Question

P AY AND P ERFORMANCE AT Y AKIMA V ALLEY O RCHARDS The state of Washington is well known for its apples. East of the Cascade Mountains, dry air and plentiful groundwater make for perfect apple-growing conditions. In 2006, the state shipped more than 92 million boxes of apples to buyers worldwide. Apple-growing is a labor-intensive process. Trees must be pruned (usually in the off-season), harvested (when apples are ripe, usually in early fall), and thinned. Apple tree thinning is done in the middle of the grow-ing season. Small, imperfect apples are removed from the tree so that the tree’s resources will be focused on the better part of the crop. Yakima Valley Orchards (YVO) is a large orchard operation in Central Washington state. The farm covers 800 acres and grows a variety of fruits including apples, cherries, and pears. Prior to 2006, YVO used hourly wages, usually around $10, to pay its tree-thinning employees. During July 2006, the firm began experiment-ing with a variety of new methods of paying employees. One such plan involved a form of piece rate. Piece-rate compensation systems offer employees a fixed payment for each unit of output they produce. YVO’s plan was to leave some of its employees on the hourly pay but shift others to a system in which pay depends on the number of trees thinned. YVO’s goal in experimenting was to find ways to boost employee productivity. According to a study by Lan Shi, it seems that this objective was been achieved. 13 Analyzing detailed informa-tion on individual-level tree-thinning productiv-ity, Shi finds that workers thinned, on average, around 80 trees per hour when paid hourly wages. After the switch to piece rates, this figure jumped around 50 percent, to 125 trees per hour. An often-stated concern about piece-rate-based compensation systems has to do with the quality of worker effort. If the firm rewards output directly, what is to stop workers from cutting corners in order to increase produc-tion? YVO solves this problem by auditing the number of apples on the ground under a thinned tree. Workers who speed their work by leaving too many apples on a tree are sent back to finish the job before being paid. Another issue with piece rates is their association with “sweatshops.” During the rapid industrialization of the United States in the late 1800s, many workers were employed in cramped, dirty, and unsafe factories, work-ing piece-rate jobs that paid barely enough for subsistence. Given this history, many people associate piece rates with worker exploitation. Changing from fixed-wage to piece-rate pay need not, however, make employees worse off. As long as the increase in worker productivity is sufficiently large, the firm will be more than happy to compensate the worker for the risk and effort costs he or she incurs by having pay tied to performance. YVO’s is experience bears this point out. As part of the farm’s experiment, one group of workers was kept on hourly wages, while the other was put on piece rates. The “hourly” group was not told about the piece-rate experiment. The two worker groups set out from different ends of the orchard, meet-ing near the middle at lunchtime. Upon hearing about the piece-rate system, some hourly work-ers asked to be put on piece rates. These workers were told about the experiment and were informed that all workers would be on piece rates soon. A final issue with piece rates has to do with setting the rate itself. Before implement-ing the plan, the firm did not know how much the piece rate would increase worker produc-tivity. If the firm sets a low piece rate and worker productivity does not improve much, then it is possible that overall worker pay may fall as a result of the change. This would likely lead to costly employee turnover. If the firm sets a high piece rate and productivity rises a lot, then overall pay may rise “too much.” This latter possibility seems to have occurred at YVO. Productivity increased so much that average hourly wages—computed as the per-tree piece rate times the average number of trees thinned per hour—rose to nearly $18, an 80 percent raise for each worker. A firm that guesses wrong on imple-menting a piece rate may then face worker resistance if it tries to reduce piece rates

• Give a brief synopsis of the example.
• Demonstrate how this example can be applied to another business situation not mentioned in the text

Answer 1

The issue is regarding change of compensation policies in order to improve productivity. In a apple orchard, the hourly compensation for the job of apple tree thinner was changed to per piece rate for a group of employees, to observe and analyse the effects of the policy. It also put in place a system of auditing of work to ensure that the workers were not hurrying up their work to earn more. Company observed a huge improvement in the productivity, and was in a fix as to how much should be the rate of per piece. If it kept it as before, it would have ended up paying almost double the compensation, and if it reduced the hourly rate, it would have faced worker resistance for this action.

Similar example can be employed where the company's profitability depends on the number of units produced per unit time. An example is a handmade painting industry of India where each painting which describes life events of the Indian deities is painstakingly produced by master painters. One unit might take days or sometimes weeks depending on the complexity and fineness of workmanship. If the worker is paid hourly wages, he might put the speed of work on lesser priority than the quality of work (which also is equally important factor, as it will decide how well the piece is received among the buyers). If he is paid on piece basis, he would like to hurry the work up to produce maximum pieces per unit time to earn more. For maximisation of profitability, the wages should be on a piece rate based, and should be rational and decent enough to keep the worker motivated in the work and at the same time enable him to do justice with the quality of the job, so as to produce a high number of good quality pieces. Striking a fine balance between the two is a key to competitiveness.