Safelite Glass Corporation is the largest installer of automobile glass in the U.S. During 1994 and 1995, glass installers were shifted from an hourly wage schedule to a piece rate schedule. On average intallers were paid about $20 per unit installed. At the time that the piece rates were instituted, the workers were also given a guarantee of approximately $11 per hour. If their weekly pay came out to be less than the guarantee, they would be paid the guaranteed amount.
The new system was instituted because management believe that productivity was below what it should have been. Productivity could have been raised by requiring a higher minimum level of output under a time-rate system, coupled with a wage increase. However, since workers have different preferences, such a change might not be acceptable to all workers and might induce massive turnover. The firm therefore adopted a piece rate system, which allowed those who wanted to work more to earn more, but also allowed those who would accept lower pay to put forth less effort.
The output measured used is units-per-worker-per-day. Upon the change from time-rate to piece-rate,
The following table shows more detailed regression results for log output:
(1) (2) (3) (4) (5) ________________________________________________________________ PPP dummy 0.368 0.197 0.313 0.202 0.309 tenure 0.343 0.224 0.424 time since PPP 0.107 0.273 0.130 new regime 0.243 worker fixed effect no yes no yes no time fixed effect yes yes yes yes yes
The worker fixed effects estimated from the regressions above are indicators of worker ability. Lazear finds that the median level of fixed effect for those who leave no later than two months after the start of the piece rate system (the leavers) is 0.15. The median level of fixed effect for those who stay beyond the initial two months (the stayers) is 0.22.
The log of pay-per-worker went up by 0.099, implying a 10.6 percent increase in compensation following the introduction of pay for performance. This is under half the increase in per-worker productivity. 92 percent of workers experienced a pay increase.
Piecework requires measurement of output. In Safelite's case, the measurement comes about through a sophisticated information system. This system was initially put in place for reasons having to do with inventory control and reduced installation lags. The economies of scope in information technology, coupled with the labor productivity gains, are probably large enough to cover whatever additional cost of monitoring was involved.
One defect of paying piece rates is that quality may suffer. In the Safelite case, most quality problems show up rather quickly in the form of broken windshields. Since the guilty worker can be easily identified, there is one easy solution: the installer is required to reinstall the windshield on his own time and must pay the company for replacement glass. Safelite tried to rely on peer pressure initially, assigning the replacement job randomly to a worker in the same workgroup. Subsequently, the system was changed to assign re-do work to the worker who was responsible. Workers are not charged the replacement cost of glass. Customer satisfaction went up after the introduction of PPP.