PRODUCTIVITY-LINKED WAGE SYSTEM (PLWS)

PLWS is a system that establishes a link between wages and productivity. This system will ensure that any increase in wages is commensurate with higher increase in productivity. It also helps the management to form a comprehensive reward system for improved productivity and wages through the active participation and cooperation of all employees.

PLWS have a positive impact on the workers. Employees are encouraged to become more productive and work hard so that they receive rewards commensurate with their efforts. It is a win-win situation for both employers and employees, as both have to work together to improve the performance of the firm.
 

ELEMENTS OF PLWS

There are two key elements in the PLWS:

1.    The Fixed Component
2.    The Variable Component

The Fixed Component comprises basic wage, plus an annual increment. It provides for income stability, acts as an indicator of the job value, reflects the cost of living and is adjusted accordingly through the annual increment. However, the annual increments should only form a small portion of the wage bill to meet the rising cost of living.

The Variable Components wage incentive, based on productivity or profit sharing formula. It determines the take home pay of an employee.
 

PLWS MODELS

Three models have been developed as guidance for company to adapt and adopt. These are:

1) The Profitability Model

Profitability is the main element in this model and it is determined by a profit sharing formula. The wage incentive will only be given if the profit falls within a pre-determined range. Here is an example of a bonus payment based on different levels of profit.

2) The Productivity Model

Firms need to derive a productivity measurement in developing this model. The measurement can be applied companywide to individuals or function or a combination of either one. The amount of wage incentive paid will depend on the productivity or performance of the company and / or individual. Formula for Productivity Model is:

T  =  A +  P

T  =  Total wage increase
A  =  Annual increment
P  =  Variable productivity payment

Annual wage increase should not be greater than the rise in productivity, if not, the competitiveness at the firm level will decline. Here is an example of variable productivity payment.

Year 1
If Basic wage = RM1,000 per month, A = 2% and P = 3%,
Basic wage + A = RM1,000 + 2% (RM1,000) = RM1,020 (built into basic wage)
P = 3% x RM1,000 x 12 months = RM360 per annum

Year 2:
If basic wage = RM1,020; A = 2% and P = 4%
Basic Wage + Annual Increment = RM1,020 + 2% (RM1,020) = RM1,040 per month
P = 4% x RM1,020 x 12 months = RM489.60 per annum

Annual Variable Payment at end of year 2:
    P for year 1                    RM360.00
    P for year 2                    RM489.60
    Cumulative for 2 consecutive years    RM849.60
 

3) The Combined Model
 
This is a combination of the profitability and productivity model. A matrix of profits and productivity are used to determine the variable component. Wage incentive will only be paid if both profitability and productivity targets achieved. Here is an example of a wage incentive according to Combined Model.

STEPS IN IMPLEMENTING PLWS

The following flowchart will provide a guide for firms to implement PLWS:

CRITERIA FOR A SUCCESSFUL IMPLEMENTATION OF PLWS
 

• Commitment from top management to ensure the support as well as instill confidence from the workers on the new system.
• The employee must be equipped with the right knowledge and information to enable them to accept the recommended system while the employer must be prepared to share relevant information and initiate programs to enhance productivity.
• Paying attention to the welfare and wellbeing in working life is one of the important criteria when implementing this system. This will ensure the basic needs of workers are not neglected.
• Close cooperation between employers and employees to create a fair measurement system will avoid any prejudice to the system.
• Communication channels must be available to provide input and information to employees against any expansion of the system to be created, as well as to get feedback and suggestions for improvement from them.
• The harmonious relationship among employees needed at the firm level.

   
For more information please contact:
Mr. S. Sugumar / Mr. Mohd Khairil Anuar / Ms. Mazuin Dahlan
Employee Productivity Unit
Knowledge Management Department