This is the tenth in this ongoing series for practical people, both Filipino and foreign who care about the country of the Philippines and would like to do something, within their own means and power, to make it a better place.
Today’s excerpt is one that ought to get a lot of attention (and maybe comments, hint hint) from both Expat and Filipino readers. Especially from the US side of the house where jobs, job security, retirement benefits and other work-related issues are in the forefront of many people’s minds these days. I haven’t discussed it with the book’s author, Attorney 
Alexander Lacson, but I’d be surprised if it isn’t one of his most contentious suggestions. The conventional wisdom on both sides of the Pacific is that higher wages and higher benefit costs are a prime reason for high unemployment figures. This may or may not be true … I’ll discuss a couple examples which may make a few people re-think the total validity of this commonly held truism, but even if “cheaper help” is not always the best path to full employment, in today’s day of tight economy, isn’t it everyone’s duty to tighten the belt and make do with less? Isn’t it every Filipino (and American’s) duty to suck it up, work for less and every patriotic employer to make sure she or he pays the absolute minimum to workers? After all, it’s nothing personal, you understand, it’s only business….
Pay Your Employees Well.
I mean how far from reality can this suggestion be? Isn’t it just wishful thinking or some sort of “do gooder” impractical thought that suggests a business can even consider paying decent or even (shudder) generous wages? It’s survival of the fittest out there … if a worker won’t work for the wages offered, s/he should take a hike and let someone else who will work for less step in, right?
And as I mentioned above, “Everyone” knows that employee costs, principally salaries, are a businesses’ biggest stumbling block on the road to make a profit, aren’t they? So if a business owner or executive pays decent salaries then she or he is headed for business disaster, or at the very least disregarding their duty to the stick holders who really own the business, right?
Well, perhaps, but I have a couple thoughts to add which may spark a different view … let’s see.
First of all, are employees really the largest expenditure a business faces? The answer to that is yes, no or maybe. It depends upon the business. If your business is something like a professional practice, say law office as an example, then it’s true that salaried workers likely make up the largest expenditure. In general, sound business dictates an employee needs to generate three times or more his/her salary to justify the position. So if you were a solo practice lawyer and you decided to hire another attorney as a salaried individual, you’d have to take the gamble that whatever you paid the new employee they would generate three times or more their salary within the first year, or your firm would be heading toward the rocks. And professionals like attorneys typically get a relatively high salary … suppose you paid the new hire $100,000 USD per anum to start .. you have no way of being sure they would generate fees of over $300,000 per year, would you.
So let’s apply the readily accepted “cheap” principle and see how low we could go. I’m not really sure what the minimum rate you could pay an attorney in salary would be, but in these troubled times let’s assume you find a lawyer who will work for $25,000 a year. “Can’t be done” you say? Well I don’t know, but let’s just play along with the example, shall we, to illustrate the point.
This new hire will only have to generate fees of say $75,000 now for the firm to break even .. easy decision, right?
Probably not. Even though very few lawyers are likely reading here, even Juan dela Cruz or Joe the Plumber knows that in all likelihood, a third-rate, last in his class barely bar qualified $25,000 lawyer likely will have trouble tying his own shoes, much less winning tough, high profile, high pay cases. If you were a smart attorney you would likely never even consider trying to find an employee at ridiculously low rates .. you’d much sooner do without until you practice justified hiring a top notch practitioner. Not many can argue with that logic, I feel.
“But Dave,” i hear you saying, “that’s a ridiculous example. lawyers, doctors, college professors, senior engineers, these are the cream of the crop and relatively few in number compared with the rest of us rank and file folks. Come back to reality, please.”
OK, I understand. You want reality? How about retail sales? That’s about the lowest common denominator type job, and very common in many respects in the US and the Philippines. Sadly I don’t have a good source for Philippine examples, but I have a wealth of business data on two nation-wide businesses most readers here are familiar with, Wal-Mart and Costco. Now overall these aren’t directly compatible because Wal-Mart has many smaller retail “small item” stores, but a division of Wal-Mart competes directly with Costco … Sam’s Club. In many ways they are almost carbon copies of each other.
One place the surely don’t copy each other is in wages and benefits. An average Sam’s Club employee (10 years on the job) makes around $40,000 a year. In Sam’s Club the same level job pays about $20,000 or less after 10 years. Costco also has a much more generous pension and benefits package.
Thus it’s easy to see Costco is on their way out, any business textbook will tell you they are committing financial suicide. How have the two fared in the past 6 months of tough sledding for business?
I don’t know for sure, I’m not a qualified financial analyst, but I’d say they;re running pretty much neck and neck, wouldn’t you?
There are a lot of reasons this might be so, but one prominent one is that Costco workers are substantially more productive than Sam’s Club employees.
The measure of our fictional lawyer’s productivity I started this discourse with was his or her ability to bring in high paying cases.
The overall measure of retail productivity is not much different. How much money does each employee account for in the profit column, or how much of the overhead that males the difference between profit and loss is chargeable to employee wages?
Each Costco work brings in 20% m,ore per work hour than a Sam’s employee and, surprisingly, Costco’s labor costs as a percentage of sales are only a little more than half of Wal-Mart’s percentage of labor costs. Hmmm, pay about twice as much, yet save 40% or 50% on actual labor costs per employee … it’s actually quite amazing, worth checking out if you employ people or are thinking of employing them. It appears that a lot of “Conventional Wisdom’ is just plain wrong.
A comic (tragic?) T-shirt that’s often seen here in the Philippines has this trite phrase printed on it “I Pretend To Work, They Pretend To Pay Me”. I’ve seen quite a few people wearing them. If you are running a business and trying to bu8ild up your country, is that a shirt you’d want your employees wearing? Food for thought.
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Philly,
There must be a point at which the amount you pay relative to the profit you make starts to trend downward. Otherwise it would have to hold true that the more you pay someone, the more profit you make, and I think recent global events have put paid to that notion.
Of ciurse there is such a point, Laurenace, I never suggested theer was not. But the expereince of the world, not just my thoughts, would suggest that a great many service industry jobs, like retail sales help, delivery drivers, etc. are paid sub-optimally. Meaning the pay has been reduced past the point of maximum motivation to perform. Costco is a great example that shows, in the real world, not the halls of academia or the back rooms of political clubs, that most US (and perhaps Filipino) retail employers have it wrong.
Money is one of many motivators of production. Up to a certain point, more wages equal more productivity, after that point each increase gives diminishing return. Hard facts show that Costco is closer to that point than is Wal-Mart. The rule being discussed is ‘Pay Your Workers Well, not irresponsibly.