding, and
issuing same, oiling machines, issuing orders for work,
obtaining accurate labor and material returns, and a host
of other minor methods and processes. These details,
which are usually regarded as of comparatively small
importance, and many of which are left to the individual
judgment of the foreman and workmen, are shown by
the rate-fixing department to be of paramount import-
ance in obtaining the maximum output, and to require
the most careful and systematic study and attention in
order to insure uniformity and a fair and equal chance
for each workman. Without this preliminary study and
systematizing of details it is impossible to apply success-
fully the differential rate in most establishments.
77. As before stated, the success of this system of
piece-work depends fundamentally upon the possibility
of materially increasing the output per man and per
I 22 Boonomic Studies.
machine, providing the proper man be found for each
job and the proper incentive be offered to him.
78. As an illustration of the difference between what
ought to be done by a workman well suited to his job,
and what is generally done, I will mention a single class
of work, performed in almost every establishment in the
country. In shovelling coal from a car over the side oil
to a pile one man should unload forty tons per day, and
keep it up year in and year out, and thrive under it.
With this knowledge of the possibilities I have never
failed to find men who were glad to work at this speed
for from four and a half to five cents per ton. The
average speed for unloading coal in most places, how-
ever, is nearer fifteen than forty tons per day. In secur-
ing the above rate of speed it must be clearly understood
that the problem is not how to force men to work harder
or longer hours than their health will permanently
allow, but rather first to select among the laborers
which are to be found in every community the men who
are physically able to work permanently at that job and
at the speed mentioned without damage to their health,
and who are mentally sufficiently inert to be satisfied
with the monotony of the work, and then to offer them
such inducements as will make them happy and con-
tented in doing so.
79. The first case in which a differential rate was ap-
plied furnishes a good illustration of what can be accom-
plished by it.
A standard steel forging, many thousands of which
are used each year, had for several years been turned at
A Piece-Kate System. I23
the rate of from four to five per day under the ordinary
system of piece-work, 50 cents per piece being the price
paid for the work. After analyzing the job and deter-
mining the shortest time required to do each of the
elementary operations of which it was composed, and
then summing up the total, the writer became convinced
that it was possible to turn ten pieces a day. To finish
the forgings at this rate, however, the machinists were
obliged to work at their maximum pace from morning
to night, and the lathes were run as fast as the tools
would allow, and under a heavy feed.
It will be appreciated that this was a big day's work,
both for men and machines, when it is understood that
it involved removing, with a single I6-inch lathe hav-
ing two saddles, an average of more than 800 pounds of
steel chips in ten hours. In place of the 50-cent rate
that they had been paid before, they were given 35 cents
per piece when they turned them at the speed of Io per
day, and when they produced less than Io they received
only 25 cents per piece. -
8O. It took considerable trouble to induce the men to
turn at this high speed, since they did not at first fully
appreciate that it was the intention of the firm to allow
them to earn permanently at the rate of $3.50 per day.
But from the day they first turned IO pieces to the pres-
ent time, a period of more than ten years, the men who
understood their work have scarcely failed a single day
to turn at this rate. Throughout that time, until the
beginning of the recent fall in the scale of wages
throughout the country, the rate was not cut.
I24. Aconomic Studies.
8I. During this whole period the competitors of the
company never succeeded in averaging over half of this
production per lathe, although they knew and even saw
what was being done at Midvale. They, however, did
Inot allow their men to earn over from $2 to $2.50 per
day, and so never even approached the maximum output.
82. The following table will show the economy of
paying high wages under the differential rate in doing
the above job.
COST OF PRODUCTION PER I, ATHE PER DAY.
Ordinary system of piece-Zwork. Jºžfferential rate system.
Man’s wages . . . . . . . $2 50 Man’s wages . . . . . . $3 50
Machine cost . . . . . . . 3 37 || Machine cost . . . . . . . 3. 37
Total cost per day . . $5 87 Total cost per day . . . $6 87
5 pieces produced. Io pieces produced.
Cost per piece . . . . . . $I 17 | Cost per piece . . . . . . $o 69
The above result was mostly, though 11otentirely, due
to the differential rate. The superior system of manag-
ing all of the small details of the shop counted for con-
siderable.
83. There has never been a strike by men working
under differential rates, although these rates have been
applied at the Midvale Steel Works for the past ten
years, and the steel business has proved during this
period the most fruitful field for labor organizations and
strikes. And this notwithstanding the Midvale Com-
pany has never prevented its men from joining any
labor organization. All of the best men in the company
saw clearly that the success of a labor organization
A Piece-A’afe System. I25
meant the 1owering of their wages in order that the in-
ferior men might earn more, and of Cottrse could not
be persuaded to join.
84. I attribute a great part of this success in avoiding
strikes to the high wages which the best men were able
to earn with the differential rates, and to the pleasant
feeling fostered by this system ; but this is by no means
the whole cause. It has for years been the policy of
that company to stimulate the personal ambition of
every man in their employ, by promoting them either in
wages or position whenever they deserved it and the
opportunity came.
A careful record has been kept of each man’s good
points as well as his shortcomings, and one of the prin-
cipal duties of each foreman was to make this careful
study of his men, so that substantial justice could be
done to each. When men throughout an establish-
ment are paid varying rates of day-work wages accord-
ing to their individual worth, some being above and
some below the average, it cannot be for the interest of
those receiving high pay to join a union with the cheap
1116211. -
85. No system of management, however good, should
be applied in a wooden way. The proper personal rela-
tions should always be maintained between the em-
ployers and men; and even the prejudices of the work-
men should be considered in dealing with them.
The employer who goes through his works with kid
gloves on, and is never known to dirty his hands or
clothes, and who either talks to his men in a condescend-
I26 Aconomic Studies.
ing or patronizing way, or else not at all, has no chance
whatever of ascertaining their real thoughts or feelings.
86. Above all it is desirable that men should be
talked to on their own level by those who are over them.
Each man should be encouraged to discuss any troub-
le which he may have, either in the works or outside,
with those over him. Men would far rather even be
blamed by their bosses, especially if the “tearing out"
has a touch of human nature and feeling in it, than to
be passed by day after day without a word and with no
more notice than if they were part of the machinery.
The opportunity which each man should have of air-
1ng his mind freely and having it out with his employ-
ers, is a safety-valve; and if the superintendents are, rea-
sonable men, and listen to and treat with respect what
their men have to say, there is absolutely no reason for
labor unions and strikes.
87. It is not the large charities (however generous
they may be) that are needed or appreciated by work-
men, such as the founding of libraries and starting
workingmen's clubs, so much as small acts of personal
kindness and sympathy, which establish a bond of
friendly feeling between them and their employers.
88. The moral effect of the writer's system on the
men is marked. The feeling that substantial justice' is
being done them renders them on the whole much more
manly, straightforward, and truthful. They work more
cheerfully, and are more obliging to one another and
their employers. They are not soured, as under the old
system, by brooding over the injustice done them ; and
A Piece-Rate System. I27
their spare minutes are not spent to the same extent in
criticising their employers.
A noted French engineer and steel manufacturer, who
recently spent several weeks in the works of the Mid-
vale Company in introducing a new branch of manu-
facture, stated before leaving that the one thing which
had impressed him as most unusual and remarkable
about the place was the fact that not only the foremen
but the workmen were expected to and did in the main
tell the truth in case of any blunder or carelessness,
even when they had to suffer from it themselves.
89. From what the writer has said he is afraid that
many readers may gain the impression that he regards
elententary rate-fixing and the differential rate as a sort
of panacea for all human ills.
This is, however, far from the case. While he regards
the possibilities of these methods as great, he is of the
opinion, on the contrary, that this system of manage-
ment will be adopted by but few establishments, in the
near future at least, since its really successful applica-
tion not only involves a thorough Organization but re-
quires the machinery and tools throughout the place to
be kept in such good repair that it will be possible for
the workmen each day to produce their maximum out-
put. But few manufacturers will care to go to this
trouble until they are forced to.
90. It is his opinion that the most successful manu-
facturers, those who are always ready to adopt the best
machinery and methods when they see them, will
gradually avail themselves of the benefits of scientific
6
I 28 Acomozyzic Studies.
rate-fixing; and that competition will compel the others
to follow slowly in the same direction.
9I. Even if all of the manufacturers in the country
who are competing in the same line of business were to
adopt these methods, they could still well afford to pay
the high rate of wages demanded by the differential
rate and necessary to induce men to work fast, since it
is a well recognized fact the world over, that the highest-
priced labor, providing it is proportionately productive,
is the cheapest ; and the low cost at which they could
produce their goods would enable them to sell in foreign
markets and still pay high wages.
92. The writer is far from taking the view held by
many manufacturers that labor unions are an almost un-
mitigated detriment to those who join them, as well as
to employers and the general public.
The labor unions—particularly the trades unions of
England—have rendered a great service, not only to their
members but to the world, in shortening the hours of
labor and in modifying the hardships and improving the
conditions of wage-workers.
In the writer's judgment the system of treating with
labor unions would seem to occupy a middle position
among the various methods of adjusting the relations
between employers and men.
When employers herd their men together in classes,
pay all of each class the same wages, and offer none of
them any inducements to work harder or do better than
the average, the only remedy for the men lies in com-
bination ; and frequently the only possible answer to
encroachments on the part of their employers is a strike.
A Piece-Rafe System. I29
This state of affairs is far from satisfactory to either
employers or men, and the writer believes the system of
regulating the wages and conditions of employment of,
whole classes of men by conference and agreement be-
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inferior, both in its moral effect on the men and, on the
material interests of both parties, to the plan of stimu-
lating each workman’s ambition by paying him accord-
ing to his individual worth, and without limiting him
to the rate of work or pay of the average of his class.
93. The level of the great mass of the world’s labor
has been, and must continue to be, regulated by causes
so many and so complex as to be at best but dimly
recognized.
The utmost effect of any system, whether of manage-
ment, social combination, or legislation, can be but to
raise a small ripple or wave of prosperity above the sur-
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that here and there a few workmen, with their em-
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International Journal of Ethics
CONTENTS OF VOLUME VI.
OCTOBER, 1895.
IS LIFE WORTH LIVING F WILLIAM JAMEs, Harvard University.
REFORM IN EDUCATION. W. MITcHELL, University of Adelaide, South Australia.
THE REFERENDUM AND INITIATIVE : THEIR RELATfon TO THE INTERESTS
OF LABOR IN SWITZERLAND AND IN AMERICA. A. LAwrence Low ELL,
Boston, Mass.
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THE ETHICAL LIFE AND CONCEPTIONS OF THE JAPANESE. TokIwo Yokoi,
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APree- Will and Responzsibility, David G. Ritchie.
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THE conFLICT BETWEEN THE OLD AND THE NEw : A RETROSPECT AND A
PROSPECT. HARALD HöFFDING, University of Copenhagen.
THE MORALITY THAT IS. ALFRED HODDER, Bryn Mawr College.
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Tendencies of Thought in Modern Judaism. | Tito Melema. JULIA H. GULLIVER,
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The Miracles of Jesus in the Synoptic Gos- C. C. STARBUCK.
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Contents of No. XVII, March, 1896.
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Cardinal Manning, St. GEORGE MIVART. The Minister and Social Problems,
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