Productivity-based Compensation and Globalization

Prof. Jorge V. Sibal1

The objectives of this study are to identify and explain:

1. the productivity-based compensation arrangements that have evolved in the

Philippines as globalization intensified which may not have substantially
contributed to industrial development; and
2. how these mechanisms may contribute to equity, efficiency, macro-economic
stability and proper allocation of labor in the labor market.

Productivity-based compensation arrangement and decent work are important

ingredients of industrial development in the era of globalization. This is the right path
towards a people-centered development strategy through competitiveness, increased
productivity and empowered workforce.

Studies of UNDP, ILO and ADB show a different trend. Globalization in Asia,
the world’s fastest developing region, revealed a “jobless growth” performance that is
high in productivity but low in equity 2. Instead of a race to the top workers’
compensation, what is happening is a race to the bottom competition. This is especially
true in the Philippines.

Compensation means all forms of financial returns and tangible services and
benefits employees receive as part of an employment relations (Milkovich and Newman,
2002). It is used interchangeably as pay and applies to all types of workers, whether
employed or self employed, and those in the formal and informal sector. Unpaid family
workers and own account workers in the informal sector are compensated in terms of
tangible services and benefits in doing work.

The components of compensation include: monetary rewards (or pay); non-

monetary rewards (or employee ‘fringe’ benefits); and psychological rewards.

Components of Compensation

Monetary rewards includes base pay, supplemental pay like overtime premium
and night shift differential, cost of living allowances, seniority pay, merit pay, incentives
pay and knowledge or skill-based pay.

1
Paper presented Research Workshop on “Enhancing Labor-Management Cooperation Toward Improved
Productivity, Competitiveness and Workers’ Welfare: Philippine Development Model Phase 2”, Dec. 13,
2006, sponsored by DLSU AKI for Economic and Business Studies, Orchid Garden Suites, Manila.
2
The result is an increased inequality between urban and rural income, and skilled and unskilled workers.
There was marked increase in flexibilization and informalization of production and employment
relationship (UNDP Asia-Pacific Human Development Report 2006, ILO, 2002).

1
 Non-monetary rewards (or employee ‘fringe’ benefits) include: leaves (vacation
or service incentives, holiday, sick, maternity/paternity, solo parents and other leaves);
insurances (life, health, hospitalization unemployment and disability); retirement and
savings/pension plans; legally required benefits like social security, medical care,
disability, unemployment insurance, etc.; and performance-based benefits like bonuses,
profit sharing and other forms of gain-sharing rewards.

Psychological rewards include recognition, status, employment security, work

challenge and learning opportunities.

Rationale for Variable Compensation System

Globalization broke the assembly line production system into decentralized

offshore operations as a result of electronic based machines and internet communications
technologies, and wide wage differentials between the developed and less developed
economies. There has now been a rapid shift to variable compensation system and
outsourcing as means to survival and growth.

Variable pay or productivity-based compensation refers to compensation other

than base wages or salaries that fluctuate in accordance with the employees’ attainment
of some standard work output. These outputs are measured in terms of a pre-established
formula, individual or group goals, contract or company earnings.

There are three forms of productivity-based compensation arrangements.

1. Time rate compensation system that incorporate merit-based incentives or

benefits adjustments, overtime pay, commissions, night shift differentials, tips and other
service charges, and payment in kinds.
2. Payment-by-result like piece rate work, productivity bonuses, stock-option
benefits, work-improvement incentives, etc. Payment-by-result is either individualized or
group-based.
3. Franchising and joint venture arrangements for self-employed and own-
account workers.

Wage is determined by the supply and demand, as well as the quality of labor. If the
determination of wages is left alone solely to employers and workers, the result would tilt
more in favor of the employers. The workers and their movement will likely be
radicalized.

This justifies state intervention in wage determination which includes:

1. minimum wage fixing

2. collective negotiations with unions
3. safety nets and consumer subsidies
4. third party arbitration
5. Regulation of both internal and external labor mobility

2
 According to Srivas de Silva of the ILO, the four objectives of compensation
administration are:

1. Equity- to narrow income inequity by protecting the purchasing power and

real wages of the workers.
2. Efficiency- to link cost and reward of labor to productivity to allow employers
reasonable profits for growth and expansion.
3. Macro-economic stability- to attain a balanced and sustainable economic
development through high employment and low inflation.
4. Proper allocation of labor in the labor market- to administer internal and
external labor migration.

Implications to the Philippines

During the 1950s, Japan’s industrial program featured “reverse engineering” by

replicating American and western technologies. The Philippines adopted the same ISI
strategies and was second to Japan in industrialization and economic growth. After 50
years however, “we are not only lagging behind, we are almost dead last in the [ASEAN]
region” (Lucio Tan, 2006).

The Philippines did not fail miserably considering that it has grown moderately
within the world’s fastest growing region. Despite its educated and creative people and
natural resource endowment, the country continues its hit-and-miss methods in
attempting to become the next tiger economy.

The country’s policy on compensation institutionalized labor and social standards

that are equal or better than those of other Asian countries. It offers protection and decent
work for workers in the formal sector. This has attracted investments in high technology
production and services operations. New jobs for wage workers especially in the various
industrial zones (EPZs) were created, in addition to new technologies transferred and
adapted.

Industries shifted to capital intensive operations which resulted to ‘jobless

growth’ both in agriculture and manufacturing. Faced with lower tariffs on imported
goods, domestic producers especially the small and medium enterprises are handicapped
with high power cost, inadequate infrastructure, government red tapes and corruption,
and shaky peace and order situation.

Many manufacturing and agricultural enterprises closed down due to lack of

preparations, safety nets and unfair playing field where smuggled goods abound in the
market. With manufacturing and agriculture declining, more than half of the country’s
employed labor force was absorbed by the service sector.

The Philippine growth rate was driven by domestic demand and consumer
spending unlike the Asian tiger economies where exports led the economic growth. The

3
economy failed to grow fast enough to provide jobs for the labor force. Over-all
unemployment and underemployment rates increased and labor market conditions
deteriorated for unskilled workers.

Effects of Globalization on Employment and the Labor Market

Many enterprises adopted lean and mean structures manned by a small group of
managers, professionals and technical staff with multi-skilled workers operating the core
businesses activities and a large group of contractual or outsourced workers.

The core of professionals, technicians and operators are adequately trained and
compensated. The peripheral workers on the other hand barely received minimum wages
and benefits mandated by the Labor Code and other social legislations.

The country’s productivity increased only at 1 per cent per year on the average in
contrast with 4.4 per cent average of neighboring countries (China, Indonesia, Korea,
Malaysia, Singapore, Taiwan and Thailand) or 1.4 per cent for all developing countries.

The reasons for low productivity are:

1. High costs of doing business. The Philippines has the highest power rates in East
Asia. Electricity is as high as 41 per cent of operating cost compared to only 10
per cent in Malaysia.
2. High underemployment in agriculture and services industries in the informal
sector.

Despite high power costs, labor productivity in manufacturing industries was

high. Labor productivity in manufacturing from 1980 – 1991 grew at an average of 8.9
per cent while the nominal wage of workers grew only at 6.1 per cent average.

Effects on Wages and Cost of Labor

Wages in the formal sector have increased, leaving behind those in the informal
sector which comprised 65 per cent of the working population. The Philippine
manufacturing labor cost per year of $2,450 was more expensive than China ($729) and
Vietnam ($711) but cheaper than Singapore ($21,317), Thailand ($3,868), Malaysia
($3,429) and Indonesia ($3,054).

The big firms (200 or more workers) have higher labor costs at 23.5 per cent since
they required more skilled workers. Labor costs of firms with 20-99 workers is only 19
per cent, lower than the average labor cost in non-agricultural firms at 21 per cent.
Manufacturing, which has high productivity, has a low labor cost at 20 per cent. This may
be explained by the employment of contingent workers.

The average wages received are higher than minimum wages. Unskilled workers
were paid higher than the minimum wage rates. As of the first quarter of 2006, the

4
establishments inspected which violated minimum wage standards was down to 15 per
cent from the previous year of 22 per cent (DOLE BWC, 2006)

Monthly wages are highest at the financial intermediation industry at 14,857

pesos ($288). This was followed by electricity, gas and water (13,612 pesos or $264),
private educational services (12,043 pesos or $234), and transport, storage and
communication (10,303 pesos or $200).

The lowest wages were in real estate, renting and business activities (6,687 pesos
or $130); construction (6,798 pesos or $132); hotels and restaurants (6,903 pesos or
$134); manufacturing (6,934 pesos or 135); and wholesale and retail trade (7,031 pesos
or $136). These five sub-sectors have the highest levels of non-regular/contractual and
agency-hired workers.

Compensation in the Informal Sector

The informal sector employed 20 million workers in 2003. These workers do not
enjoy safety nets. Cost of labor in the informal sector can not be accurately recorded
since most of the workers are unpaid family workers, domestic helpers and own-account
workers.

In a 2002 survey of contractual workers in Metro Manila, Laride reported that

2/3rds of their respondents earned between 100 pesos ($1.94) to 250 pesos ($4.85) per
day. Majority were not covered by the SSS. Half of them lived in one-room house with a
bathroom annexed. Forty five per cent had no separate bedroom; 72 per cent did not have
a dining area; and 50 per cent did not have running water.

In 2003, micro-enterprises (1-9 workers) and small enterprises (10-99 workers)

accounted for 99.3 per cent of all establishments in the country. Employment generation
is therefore very dependent on the viability and growth of these enterprises.

Effects on balancing work and family life & flexible work arrangements

Foreign-owned companies, companies with foreign equities and those with unions
provided more decent work. They are normally subjected to compliance standards.
Unionized firms also have more decent workplace because of the high awareness and
vigilance of trade unions in the local and international labor standards.

More than 60 per cent of establishments implemented balanced work and family
life programs in 2003. These were higher in foreign-owned companies (79 per cent),
companies with foreign equities (68.9 per cent) and in unionized companies (65.4 per
cent).

More than 50 per cent allowed extended maternity and paternity leaves without
pay. The practice of flexible work arrangement ranged from 31 per cent (for unionized)

5
to 42 per cent. Facilities for employees with children were minimal in most
establishments at a range of 3.5 per cent to 6.5 per cent.

Half of the firms practiced sliding flexible works arrangements, higher in foreign
firms, local firms with foreign equity and in non-unionized companies. Compressed
workweek ranged from 30 per cent to 39 per cent, higher in foreign companies and in
unionized firms. On-call arrangement was low at a range of 16 per cent to 31 per cent,
lower in foreign companies and in unionized firms. Teleworking arrangement was very
minimal at 4 per cent or less.

Effects on Hiring of Regular and Contingent Employees

During the last 2 decades of deepening globalization, new forms of hiring patterns
emerged in addition to the traditional model of “full-time protected regular wage
employment”.

In a survey of establishments employing 10 or more workers from 1991-1997,

non-regular workers have increased from 20.5 per cent in 1991 to 28 per cent in 1997.
1997 was the start of the Asian financial crisis.

Non-regular workers were highest in the construction industry at 65 per cent or

47,985 out of 84,794 workers in 2004.

There were 894,932 workers in the manufacturing industry in 2004 representing

37 per cent of the 2.4 million workers in non-agricultural establishments with 20 or more
workers. Their products ranged from food, apparel, steel, cement, machineries and
equipment, chemical products, wood and furniture products, etc.
 88.7 per cent were rank-and-file workers. The rest were
managers/executives (3.6 per cent), supervisors/foremen (7.1 per cent) and
owners and unpaid workers (0.6 per cent).
 64 per cent were regular and 25 per cent non-regular.
 non-regular workers were composed of contractual/project-based workers
(9.4 per cent), casual (6.7 per cent), probationary (4.1 per cent),
apprentices/learners (3.1 per cent) and seasonal (1.8 per cent).

Manufacturing also employed the most number of output-rate workers- the piece-
rate workers, the pakyao/takay workers, and the quota workers. There were very few
hourly paid workers (2.2 per cent), part-time workers (0.4 per cent), task workers (0.1 per
cent) and commission workers (0.1 per cent) in manufacturing.

The retail and wholesale trade was the second biggest employer among non-
agricultural industries. It employed 367,703 in 2004 or 15 per cent of the 2.4 million
workers covered by the survey. Almost 59 per cent of the rank and file workers were
regulars while 25 per cent were non-regulars, the same percentage as in manufacturing.
Non-regular employment among the rank and file was higher in the retail industry at 31.4
per cent.

6
 Among the 94,155 non-regular employees, 36,724 were contractual or project
based, 29,813 were casuals, 18,299 were on probation, and 8,200 were seasonal workers.
Output workers were very minimal in numbers at 8,714 or 2.4 or non-regular workers.
More than one half (6,346) were piece-rate workers and the rest were paid by
commissions (1,181) and pakyao/takay (1,058).

There was a high number of commission paid workers in the transport, storage
and communications industry at 25,177 workers or 13 per cent of the total output rate
workers.

Hiring Through Labor Contractors and Agencies

Thirty percent of big enterprises (200 or more workers) contracted out more jobs
compared to medium-sized (100-199 workers) companies at 25.8 per cent and small-
sized (20-99 workers) companies at 15.2 per cent. More foreign owned companies (45
per cent) and companies with foreign capital (36.6 per cent) relied more on
subcontractors than locally-owned firms (14 per cent).

Those serving the local markets only have the lowest subcontracting activities at
15 per cent compared to those serving both local and export markets at 32.6 per cent.
Those serving the export market only have lower subcontracting activities at 26.3 per
cent.

The most common jobs/services contracted out were general administrative

services (41 per cent), production processes/assembly activities (26.3 per cent) and
transport services (20.9 per cent). Manufacturing firms were the highest users of
subcontracted production and assembly activities. Service firms subcontracted mostly
administrative and transport services.

Agency-hired workers were not considered part of the workforce of the business
establishment. They were usually given employment contracts of limited duration
(usually less than six months) and were not entitled to benefits given to regular
employees.

In 2003, agency-hired workers comprise 10.8 per cent (316,000 workers) of

persons engaged in non-agricultural establishments with 20 or more workers. The
average number of agency-hired worker was 21 per establishment. Security services
comprised the biggest bulk at 37 per cent, followed by production/assembly (23 per cent),
janitorial (15 per cent), marketing/sales (10.6 per cent), general administrative (3.3 per
cent), transport service (3 per cent), and others (7.5 per cent).

The bigger sized enterprises hired more agency workers than the smaller firms.
Companies with foreign capital, catering to the export-oriented, or unionized hired more
agency workers than firms that were Filipino-owned, catering to the local market or non-
unionized (Labstat, 2005).

7
Conclusion

The productivity-based compensation arrangements that have evolved in the

Philippines as globalization intensified have not substantially contributed to industrial
development. While it has spurred the race to the top compensation among the skilled
workforce in the formal sector, the reverse (or race to the bottom) resulted in the informal
sector due to high unemployment and underemployment.

In general, these variable pay mechanisms have not contributed to equity,

efficiency, macro-economic stability and proper allocation of labor in the labor market.

The leading industries in the country like electronics, garments, business process
outsourcing, call centers and other service establishments have extensively used overtime
pay, night-shift differential and other premium pay, commissions, tips and service fees
and payments-by-result.

Several industries have increased their hiring of contingent workers whose

compensation payments are productivity-based. In manufacturing, workers are paid on
piece-rates. In the transportation industry, workers are paid on commission and in hotel,
restaurant and education services, many workers are hired on part-time basis.

Big firms, especially foreign owned and those with foreign equity and are linked
with the international value chain hired more contingent workers compared to smaller
firms and those that cater to the domestic market. These firms have high levels of
compliance to labor standards and decent work. One factor that contributes to high
compliance to labor standards in big firms is the presence of trade unions.

It is disturbing to note that trade union membership is on a rapid decline as

globalization deepens. This may be due to the trade unions themselves as they have been
too traditional in their dealings with employers, or that the employers are becoming
proactive themselves and have openly been competing with unions in empowering their
workforce unilaterally.

In the voluntary self-assessment of big companies in compliance to labor

standards, non-unions like labor-management committees, health and safety committees
and similar employee groups are substituted for employee representation.

Variable compensation contributes to the competitiveness of enterprises operating

in the Philippines. High skilled and productive workers as core regular employees are
retained by employers for high productivity operations. The hiring of contingent workers
for services and peripheral work helps companies compete with low wages in nearby
countries.

8
 The main pitfall of productivity-based compensation arrangement is that it may
lead to overwork that may result to health hazards, higher risks of accidents and
unbalanced family and work life on the part of the workers. This is especially true for
women workers as experienced in the electronics, garments and call center industries.

In the hiring of contingent workers using variable payment, there are many cases
of compensation below labor and human standards and therefore not leading to decent
work especially among the informal sector workers.

This is true in some manpower cooperatives whose members are categorized as

self-employed or individual contractors. They have used this as an excuse for exemption
from coverage of SSS and other labor standards.

Productivity-based compensation arrangements are also intensified in the informal

sector because the micro and small service and agricultural enterprises are exposed to
stiff competition from imports as a result of low tariffs and smuggling. Most of the
workers here are unpaid family workers, own-account workers and domestic helpers. If
the agricultural family enterprises lose out to imported vegetables from China for
example, their meager earnings will be further depleted and this will push them deeper
into poverty and undernourishment.

The extent of government intervention in compensation administration through

the minimum wage fixing, labor standards policy formulation and enforcement, and
provisions of safety nets and subsidies to workers is weak to moderate. Some employers
and neo-liberals have been advocating less, if not very minimal state intervention. The
left-leaning pressure groups, on the other hand, are batting for more government
interventions in favor of the workers.

Considering the desires of the extremist groups, the status quo is still tolerable at
present. More government interventions should be done in close partnership and
cooperation with the social actors, not only the employers and the trade union
organizations but also other actors like the NGOs, informal sector organizations, church,
academe, etc. Changes should be formulated and implemented on case-to-case basis- per
legislation, industry, region, locality or firm.

Using the objectives of compensation administration (by Srivas de Silva) as

standards (equity, efficiency, macro-economic policy and proper allocation of labor in the
labor market), the government and the major social actors have achieved some positive
and negative results.

Positive Results Negative Results

Equity > Increased earnings of formal > High unemployment and
sector employers and workers in underemployment resulting to high
electronics, garments, BPOs, levels of poverty and
services and overseas employment undernourishment, and income

9

> high level of compliance with
labor standards in the formal sector
Efficiency > increased productivity in the
bigger enterprises in the formal
sector but jobless growth
> flexible compensation schemes
contributed to competitiveness and
higher incomes of local firms
Macro- > moderate growth performance but
economic laid back in industrialization
stability compared to the South East Asian
standards
> strategies are short to medium
term only
Proper > advances in the administration of
allocation overseas employment
of labor
in the
labor > moderate accomplishments in
market education and skills training
inequity among classes and regions
> low levels of decent work in the
informal sector and in small and
micro-enterprises
> low productivity and lack of safety
nets in the informal sector and in
small and micro enterprises
> some flexible work arrangements
and subcontracting lead to very low
compensation and less decent
working environment
> consumption-led growth, not
investment-led
> wanting in long-term strategies
> no long-term interventions in
transforming OFW earnings to
investment-led development
strategies
> weakening investments in national
HRD compared with other South
East Asian countries

Recommendations

1. Trade unions, NGOs, organizations of consumers, farmers and other small

producers in partnership with the academe should set up a professional Social
Compliance Academy to train and accredit certified assessors for social and labor
standards compliance, and to give compliance awards to establishments and
organizations. The Academy should also develop and maintain professional
inspectors, trainers and remediation consultants to assist workers and employers
in labor standards assessment and remediation.

The immediate target for capability building are trade union members, labor-
management cooperation practitioners, occupational health and safety inspectors,
environmental inspectors and assessors, and other labor standards inspectors to be
accredited from among the employers, trade unions, local government units,
NGOs, consumerists, small producers, etc.

2. Expand tripartite mechanisms and social accords at the level of local government
units (provinces, cities and barangays) preferably through LGU ordinances /
legislations. Involve other social partners (NGOs, organizations among informal
sector workers, academe, church, civic organizations, etc.) in the tripartite bodies

10
 aside from government, employers and trade unions. Conduct more researches
and documentation of successful tripartite practices in LGUs like Marikina City,
Naga City, etc. and promote these good practices to others LGUs for replication.

3. Strengthen the advocacy campaign for good practices of labor and social
standards in the informal sector small and micro-enterprises with focus on good
organizational safety, cleanliness and health practices by cooperative efforts of
government, NGOs, trade unions, cooperatives, associations of small producers
and service providers, etc. Target specifically labor-only contractors and other
service providers including those that are not complying with present labor laws
and standards.

4. Actively support the various programs of employers for good practices of CSR
especially those that directly uplift the poor segments of workers and their
communities. Specific projects that need active support are the “big-brother, small
brother” technology transfer and business linkaging, education and skills
upgrading program in partnership with the government and private educational
and training institutions, patronize and improve the quality of local products
campaign (“tangkilikan”), anti-smuggling and anti-dumping campaign, etc.

5. Pressure government to minimize direct deductions from workers salaries and

wages in form of taxes and other mandatory deductions/contributions. Support
government programs that uplift the workers’ living standards like price
monitoring of basic goods and services like transportation, rent, basic food items,
education, skills training, health, etc. These measures will help increase incomes
of the poor workers and reduce poverty and undernourishment in the country.

6. Support the campaigns of multi-sectoral organizations like the Fair Trade Alliance
for the calibration of the country’s tariff rates based on specific industry’s level of
preparedness and competitiveness. Government negotiators should actively
consult and involve industry players in their negotiations on multi-lateral and
bilateral trade agreements.

7. Uphold the rights of trade union to organize workers and bargain collectively.
Trade unions should adjust their programs and activities towards social movement
unionism and international cooperation among trade unions and other civil society
organizations. Support new legislative actions that will uplift the plight of
informal sector workers like the domestic helpers, market and sidewalk vendors,
public utility drivers including tricycle drivers and operators, women workers,
farmers and agricultural workers, cooperatives, etc.

8. Actively support the campaign of all social partners- government, employers,

workers, etc. to preserve and expand jobs in the country through various programs
and interventions like entrepreneurship development, government pump-priming
infrastructure projects through labor intensive construction methods, maximum
usage of indigenous materials, and others that have already been mentioned.

11
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 Macaraya, B. (1999) “The Labor Code and the Unprotected Workers”, Proceedings
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 Verma, Anil (2005), “Global Labor Standards: Can We Get from Here to There?”,
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Websites:

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Chapter, http://www.alni.org.ph/resources/index2.htm
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Bureau of Product Standards, http://www.dti.gov.ph/contentment/7/11/697.jsp
Bureau of Working Conditions, http://www.dole.gov.ph/
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story_id=5025883 , (opened 1.11.06-jvs)

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