1

Piece Rate and Time Rate Payment System in Agrarian Economies:

A Theoretical Insight on Malaysian Rubber Estate.


Parthiban S.Gopal

Abstract

Wages and its method of payment is a perennial old problem for the rubber tappers in
Malaysian estates. This paper proposes the method of payments which is prevalent in
agrarian economies, is widely adopted in Malaysian rubber estates wage structure,
particularly for the rubber tappers. The method of payment that becomes the centre of
contention in this paper is weather the time rated or piece rate payment is appropriate for
the rubber tappers. Therefore the objective of this paper is twofold: Firstly, to examine the
conceptual difference and operational definition of time and piece rated payment in
Malaysian rubber estates. Secondly, to scrutinize the viability of these mode of payment
vis-a-vis theoretical interpretation, in the rubber estates. The methodology of this paper is
based solely on document research; that is, peer reviewed journals as well as books and
articles authored by prominent researchers and scholars on wages and payment structure
especially in agrarian economies. Finally, the findings of the study would further elucidate
the importance of this mode of payment as a part of wage determinism mechanism for the
rubber tappers in the Malaysian rubber plantation sector.






2
I. Introduction
This study investigates the compensation theory that guides the two methods of payments
widely used in agrarian economies. Piece rates and time rates are the two methods of
compensation that are commonly employed in agricultural activities. The rubber estates in
Malaysia are no exception. This crux of this study provides a theoretical perspective of the
main features of the two systems and the circumstances under which an employer is likely
to choose one or the other.

II. Background of the Study
The earnings of rubber tappers have attracted considerable attention in the literature
i
. At
least two reasons account for this; first, the tapper is not separable from the rubber industry
that has contributed so much to the prosperity of the Malaysian economy since its
commercial cultivation in the 1800s. Second, while previous studies have shown that the
earnings of plantation workers have been low, relative to workers of comparable skill in
other sectors ( Zulkifly and Ishak, 1998; Selvakumaran and Bala, 1995), it is not always
realized that even within the plantation sector, the earnings of the rubber tapper have been
among the lowest. In 1998, the average monthly earnings of a tapper was
MYR605.00(USD195.00)
ii
, relative to MYR886.00(USD285) earned by an oil palm
harvester, RM765.00(USD246.00) earned by a palm oil mill worker (Category II) and
RM612.00(USD197.00) taken home by a rubber installation worker. The tappers earnings
generally exceed only those of the field workers whose monthly income averaged
RM430.00 (USD138.00) (Audong and Tan, 2000: 46; see also Navamukundan and Geetha,
2003: 325-425). However, not all studies that have commented on the low earnings of
rubber tappers have explored the underlying payment system because their main concerns
3
lay elsewhere. In fact, there is a general paucity of studies devoted solely or primarily to
wage issues in the plantation sector. The studies by Parmer (1960) and Nijhar (1976) are
among the few exceptions.

III. Objective of the Study
The primary objective of this paper is twofold: Firstly, to examine the conceptual difference
and operational definition of time and piece rated payment in Malaysian rubber estates.
Secondly, to scrutinize the viability of these mode of payment as a part of the wage
structure, in the Malaysian rubber estates.

IV. Research Methodology
Since the study focuses on various theoretical features of payment system with regards to
the rubber estates wage structure, document research deemed suffice and was conducted.
To ensure reliability of these documents, only established peer reviewed journals as well as
books and articles authored by prominent researchers and scholars on wage system
especially in agrarian economies

V. Methods of Payment: Piece Rate and Time Rate
Two modes of payment are widely used, especially (though not exclusively) in agriculture.
They are piece rates and time rates (Lazear, 1986: 405-430; 1998: 98-119). A piece rate
rewards labour according to some measure of the workers output, whereas a time rate
compensates a worker based on the number of hours allocated to the job (Borjas, 1996:
402). Under a time rate, time on the job is used as the unit of measuring input (or as the
proxy for effort).
4

Under a piece rate, compensation of a worker is a function of output or:
w
t =
f (q
t
)
where w
t
is compensation for period t, and q
t
is a workers output in period t.

On the other hand, compensation under a time rate is a function of input (or effort), usually
measured by time allocated to the job, or:
w
t
=g (E
t
)
where w
t
and E
t
are compensation and (some measure of) effort in period t, respectively.

Piece rates are often viewed as incentive pay because earnings are dependent on individual
output (Seiler, 1984: 363-376), whereas time rate earnings are solely a function of hours
worked. The International Labour Organization (ILO) offers a different perspective: time
rates are payments to employees who are redeemed hourly, daily, weekly or monthly, while
piece rates are paymenst for workers who complete specific steps in the production
process (ILO, 1984: 1-164 and Sajhau 1986: 79). The piece rate system is now more
popularly referred to as payment by results (PBR). In short, a piece rate and a time rate
represent a payment by output and a payment by input respectively (Dobb 1959: 50-55;
Paarsch and Shearer, 1997: 1-2; Shearer, 2003: 1-3)

V.1 Piece Rates or Time Rates?
Output based pay has several advantages (Lazear, 1998: 98-119). First, the inherent
strength of an output based pay system is that it discourages unproductive workers from
applying for the job and induces inefficient workers to leave. This can be illustrated by
5
examining the choice faced by a tapper in deciding between an estate offering payment on
the basis of output (piece rate) and one that pays a fixed monthly salary (time rate). This
two payment systems are reflected by schedules B and A respectively in Figure 1 (Refer
Appendix).

Schedule A represents a time rate payment while schedule B represents a piece rate
payment. Assume that MYR0.60 sen (USD0.20 cents) is paid for each kilogram of latex
collected under scheme B. Under scheme A (the time rate wage scheme), the weekly salary
is fixed at MYR180.00 (USD58.00), regardless of the amount of latex collected
iii
. What
would be the workers choice?

If the worker is able to tap and collect more than 300kg of latex each week, he will opt for
the piece rate scheme since his takings will exceed MYR180 (USD 58.00) per week. On the
other hand, a less productive job-seeker who is unable or unwilling to tap and collect at
least 300kg of latex a week will choose the time rate scheme that offers a fixed weekly
income of MYR180.00(USD58.00). The piece rate scheme, therefore, attracts more
productive or better motivated workers. The less motivated and less productive workers
will seek employment with employers offering a time rate paying scheme.

However, Baland et. al (1999: 445-461) express a slightly different view. While they agree
that a piece rate contract attracts the most able workers, they point out that it draws the least
able ones as well. Only workers with medium level ability opt for the time rate. A highly
able worker can choose his own level of effort, under the piece rate, to earn a higher level
of earnings per day than is possible under a time rate contract. By the same token, a less
6
able worker will also be drawn to a piece rate system, despite the prospect of lower
earnings per day, because the time rate contract requires an effort level beyond his ability.

The second strength of the piece rate scheme is that it motivates workers by providing them
a direct incentive to boost individual effort. This is readily seen from Figure 1. A tapper
seeking to maximize his weekly earnings will opt for the piece rate scheme (B) because by
tapping and collecting more than 300 kg. of latex per week he can earn more than
MYR180.00(USD58.00) per week. Scheme B, therefore, provides him with a direct
incentive to work harder or to put in more effort. A less productive or unmotivated tapper
would choose scheme A that guarantees a (safe) fixed weekly salary of MYR180.00
(USD58.00). Of course, if his collection of latex consistently falls below 300 kg. per week,
he runs the risk of being terminated from the job.

Third, even if more productive workers are attracted to a piece rate scheme, not all workers
under the scheme will have identical abilities. Nevertheless, it can be shown that under a
piece rate system, a more able worker will indeed produce more output than his less able
counterpart
iv
.

Let us assume that a rational worker will choose that level of output that will maximize his
utility. Utility is assumed to increase with the net pay that in turn, depends on output
produced. The greater the output produced, the greater will be the net pay, and the higher
will be the workers utility. A utility maximizing worker will produce until the point where
the marginal gain (revenue) from the additional unit produced (or additional effort) will just
offset the marginal cost of putting the additional effort (to produce that unit).
7

If the payment for each unit of output produced is given by w, the marginal revenue (MR)
from each unit of output will be constant and equal to w. The horizontal line labeled MR in
Figure 2 (refer Appendix) shows this.

The marginal cost of producing output (MC) is the disutility suffered in allocating time
away from other pleasurable activities to work. The MC of effort will rise as more output is
produced because more leisure is sacrificed in favour of work. Furthermore, the MC of
effort of a more able worker (MC
A
) will be lower than the MC of a less able worker (MC)
as shown in the Figure 2 (refer Appendix) .

The utility maximizing worker will choose that level of output (effort) where the MR from
the additional output is equal to the MC of producing the output. For the less able worker,
this is given by the level of output q* whereas the more able worker will produce a larger
output (q
able
).

Thus, a piece rate system not only attracts more productive workers, but also motivates the
more able among them to produce a higher output than the less able ones.

Let us now examine the time rate system. How much effort will time rate workers allocate
to their jobs? Assume that in order to earn a fixed rate of pay, a minimum level of output
(q*) is required of them. The worker will thus, be motivated to produce this minimum
output level and no more. The worker will be terminated if he does not meet this minimum,
8
but there is no additional incentive to exceed q*. Thus, under the time rate, workers,
regardless of their ability, will tend to produce similar output levels.

Fourth, piece rate contracts may simply be better contracts in a sense that they present a
mutually beneficial arrangement to workers and employers. It has an inbuilt motivation to
the former to choose their own pace of work and earnings. It is an advantage to the latter
when it obviates the need for supervision. This savings in monitoring costs can occur only
if the quality of output is unlikely to vary much and/or productivity is easily measurable.

The fifth advantage of the piece rate scheme is that it is useful for sorting productive
workers from their less productive counterparts. Figure 3(refer Appendix) illustrates this
point. The figure is drawn to show the payment schemes of two estates, X and Y. It is
assumed that estate X pays the rubber tapper the full marginal profit while estate Y pays
him only 60 percent of the marginal profit. It is clear from the figure that estate Y pays a 60
percent lower rate for every kg.of latex tapped and collected, but guarantees a minimum
amount of RM60 per week (time rate).

Any worker planning to tap and collect more than 300 kgs. of latex per week, will prefer to
work in estate X. They will be sacrificing the guaranteed minimum payment in exchange
for receiving the full marginal revenue from each additional kg. of latex collected. In
contrast, those who are less hardworking will choose to work in estate Y. Given that they
do not plan to tap and collect more than 300kg. of latex per week, estate Ys scheme would
be more attractive to them. Hence, an estate that pays the full marginal revenue attracts
9
high productivity workers while an estate that pays workers less than the full amount of the
marginal revenue runs the risk of attracting only low productivity workers.

To summarize, the piece rate system attracts the most able workers, elicits high levels of
effort from the work force, ties pay directly to performance (thus, minimizing the role of
discrimination and nepotism) and increases the firms productivity (Borjas, 1996: 406).

If so many advantages prevail, why are piece rate schemes not adopted more widely?
Several factors militate against the universal adoption of the piece rate scheme (Borjas,
1996: 402-403). One reason is that the incentive effect inherent in the scheme is of little use
when the employers production depends on team effort. Offering piece rates to one of the
workers along a production line would have little impact on his productivity since the speed
at which the line moves also depends on the productivity of all the other workers on the
line. Although it might be possible to structure compensation so as to offer a piece rate to
the entire team based on the teams output, this introduces the danger of some members of
the team free riding on the effort of others. Piece rate systems therefore, work best when
the workers own pay can be tied directly to his own productivity.

A piece rate system, by overemphasizing the quantity of output produced, may sacrifice
quality. In the typical piece rate system, there is a strong incentive to trade off quality for
quantity since payment hinges on the latter. Insisting that the workers earnings will depend
on his output meeting a well-defined quality standard, could minimize the problem. But
incorporating both quality and quantity standards in the payment formula would increase
10
the employers monitoring costs and reduce the attractiveness of the piece rate systems to
the employer.

The fact that earnings can fluctuate considerably under a piece rate system also undermines
its attraction to workers. For example, in the rubber estates, the amount of latex collected
depends on weather conditions, the age of the tree, the terrain and others. These factors,
outside the control of the tapper, can affect his earnings significantly even if there is no lack
of effort on his part. This uncertainty in earnings level is absent under the time rate mode.

A related question is: who should bear the risk of any fluctuation income? If pay is output-
based, the worker assumes the risk and a risk-averse worker will avoid working under such
an arrangement. On the other hand, under a time rate system, the firm assumes the risk and
it will attract risk-averse workers.

Lazear (1998: 119) argues that other things being equal, it is better to have the firm bear
the risk. This is because firstly, firms are generally in a better position to diversify the risk
by pooling it with other projects or by selling it to a third party through the capital market.
Apart from diversifying, firms can also conduct arbitrage to protect themselves from wild
fluctuations in output or in the prices of their input and output.

Second, workers find it more difficult to deal with the risk. Workers, particularly those with
low wages, have liabilities such as food, housing, clothing and other expenses that are
relatively fixed. Hence, any variation in their income is likely to cause significant
difficulties for them and their families. But highly paid executives or big companies have
11
substantial savings to cushion any decrease in workers wages. As a result it is generally
better to have the firm bear the risk. The problem, however, is that when the firm bears the
risk and the worker feels insured, his incentive to work is reduced. Thus, there is a trade-
off: More risk-taking by the worker means more effort and higher average compensation.
However, more risk-taking also means more variable pay. Lazear (1998) suggests that, in
general, the rule should be high productivity workers whose average compensation is high,
should bear a greater proportion of the risk than low productivity workers.

A fundamental principle missed by Lazear (1998) is that since capital keeps the profit, it
must be prepared to take the risk. After all, profit is a reward for risk-taking. On the other
hand, if capital wants to share the risk with labour, it must be prepared to share profits as
well!

Borjas (1996: 407), on the other hand, suggests that firms will have to find means to
compensate workers for the disutility caused by fluctuations earnings. This compensating
differential, however, will reduce the employers profits and fewer firms will choose to
offer piece rates.

Finally, imbedded in the piece rate system is the so-called ratchet effect (Borjas, 1996:
407). If a worker produces high output, the management may interpret this to mean that the
job was not quite as difficult as originally conceived and lower the piece rate in the next
period. This forces labour to work
harder just to keep even. The ratchet effect discourages workers from accepting piece rate
jobs.
12

The prevalence of the time rate system, despite some clear advantages offered by the piece
rate, suggests that it might be more appropriate under certain conditions. At least two
situations clearly call for a time rate.

As stated earlier, a time rate or input based pay is compensation that depends on the amount
of time or effort spent on an activity. It is independent of output considerations. Input is not
always easy to measure but firms use proxies to assess effort. The most commonly used
measure is time at work. According to Beacham (1979: 10-29), the time rate, probably the
oldest and most widespread method of remuneration, is also referred to as hourly rate, day
rate, day-work or time work. A worker undertakes to attend and perform the duties required
during a specified period in return for an agreed and specified sum of money. The scheme
operates on the assumption that the amount of time spent is positively correlated with the
effort expended.

A time rate system is more appropriate when it is expensive or difficult to measure output
(Lazear, 1998: 117-119). To illustrate, the duties of a manager are often highly varied or
repetitive and affects all subordinates in the organization. Hence, measuring his output will
be extremely difficult. For the employer, it will be more efficient and cost-effective to
ignore differences in output across managers and pay them all a fixed rate (or time rate)
salary instead.

Another factor to consider is that under the time rate, workers are less focused on quantity
and can turn their attention to quality. This argument is, however, not watertight since an
13
appropriate compensation scheme can be established in a piece rate system to strike a
desired balance between quantity and quality as well, though this will increase monitoring
costs.

V.2 Choice of Payment Systems
In an interesting paper, Baland et. al (1999: 445-461) argue that the position of the
employer in a labour market influences his choice of the system of wage payment. They
provide formal proofs
v
for the propositions 1 and 2 stated below:
1. A monopsonistic (or sole) employer of labour in a market will find it more
profitable to either hire workers under a time rate system or offer both systems of
payments (rather than relying exclusively under piece rates). If the time rate is used,
it becomes a device to extract more work from low ability workers who might have
otherwise opted for a piece rate that allows them to earn what they can get while
working at their own pace. However, offering both systems increases the profit of
the employer because he segments the market, allowing the most able and least
able workers to opt for the piece rate system while those of medium ability will be
naturally drawn to the time rate system.
2. If the employer has to compete for labour in the market, employers cannot offer
different wage rates to workers of different ability. In this situation, the piece rate is
more attractive to the employer, provided additional supervision costs are not
incurred (to ensure quality). If supervision is necessary under the time rate system,
it further reinforces the superiority of the piece rate.
14
3. Piece rate contracts may be supplementary contracts that coexist with time rate
contracts because the benefits of piece rate contracts are achieved at some cost to
the employer in terms of task quality.
4. Piece rates and time rates for the same task may coexist, especially in periods of a
slack in the demand for labour. During such periods, the time rate is rigid
downwards and cannot be brought down, leading to involuntary unemployment.
The coexistence of time rates allows the absorption of unemployed workers on
piece rate contracts. A dual labour market thus emerges where time rate
employment is rationed and piece rate work is competed for.
5. Finally, piece rates are also becoming popular as a means of avoiding statutory
regulations covering time rate workers whose employment is more formalized.
Piece rates are being used as a device to implement the casualization of labour
employment.

Apart from market structure, our earlier discussion suggests that the piece rate contract may
be made more attractive over the time rate in several situations where:
1. the cost of measuring output is low and can be done without too much error.
2. the value of the alternative wage is high in relation to the average output at the
current firm.
3. workers ability levels are heterogeneous.
4. there is the need to attract the most able workers.
5. only workers of poor ability are available because payments are made based on
acceptable results.
Of course, where these conditions are not met, the time rate will be the better alternative.
15

VI. Conclusion
The study evaluated the strengths and weaknesses of the piece and time rate systems of
payment. The piece rate system had several advantages that make it a logical choice,
particularly in agrarian settings. It attracts the more productive workers, motivates the more
able workers to produce more, ties pay directly to performance, requires minimal
supervision in some circumstances and increases the firms productivity. Time rate, on the
other hand, has persisted because it de-emphasizes quantity at the expense of quality, and is
useful in situations where output is difficult to measure, or is attributed to a particular
worker. A time rate also minimizes the risk of fluctuating incomes and is therefore,
preferred by risk-averse workers. The wage system that evolved in the estates began with a
piece rate payment and later incorporated elements of a time rate. Understanding the
theoretical underpinnings of these two systems helps us evaluate the arguments for and
against this gradual modification.










16
Footnotes
i A sample of works that comment on the wages of Indian labour in the colonial period includes Parmer,
1960; Netto, 1961; J ackson, 1961; Sandhu, 1969; Barlow, 1978; and Arasaratnam, 1979. The works of
Gamba, 1962b; Nijhar, 1976; Selvakumaran, 1994 and Ramasamy, 1994, for example, extend their attention
to the post-colonial period as well.

ii MYR is Malaysian Ringgit (Malaysian Currency) and USD is Dollar for United States of America (USA
Currrency)

iii
Of course, this can only be a short-term arrangement. If the worker consistently collects a very small
amount of latex, he will be terminated

iv The analysis that follows is based on Borjas (1996: 403-404).

v The formal proofs for the propositions, not repeated here, may be found in Baland et. al (1999: 445-461).

















17
Appendix
Figure 1
Wage Rate








The Screening Effect of Output Related Wage
Source: Lazear (1998: 100)

Figure 2


Wage Rate






The Allocation of Work Effort by Piece Rate Workers
Source: Borjas (1996:404)

0
180
(58)
300 Kgs. of latex tapped
B
A
MYR(USD)
/week
0

MYR (USD)
MC
MC
able

MR
w
q* q
able
Output

18



Figure 3

Wage Rate
[RM (USD)
/week]







The Sorting Effect of Output Related Wage
Source: Lazear (1998: 104)























0

60(20)
X
Y
300 Kg. of latex tapped

19


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