How much do you pay your workers? Do you think you pay too much? Or do you pay according to what you can afford? Do you pay what is average in your sector? Do you pay by a monthly salary or individual incentive pay scheme? Do you cut down on wages when the company is going through a difficult time? These are issues that you as the business owner or manager must take decisions on and cannot afford to delegate to others. Pay matters are very important indeed. Today we will look into some issues related to pay, that matter to the success of your company.
Let us have a look at two similar companies, which operate in the same sector, furniture for instance. Company A has 100 workers, with a salary of Birr 5000 per month. Company B also has 100 workers and pays them 6000 Birr per month. Company B’s productivity is 25% higher than company A. Secondary benefits are the same for both companies. Which company will have higher labour costs, company A or B? It is tempting to conclude that company B’s labour costs are higher but is that really so? While company A produces 1000 chairs per month, company B produces 1250 chairs. In relation to the labour rates, the chair costs 500 Birr each for company A and 480 Birr for company B. With a selling price of 800 Birr per chair, the return for company A will be 300,000 Birr, while company B will earn 400,000 Birr. Taking away overhead and other production costs of say 200,000 Birr, the profit for company A will be 100,000 Birr and for company B it will be 200,000 Birr. In other words, with a 20% higher pay and 25% higher production, company B makes double the profit than company A. It could even afford to pay its workers still more. Paying workers less may cost the company instead.
Suppose your company is struggling and your profits are going down. You need to take measures. You decide to let your production manager go. After all he is expensive with a salary of 25,000 Birr per month, and you replace him with a younger and cheaper production manager at 10,000 Birr per month. You expect that your costs will go down, but the opposite may happen instead, because the new production manager is less experienced, slower, and less capable. The paradox is that as a result your costs have increased by cutting on salary costs! So don’t confuse wages with production costs and realise that the wages may not represent that much a portion of your total production costs, as you may think. Check your accounts and analyse your figures.
It is often thought that low wages present a competitive advantage. One reason why foreign companies invest in countries like Ethiopia, is that the labour rates are relatively low. Cutting down on wages is tempting but there are more effective ways to compete, like quality, service, delivery, and innovation. In reality, low labour rates are an ineffective way to compete.
Another misunderstanding is that individual pay schemes, based on performance are the most effective way to motivate workers to be more productive. While this is certainly so for certain jobs, individual pay schemes may negatively affect teamwork. So, where you want people to work together, such payment schemes may result in the opposite. With individual pay schemes there is also the danger of fraud with workers carrying out services that are not really necessary to boost their production figures. Salespeople may become aggressive in their approach to customers, eager to boost their sales, chasing them away instead. Individual pay schemes absorb a considerable amount of management time and resources. They certainly have their value and place, but management needs to carefully consider the purpose and kind of jobs it will be used for. Group or team-oriented pay can be effective instead, resulting in cooperation among workers and peer pressure to perform.
In conclusion I suggest that managers who are trying to improve performance of their workers or who want to solve organizational problems by using pay as the only tool will get disappointed by the result. Not much may happen while in fact they will spend a lot of money instead.
People want more than money alone for their work. They seek an enjoyable work environment, also in Ethiopia. Workers will look for another job if that is not what they find in your company. Many business owners and managers think too much about wages, when other management tools work just as well, or even better.
Finally, be careful in recruitment. If somebody joins your company for money alone, he will also leave for money. It is therefore important to retain workers by making sure they like the work, the people, and the way the company is managed. Not the money, which every company can offer. Emphasizing pay as the primary reward encourages people to come and to stay for the wrong reasons. Make sure that workers are not stuck into working in a company where they don’t want to be simply for the money. Make sure also that the messages sent by the way you pay workers are intended. For example, talking about teamwork and cooperation and then not having a group-based component in the pay system but individual pay schemes instead is contradictory and indicates what the company believes is really important.
Ton Haverkort
