Sharing prosperity with employees
The economist Arthur Pigou explained in his seminal “The Economics of Welfare” that in a competitive market, workers would be paid an amount equivalent to their marginal contribution to production. However, when market conditions deviate from perfect competition, workers could be exploited by being paid less than this amount, leading to an inequitable distribution of income and potential market failures that could justify government intervention.
A World Bank study on the Philippines showed that while the country’s gross domestic product (GDP) and labor productivity have been steadily increasing, the level of real wages for workers has remained flat through the years. This indicated that the fruits of productivity were not being shared fairly with workers. This is a textbook case of systemic worker exploitation, as Pigou explained. Not surprisingly, other studies have shown that our country also has one of the slowest rates of growth in the middle class and the slowest rate of poverty reduction, too.
The same World Bank study revealed that the situation in our neighboring countries has been quite different. The real wages of workers in Indonesia, Malaysia, Thailand and even Vietnam have been growing through the years. As a result, the proportion of the middle class among our neighbors has been growing as well, indicating a healthy level of shared prosperity. Vietnam surpassed the Philippines in GDP per capita in 2020, making us drop to sixth place in Southeast Asia— even further from our status as the largest economy in the region after World War 2.
This alarming trend needs to change. In 2020, the Management Association of the Philippines (MAP), together with two dozen business associations, launched the Covenant for Shared Prosperity. The Covenant invites Philippine business leaders to manage in ways that benefit the various stakeholders of the business, in addition to producing profits for the shareholders.
The recent bills filed to hike the minimum wage by P100 to as much as P350 have spurred the usual debates among labor and business groups. Labor groups argue that the hikes are necessary given the inflation that has been ravaging the working class. The business leaders counter that businesses cannot afford the hikes and could even force them to let more people go or close down entirely. As with any complex issue, there is truth in each side of the argument.
MAP’s Covenant aims to address the persistent inequality and poverty in the country through the promotion of more inclusive business practices. This is not a new thing, of course. The Constitution calls on all economic entities, including corporations and all types of businesses, to contribute to the common good and the vision of the country for an improved quality of life for all. The Securities and Exchange Commission’s Code of Corporate Governance also states that the “corporation should be socially responsible to all its stakeholders and contribute to their balanced development.”
4 strategies: The holistic approach
A major commitment of the Covenant is to employees. Businesses should hire fairly and provide just compensation, development opportunities, and work-life harmony to workers. The matter of just compensation is particularly important given the findings of the World Bank.
Businesses can implement a Shared Prosperity business model for workers through several interconnected strategies.
The first strategy is to build a career path for the lowest workers to earn a family living wage. The family living wage is the income required by a worker to live a decent life supporting a family of five members. According to the Ibon Foundation, the family living wage in the National Capital Region as of February is P1,198 per day or P26,049 a month. The minimum wage is barely half this amount. Global companies such as Unilever, L’Oreal, IKEA and Patagonia have all committed to paying living wages.
The second strategy is to provide productivity-based pay using the “two-tiered wage system” (TTWS) promoted by the Department of Labor and Employment (Dole). Under the TTWS, the first tier shall be the regional minimum wage rates established by the wage orders of the Regional Tripartite Wages and Productivity Board. Since the minimum wage aims to protect vulnerable workers, the wage boards consider the poverty threshold, average wages and socioeconomic indicators when setting it.
The second tier, on the other hand, consists of productivity bonuses and incentives as agreed between workers and management. Early this year, Dole recognized Nickel Asia Corp. for its implementation of the two-tiered wage system. The management agreed with its labor unions to provide performance-driven increases based on measures of employee contributions to annual group objectives, attendance and compliance with safety, environment and company policies.
The third strategy is to provide continuous training and development to workers combined with humanistic supervision to ensure productivity, engagement and retention. During these times of fast-developing digital and artificial intelligence technologies, workers must be capacitated to use the most productive methods and tools to produce greater value for the customers of the business. Of course, business leaders should take care in using such technologies not merely to be more efficient since this can lead to harmful loss of jobs for workers. Instead, these technologies should be used to innovate market-creating processes. These are processes needed to convert complicated and expensive services into simpler and more affordable ones so that many more people can access them.
The fourth strategy is to minimize pay inequality in the business by monitoring the ratio of CEO pay to average employee pay. Peter Drucker, noted management guru and author, recommended that this ratio should not exceed 20:1. The Global Financial Crisis of 2008 was partly caused by excessive compensation to executives, prompting the United States and the United Kingdom to enact laws requiring the disclosure of the CEO pay ratio by publicly listed companies. The Global Reporting Initiative, the leading sustainability reporting standard in the world, also recommends the disclosure of this ratio. Research has shown that fairness in pay helps to improve employee motivation, loyalty and productivity.
These strategies represent a holistic approach to achieving Shared Prosperity for employees and underscore the crucial role businesses play in national development.