Monday, June 16, 2014

Using Variable Compensation to Promote High Performance and Inclusive Growth in the Philippines

Disclosure: I'm an entrepreneur. I have employees, therefore across the board wage increases has direct impact on my fixed cost just like other businesses. But I believe in the value of gain sharing.

There is always a demand for higher wages. Whenever a wage order is passed, the recipients complain that it's not enough. Despite it not being enough, the impact on companies that cannot afford it is tremendous. Some close down, others decide to break the law by not paying the new minimum wage. This means that people lose their jobs or are shortchanged.  Another bad effect is, it doesn't drive performance. It doesn't make people want to work better.

The impact of across the board wage increase affects the workers themselves in a negative way. Whatever salary increases they get are cancelled out by increased cost of goods because employers want to recoup the increased expense! Thus, the vicious cycle continues. Add to that the fact that across the board salary increase at least the way it is given now do not impact on employee motivation and performance. It just produces more unemployed people and unhappy underpaid employees.

In the midst of all these who become losers? The workers. The employers calculate their target profit based on how much they invest. Bigger investment means bigger profit targets. You look at most large companies who pay minimum wage, you'll see that they achieve their profit targets and are some of the most profitable companies and wealthiest individuals in the country.

I believe that there is another way of compensating employees in a way that promote sense of ownership and higher performance.  That is through introduction of meaningful systems that handsomely reward contribution to productivity, cost effectiveness, customer happiness and profit. The beauty of such as system is variable nature of the pay. You only give employees the additional financial compensation if they meet or exceed certain performance targets. By committing certain percentage of company profit to giving back to employees and with effective communications, I expect better partnership between management and employees to develop.

I know that this is easier said thaN done but I believe a serious conversation among those who can make this happen should begin. I'm talking about management and labor sector and the legislators.

We need to change tact. We need  a better way of pursuing inclusive growth for the Filipino People if that is the goal.  I enjoin the labor sector to look into this and campaign for it.  I'm talking about variable compensation based on productivity and profitability.  I already wrote about it during the last election here. A wealthy company shouldn't just have wealthy employers, they should have happy and wealthy workers as well.

1 comment:

Guillermo Rogerson said...

"Whatever salary increases they get are cancelled out by increased cost of goods because employers want to recoup the increased expense..." - It does seem like an endless cycle, doesn't it? I do understand your point of view. From an entrepreneur's perspective, it does get challenging when new wage order is released. But it wouldn't be fair and just to deprive employees of their rights to a better salary and compensation. The government should always look into how both employers and employees can benefit from new payroll legislation. One thing I can recommend for now is for entrepreneurs to include themselves in the payroll, so that they wouldn't be earning from the ROI alone. A lot of business owners do this to keep their company's finances in good circulation. Using payroll solutions also does the trick in giving proper compensation to employees. Great post, by the way.

Guillermo Rogerson

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