(11) Systematic Management: Wage Systems
- Jon Smart
- Apr 22
- 14 min read
This is the 11th blog post in the Organising for Outcomes series. It is helpful to understand where we’ve come from, how today’s ways of working have evolved, and the context that those ways of working evolved in. This helps us to understand why we’re working the way we’re working and what we might want to change in today’s context, which is significantly different compared to previous technology-led revolutions.
In the previous post we took a closer look at the second of three key systems that were developed as part of Systematic Management: Production Control. Many of the management innovations introduced in the time period from 1870 to 1900 are still in use today, sub-optimally, in a very different context.
In this post we'll take a deeper dive into the last one of three key systems that were developed as part of Systematic Management: Wage Systems.
Wage systems. Incentivising more for less.
In the early 20th century, three management levers came to the forefront.
Cost Accounting improved accuracy and timeliness of costs, so that pricing and profitability was less of a wild shot in the dark. Production Control aimed to increase efficiency by orchestrating workflow across the factory.
A third area of focus during this time period was Wage Systems: how to incentivise workers to increase output. Against a backdrop of falling prices, rising wages, and expanding markets via railroads, the priority was getting more from labour. The chosen lever? Financial incentives—often to the exclusion of everything else.
In this time period there is very little in the writing about working conditions, training, development, environment, engagement, satisfaction, culture or safety. In Pittsburgh alone, the year ending June 1907 saw 526 workplace deaths and 509 serious injuries—treated as collateral in the pursuit of productivity.
Taylor writes the following in his 1895 paper ‘A Piece Rate System’:
“the fundamental aim [of workers] is the universal desire to receive the largest possible wages for their time; And on the part of employers, the desire to receive the largest possible return for the wages paid”
Day work soldiering
Employers sought to maximise sustainable output. Workers on day rates, however, were incentivised to do as little as possible while still collecting a full day's pay—a behaviour known as soldiering.
Incentives were not aligned. Soldiering is understandable behavior. With no link between effort and reward, exerting more energy yielded no benefit—only greater fatigue. Worse, those who did work harder faced social consequences. Peers, seeking to protect the collective status quo, often enforced underperformance through intimidation and, at times, violence.
The result: a systemic misalignment of incentives and a culture of minimal viable effort.
Taylor, who had a unique perspective, coming from a privileged background, turning down Harvard and starting out as an apprentice and machinist, writes:
“The writer saw workmen carefully nursing their jobs by the hour and doing next to nothing to avoid making a record, and he was even more forcibly convinced of the necessity for change while he was still working as a machinist by being ordered by the other men to slow down to half speed under penalty of being thrown over the fence.”
“It becomes the workman’s interest to go just as slowly as possible and still convince his foreman that he is working well. 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.”
Piece work
To counter soldiering under day rates, many employers turned to piece work—paying by output rather than time. The financial incentive was now clear: work harder, faster, smarter, to increase the quantity of pieces that you are being paid for. In some cases, output and wages doubled.
Whilst fixed overhead costs can be spread over increased output, there was however a diminishing incentive for the employer. As output increased, with labour being a major cost, the cost per product did not materially reduce and the wage bill rose in a linear manner. Twice the output, for almost twice the cost. When workers began earning more than market norms—or more than their peers at competing firms—management responded by cutting piece rates.
The message was received. Workers quickly realised that exceeding expectations triggered rate reductions. The result: piece work soldiering—just enough output to increase earnings, but not enough to provoke a cut. A management vs worker standoff was created.
Everyone in a role who had their piece rate cut had a grievance. There was an incentive to pay subscriptions to unions, to negotiate on workers behalf with management. Strikes and unrest were common when factories introduced piece work.
James O’Connell, president of the International Association of Machinists, wrote in the June 1900 edition of Engineering Magazine:
“I know of no more discordant or unpopular note to strike in the whole gamut of economics than that of piecework. Cover it up as you please, call it what you will, if you introduce the subject at any meeting of workingmen it has the same effect that a red flag is popularly supposed to have upon a mad bull.”
Profit Sharing
In profit sharing schemes, an employer would offer an additional reward, on top of the existing wage system, based on the profitability of the company. The employer would determine the percentage and how it was distributed. It was positioned as a solution to industrial conflict, by aligning worker and employer interests.
However, the time to a positive financial reward, if any, was long at one year, there was little correlation to individual effort, profitability could be affected positively or negatively by many factors out of the control of the workers, payment was at the employer’s discretion and there was a lack of transparency.
Premium Work
Premium work wage systems were another attempt at aligning the incentives of workers and management. Premium work is a combination of day and piece work. Both time and output are taken into account, resulting in a premium over a benchmark, with a guarantee of the day rate if the benchmark is not met. Typically the savings resulting from increasing output were split between the employer and the employee, often 50:50.
For example, a worker would be given a standard time to complete a task based on prior measurement and estimation. If the worker took that time or longer, they received their normal day rate. If they finished in less time, they were paid a premium, usually a percentage of the time saved or a bonus amount.
Let’s take a closer look at the evolution of wage systems as part of Systematic Management:
1889, Henry R. Towne, ‘Gain Sharing’: Departmental Premium Work
In May 1889, at the ASME meeting in Erie, Pennsylvania, Henry Towne—President of ASME and co-founder of Yale & Towne—introduced a novel approach: Gain Sharing.
Unlike profit sharing, Towne’s model guaranteed base wages (whether day or piece work) and rewarded employees with a share of department-level cost savings. Of every $100 saved from one period to the next, $50 stayed with the company; the remaining $50 was distributed pro-rata to employees based on wages earned.
The system ran for two years across 300 employees and, in Towne’s word the approach ‘is demonstrated to be practical and beneficial’, delivering an average 5% bonus on top of regular pay.
Key to its operation was monthly tracking against a benchmark drawn from the prior six months, with payouts made annually. A clear implication is that this wage system relied on the existence of a robust cost accounting system, to be able to determine the previous and current costs.
Regarding visualising savings, as a feedback loop and incentive, Towne writes:
“It has been found very beneficial, to have posted in each department where the gain-sharing system is in force, a suitable blank, on which can be entered each month the net results of the system during the preceding month, and including 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.”
There was a direct financial incentive for workers to reduce the cost of goods, by improving efficiency and increasing output, with a guarantee of a daily wage.
Improvement was optional. Towne reports that this was initially met with scepticism, until dividends proved real and improvement was incentivised.
But challenges surfaced. Not all workers contributed equally to the gains, making it hard to distribute rewards fairly. Rewards were shared by department, not by contribution, dampening motivation for high performers.
Without clear benchmarks or quality safeguards, short-term output sometimes came at the cost of long-term performance. In addition, there were disagreements between management and workers over how gains were calculated and distributed. In some cases, skilled workers benefited disproportionately leading to resentment among less skilled employees. During downturns, payouts of calculated savings disappeared, undermining confidence in the system.
1891 Halsey ‘Premium Plan’: Individual Premium Work
In Halsey’s paper, presented at the June 1891 ASME meeting in Providence, he describes a financial incentive scheme where a premium is paid based on time saved:
“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”
In the discussion after the presentation of the paper, William Kent, General Manager of the Springer Torsion Balance Company comments on his experiences of implementing Halsey’s incentive system:
“Mr. Halsey some three or four years ago proposed to me this premium plan, and I fortunately was then in a position to put it in practice at once, and it has been in use in the shops of the Springer Torsion Balance Company now for three years, with satisfaction to both employer and employed. I heartily endorse the plan as admirable in every respect.
This plan may result finally in the piece-work plan pure and simple. Whenever experience has gone so far that you cannot improve the method of manufacture, and the workman has got into a rut, then the amount which he gets under the premium plan will be a certain amount per piece. You might just as well in that case pay him by the piece; but as long as there is any chance of improvement, and men have not reached the utmost limit of their skill or inventive powers. so long will the premium plan be a good incentive to the workmen.”
Unlike Towne’s department-level model, Halsey’s Premium Plan incentivised individuals to work faster, with direct personal rewards. But the model hit limits. As Kent observed, experimenting on radical innovation, such as new machines, jigs, machining speeds, metal, this reaches a plateau, effectively setting a new normal piece rate. There was little incentive to trade short-term output for long-term step-change. Like Gain Sharing, quality wasn't accounted for, risking lower quality being an unintended consequence.
Henry Gantt, creator of the Gantt chart and Fredrick Taylor’s first apprentice asked a pertinent and leading question in the subsequent discussion in the ASME meeting:
“What is a day’s work?”
Halsey had described the benchmark as ‘being determined from previous experience’. However it was still educated guesswork, still ‘Rule of Thumb’, the opinion of the foreman or the superintendent and it was at the job level, not at the atomic task level.
Halsey’s Premium Plan with its focus on the individual was getting closer to Scientific Management.
1895 Taylor ‘A Piece Rate System’: Individual Differential Piece Rate Work
Four years later, at the June 1895 meeting of ASME in Detroit, Frederick Taylor, presented his first paper. In the paper Taylor presented his differential piece rate system as an incentive for workers to maximise output and to prevent soldiering.
“The differential rate system of piece-work consists 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 incentive system was per individual, with a standard ‘scientifically’ measured benchmark of time using a stopwatch and it included quality as a criteria for pay.
But unlike earlier models, there was no guaranteed day’s pay. Fall short of the rate-fixer’s standard, and you earned less than before. The promise of reward came with the threat of loss, a stick and a stick, as many workers saw it. There was little autonomy in this incentive system. In Towne’s or Halsey’s models, workers could choose to work faster and be rewarded for it, or not, and still receive a daily wage. Here, maintaining pay meant matching a pace set by someone else, often achievable only by “first class men.” Choice and control were replaced by compliance. Taylor writes:
“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 inaccurate, while at the same time it discourages and sifts out men who are incurably lazy or inferior.”
“Each workman should be called upon to turn out the maximum work which a first-rate man of his class can do and thrive under.”
Crucially, underpinning this incentive system was ‘elementary rate fixing’. This was the answer to Gantt’s question of ‘What is a day’s work?’ at the ASME meeting four years earlier.
“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 establishment may be analyzed or divided. These elementary 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.”
Here we see the introduction of Time Study, which marked a shift to micro-measurement with every motion timed, task by task, with a stopwatch.The rate-fixer would measure the time of what was considered the essential tasks, leaving out what was considered wasteful tasks. Taylor distrusted observed averages, believing workers padded time, especially when being watched.
An allowance of 40% was then added for interruptions, technical difficulties and unknowns. But despite its scientific label, the system relied heavily on judgement calls: what to time, what to exclude, how much margin to add. Decisions sat with the Planning Department, not the people doing the work. Ironically, Taylor’s method still leaned on Rule of Thumb—just with a stopwatch in hand.
“The system of differential rates was first applied by the writer to a part of the work in the machine shop of the Midvale Steel Company, in 1884. It was gradually applied to a great part of the work of the establishment, with the result, in combination with the rate fixing department, of doubling and in many cases trebling the output, and at the same time increasing instead of diminishing the accuracy of the work.”
Autonomy reduced further for foremen and workers. The centralised rate-fixers in the rate-fixing department determined exactly the atomic tasks that made up jobs and the exact time to take, to the second. People became even more of a cog in the machine.
Many workers saw it as exploitative, leading to resistance and dismissal. At Watertown Arsenal, Massachusetts in 1911, the application of Taylor’s system led to a walk out by the Foundry workers. This in turn led to a US Congressional Hearing in 1912, resulting in the banning of scientific management in US government arsenals and navy yards, as per the Naval Appropriations Act of 1915. This act banned time and motion studies being used to set wage rates, prohibited the use of stopwatches to time workers and prevented the payment of “any premium or bonus or cash reward to any employee in addition to his regular wages, except for suggestions resulting in improvements or economy in the operation of any Government plant”. This however did not stop the spread of these practices in private industry.
1901 Gantt ‘A Bonus System of Rewarding Labor’: Individual Premium Work
Six years after Taylor’s Differential Piece Rate paper, Henry Gantt presented his ‘task and bonus’ paper at the December 1901 ASME meeting in New York.
The paper outlined an approach that Gantt had recently put into place at Bethlehem Steel Mill where he was working with Taylor at the time:
“If the man follows his instructions, and accomplishes all the work laid out for him, as constituting his proper task for the day, he is paid a definite bonus in addition to the day rate which he always gets. If, however, at the end of the day, he has failed to accomplish all of the work laid out, he does not get his bonus, but simply his day rate.
If we allow the men their day rate and offer them a bonus or premium for doing the work in accordance with our instruction cards they see at once that they have nothing to lose by confirming to our wishes, and all to gain.
When this payment of a bonus went into effect, the amount of time wasted diminished very rapidly, and soon a majority of the men on the machines were earning their bonuses regularly. In order to be sure that they got all the assistance possible from the foreman, he, too, received a definite premium for each machine under his charge that made its bonus, and in order that the poorer men might receive sufficient instruction from the foreman, it was made to his interest to give them special attention.”
Gantt takes a more empathetic approach to incentivising workers than Taylor. In Gantt’s task and bonus system, workers are invited to meet the timings given to them in the instruction cards in order to earn a bonus. This is voluntary, if workers want to still work slowly or inefficiently they can choose to do so, receiving their usual day’s pay.
For each worker that made their bonus, Gantt also incentivised and rewarded their foreman. This incentivised the foreman to support their workers, to help less experienced workers. An increase in output of 200% to 300% was reported, with a reduction in accidents and workers who learnt to solve problems for themselves rather than wasting time hunting down the foreman to repeatedly ask the same questions.
Gantt acknowledges that the instruction cards do not represent the absolutely best possible method, but rather the best method known with the present state of knowledge and they can be and will be changed as knowledge changes, always intending to be “within the ability of a good man to reach”.
Wage Systems: Why we work the way we do today
The way we work today in the Age of Digital, with mostly unique unknowable work, is deeply influenced by the historical evolution of wage systems in an entirely different context in the Age of Steel and Heavy Engineering.
Wage systems evolved as a financial incentive, or more often a financial threat, to maximise human output in a factory setting, with increasing role specialisation matching the sequential building of physical products, with a high cost of rework, in the context of mostly repetitive, knowable, manual labour in loud, hot, smelly, dangerous environments.
The approach to incentivising increased output included a reduction in autonomy for workers and foremen with the introduction of the centralised Rate Fixing Department issuing instructions, a behavioural norm of order-giver and order-taker, and increasingly treating people as cogs in the machine with “brain work removed from the shop” to quote Taylor.
Three aspects emerge to explain why we work the way we do today, with respect to the Wage Systems which evolved between 1870 and 1900:
Incentivising output over outcomes - The focus is still on output (features) rather than outcomes (value). Even organisations who have adopted more progressive, modern, ways of working, still find themselves incentivising output, or worse, activity, by milestones in a predetermined plan.
Order giver, order taker behavioural norms - The order-giver and order-taker, autocratic approach is still alive and kicking in organisations today, in the context of work that would benefit from an emergent approach, with empowered, autonomous multidisciplinary teams experimenting on outcome hypotheses, using collective brains to align, act, reflect and adapt, within minimal viable guardrails and clear decision making rights, rather than follow predetermined, handed down orders, or needing run decisions up the flagpole every time.
Financial over intrinsic incentives - To this day, when using the word incentives in the context of work, the vast majority of people assume that it is referring to financial incentives. “When you say incentives here, people will immediately assume that you mean financial incentives. In fact, we need to use another word for non-financial incentives, it’s so engrained.” is a common response. There are a great many non-financial incentives that motivate people, including for example autonomy, purpose, mastery (Dan Pink), belonging, making a difference, liking co-workers, working in a safe environment and so on.
In the next post, we'll take a look at the evolution of centralisation, increased specialisation and improved data feedback loops, to understand why we work the way we do today and what we can relearn from the past.
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