PRODUCTIVITY-LINKED WAGE SYSTEM (PLWS) COLLOQUIUM AND STRAIGHT TALK Sugumar Saminathan Manager, Malaysia Productivity Corporation, Tel: +603-79557266 ext 544,DL: +603-79562566, Mobile:+6019-6354078 E-mail:sugumar@mpc.gov.my Website:http//www.mpc.gov.my Ministry of International Trade and Industry (MITI) 14 April 2015 (Tuesday) Grand Bluewave Hotel Shah Alam Transformation • Innovation • Partnership 2 BUSINESSMAN: “Productivity is reducing cost and increase profits.” CONSUMER: “Productivity bring good quality products and services at cheaper prices and higher living standards.” I PROD T I UCTIV Transformation • Innovation • Partnership 3 WHAT IS PRODUCTIVITY? Productivity is a measure of efficiency in the use of inputs or resources in relation to its outputs 5 WAYS OF IMPROVING PRODUCTIVITY? 5 Ways Firm Approach Output Productivity = O Reduce Cost Input Output : Goods & Services Input Manage Growth : Resources Used Output ●Gross Domestic Product (GDP), ● Total Output, ● Added Value, ● Monetary Value of Production, ● Quantity of physical unit produced I O I Input ● Employees, ● Total man-hours worked ● Labour cost, ● Capital/Fixed assets, ● Energy, ● Material, ● Services O Work Smarter I Pare Down O I O Work Effectively I Transformation • Innovation • Partnership 7 Transformation • Innovation • Partnership 8 PRODUCTIVITY : WEALTH CREATION AND SHARING Baking & sharing a bigger economic cake PRODUCTIVITY -LINKED WAGE SYSTEM Transformation • Innovation • Partnership 9 Why Do We Need To Restructure Our Wages? • A flexible and competitive wage system will enable companies to make quick adjustment to wages that will ensure job stability and reduces the likelihood of retrenchment in the event of an economic slowdown. Transformation • Innovation • Partnership 10 Productivity-Linked Wage System 11 PRODUCTIVITY- LINKED WAGE SYSTEM (PLWS) PLWS is a wage system which establishes a link between wages and productivity/performance. PLWS ensure any increase in wages commensurate with increase in productivity/performance. PLWS enables employees to obtain a fair share of gains that arise from productivity growth and performance improvements. Transformation • Innovation • Partnership 12 Malaysia’s Policies on Linking Wages To Productivity Guidelines on Wage Reform was established in August 1996 with the following objectives: i) Establish a closer link between wages and productivity ii) Develop a wider and systematic approach towards improving productivity and wages iii) Ensure active involvement and cooperation of employees to develop PLWS iv) Ensure that employees obtain a fair share of gains from productivity growth and performance improvements Transformation • Innovation • Partnership 13 PHASES IN IMPLEMENTING PLWS PHASE 1 PHASE 2 PHASE 3 Creating Conducive Environment Establishing PLWS System Implementing PLWS System MPC PLWS MODEL Start 1. Create awareness on PLWS among management team 2. Measure company’s performance 3. Develop PLWS Committee 4. Developing Corporate, Division & Unit KPI 5. Briefing Session with Company’s Workers 6. Obtain feedback from employees and management 7. Linking Incentives with Improvement 8. Establishing PLWS on a trial basis 9. Review and make the necessary adjustments 10. Implement PLWS at the firm level 11. Plan (continuous Improvement) Transformation • Innovation • Partnership COMPONENTS OF PLWS FIXED COMPONENTS VARIABLE COMPONENTS BASIC WAGE ANNUAL INCREAMENT Wage increase for the year based on:- Productivity, or Profit sharing formula There must always be the fixed and the variable component in the PLWS Transformation • Innovation • Partnership 15 PLWS Model 1: Profitability Model #1 • Payment of bonus according to profit levels based on monthly basic pay. Profit After Tax (RM Million) <1.5 (threshold) Bonus [Month(s)Salary] 0 1.5 - 1.99 0.5 2.0 - 2.49 1.0 2.5 - 2.99 1.5 2.0 3.0 and above Transformation • Innovation • Partnership PLWS Model 1: Profitability Model #2 • Bonus payments paid in quantum (RM) Profit Before Tax (RM Million) Bonus (RM) <5 (threshold) 0 5-7 500 7-9 1,000 9 - 11 1,500 2,000 11 and above Transformation • Innovation • Partnership PLWS Model 2: Productivity Model #1 • Bonus paid out at the end of the financial year based on saleable output. Production Volume (000 m2) (Saleable Output <5,500 <5,600 <5,750 <6,000 <6,250 <6,500 Bonus (Months) 0 0.25 0.75 1.25 1.75 2.00 Transformation • Innovation • Partnership 18 PLWS Model 2: Productivity Model #2 • Incentives given based on the productivity targets achieved (Individual). Planned Target Actual Achievements Incentive (RM) 80% Above 100% 150 80% 91 – 100% 100 80% 80% - 90% 50 80% Below 80% Transformation • Innovation • Partnership 0 PLWS Model 2: Productivity Model #3 • Incentive given base on identified monthly productivity indicators and linked to the team incentives (Team). Performance Criteria Performance Standard (Target) 1. Production targets Above 80% 2. Quality output Above 90% 3. Customer complaint Zero complaint 4. Maintenance 5. Discipline No machine breakdown • If team of 5 employees able to achieves all 5 criteria RM100/ team member • If team achieves only 2 criteria No incentives No. of Criteria Achieved Incentives (RM) 5 100 4 80 3 60 2 0 No reminder or 1 warning letter • Innovation • Partnership Transformation 0 PLWS Model 3: Combine Model #1 • Payment of bonus according to 2 criteria – Company Performance and Employee Performance Rating Operating Profits (RM Million) Above 5.00 Variable Productivity payment (Months) 1.00 1.00 1.25 1.50 1.75 2.00 4.00 – 5.00 0.75 0.75 1.00 1.25 1.50 1.75 3.00 – 4.00 0.5 0.5 0.75 1.00 1.25 1.50 2.00 – 3.00 0.25 0.25 0.5 0.75 1.00 1.25 Below 1.00 0 0 0.25 0.5 0.75 1.00 70 - 79 >80 Employee Performance Rating <40 40 - 49 50 - 59 60 - 69 (%) Transformation • Innovation • Partnership INDUSTRIAL RELATIONS (AMENDMENT) ACT 2007 Transformation • Innovation • Partnership 22 Section 13: Collective Bargaining (2A) A proposal for a collective agreement may provide for one or more of the following: (a) provision for training to enhance skills and knowledge of the workmen; (b) provision for an annual review of the wage system; and (c) provision for a performance-based remuneration system. Transformation •23Innovation • Partnership PLWS in Collective Agreement Transformation • Innovation • Partnership 24 DISTRIBUTION OF COLLECTIVE AGREEMENT (CA) WITH PLWS BY SECTORS –20102012 Sector Total Number of Collective Agreement Number of CA / Percentage With PLWS 2010 2010 2011 2011 2012 2012 No. % No. % No. % Manufacturing 195 180 147 144 73.85 129 71.67 125 86.81 Services 116 117 127 88 75.86 95 81.20 111 87.40 Agricultural 17 17 13 15 88.23 17 100.00 13 100.00 Others 2 6 9 2 100 6 100.00 7 77.78 Total 330 320 293 249 75.45 247 77.19 256 87.37 Transformation . Innovation . Partnership 25 ELEMENTS OF PLWS IN CA BY SECTORS, 2012 No Elements Manufacturing (125) Services (111) Agricultural (13) Construction (3) Quarry & Mining (4) 88 (70.4%) 37 (29.6%) 7 (5.6%) 17 (13.6%) 51 (45.9%) 31 (27.9%) 3 (2.7%) 30 (27.0%) 1 (7.7%) 2 (15.4%) 1 (33.3%) 1 (33.3%) 2 (50.0%) 2 (50.0%) - - - 3 (23.1%) 1 (33.3%) - 115 (92.0%) 23 (18.4%) 106 (95.5%) 26 (23.4%) 5 (38.5%) 2 (66.7%) - - - - - - - 2 (15.4%) - - - - - - - - Bonus Payments 1. Contractual Bonus 2. Bonus Based on Management Discretion 3. Fixed and Additional Bonus Bonus Based on Profit/ Company Performance Annual Increment 4. 5. Yearly Increment 6. Increment based on Merit 2 (50.0%) 1 (25.0%) Incentives/Allowances 1 (0.8%) 1 (0.8%) 7. Group Target 8. Individual Target 9. Service Charge - 10. Skill Allowance 5 (4.00%) 14 (12.6%) 7 (6.3%) 11. Piece Rated Incentives - - 12. Commitment / Attendance Incentives 13. COLA 14. Cost and Time Saving Incentives 59 (47.2%) 5 (4.0%) - 11 (9.9%) 17 (15.3%) - 15. Price Bonus - - 16. Long Service Award 9 (7.2%) 17. Outturn Incentives 18. Performance Allowances for Maximum Scale Employee 19. Trip Incentives 20. Quality Service Allowance 21. OMO Incentives 22. Coaching/Teaching Allowance 23. Productivity Payment 2 (15.4%) 3 (23.1%) - - 1 (33.3%) 1 (25.0%) - - - 2 (15.4%) - - - - 21 (18.9%) - - - - - 6 (46.2%) - - - - - - - 2 (1.6%) 1 (0.8%) 9 (8.1%) 1 (0.9%) 12 (10.8%) 3 (2.7%) - - 1 (25.0%) - - - - - - - - - - 1 (33.3%) - 2 (1.6%) 4 (3.2%) Transformation . Innovation . Partnership 26 PLWS Examples. Transformation • Innovation • Partnership Example 1: Incentive Based on Performance and Productivity Wage System Fixed Components Basic Pay Wage Variable Components Min. Annual Increment Profitability Productivity Incentives Transformation • Innovation • Partnership Combined Variable Components Profitability Incentive – the profitability incentives will be pay when the profits fall within a predetermined range as shown in Diagram : Profit Sharing Profitability Profit sharing formula to determine “money in the pot”. The wage incentive will only be given if the profit falls within a predetermined range Total Bonus = Profit After Tax Monthly Payroll Cost Transformation • Innovation • Partnership Example of profitability Incentives The bonus will be paid when the company makes certain amount of profit that falls within a predetermined range. Table : Profitability Incentives Profits After Tax (RM Million) Monthly Payroll Cost (RM Million) Bonus = Profit After Tax Monthly Payroll Cost Less than 5 5 0 5 5 1month 6 5 1.2 month 7 5 1.4 month 8 5 1.6 month 9 5 1.8 month 10 5 2.0 month Transformation • Innovation • Partnership Productivity Incentives The incentives will based on team and individual performance against predetermine productivity measurement. Diagram: Productivity Incentives Productivity Based on team and individual performance against predetermined productivity measurement • Total output • Quality output • Wastages • Customer Satisfaction • Individual Performance Transformation • Innovation • Partnership Matrix incentives Matrix incentives will be given based on the profitability and average performance of division, department and individual as shown below. Profits (RM million) Incentives (Months) Less 5 0 0.1 0.3 0.5 5- 7 0.1 0.3 0.5 0.7 7-9 0.2 0.5 0.7 1.0 9-11 0.3 0.7 1.0 1.3 11-13 0.4 1.0 1.5 2.0 13-15 0.5 1.5 2.0 3.0 Average Performance (%) Less 70 70 -80 80-90 90-100 Transformation • Innovation • Partnership If the company performance are as follows: • Division Performance is 85% • Department Performance is 90% • Individual Performance is 85% • Average Performance of an employee is 86.7% • Based on the calculation above the respective employee will received 2 months bonus if the company makes RM 13 million profits .The incentives taking into consideration the overall employees performance. In order to received higher quantum of bonus each employees should contribute to the division and department performance as well as their own performance. Transformation • Innovation • Partnership Example 2: Increment and Bonus Based on Performance and Productivity Performance Rating Increment Rate Performance Bonus 5-Well above target 4.00% 2.5 months 4-Above target 3.00% 2.25 months 3-Target realized 2.50% 2 months 2-Target almost realized 1.50% 1.25 months 1-Target not realized 0.00% 0.5 month Transformation • Innovation • Partnership Example 3: Incentive Based on Performance and Productivity Company Performance Employees Performance A B C A B C A B C Fixed 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 Variable 0.7 0.6 0.5 0.6 0.5 0.4 0.5 0.45 0.4 Total 1.9 1.8 1.7 1.8 1.7 1.6 1.7 1.65 1.6 Band 1 Band 2 Band 3 Transformation • Innovation • Partnership Example 4: Incentive Based on Performance and Productivity Company Performance (After Tax) RM Bonus (Month) No Profit 0.50 Zero but less than 10 million 1.00 10 million but less than 25 million 1.25 25 million but less than 50 million 1.50 50 million and above 1.75 Transformation • Innovation • Partnership Example 5: Incentive Based on Profits Variable Incentive Scheme Gross Operating Profits (in term of percentage of achievement) Bonus in term of number of months More than 110% of annual budget 1.5 105% to 109.99% of annual budget 1.25 100% to 104.99% of annual budget 1.0 95% to 100% of annual budget 0.5 90% to 95% of annual budget 0.25 <90% of annual budget - Transformation • Innovation • Partnership Example 6: Incentive Based on Performance and Productivity NPAT 1million or more or ROE 6% Whichever is higher >6.00% to 8.00% >8.00 to 10.00% >10.00% to 12.00% >12.00% to 14.00% >14.00% to 16.00% >16.00% to 18.00% >18.00% Bonus 0.33 month 0.50 month 0.75 month 1.00 month 1.25 month 1.50 month 1.75 month 2.00 month Transformation • Innovation • Partnership NPAT (mil) 1-1.5 1.5-2 2.00 - 2.75 2.75-3.25 3.25-2.75 3.75-4.25 4.25-4.75 >4.75 Example 7. Rework Incentives Incentives will be paid when there is reduction in rework rate. Planned Rework Actual Acheivements Incentives (RM)* 10% of the monthly output 10% of the monthly output 10% of the monthly output 10% of the monthly output 10% of the monthly output > 11% 0 8%-10% 10.00 5%-7% 15.00 2%-4% 20.00 0-1% 25.00 Transformation • Innovation • Partnership 39 Example 8: Performance Incentives Allowance • The company decided to reward employees which already reach their maximum salary. Employees who have reached the maximum on their salary scale and have performed commendably during the period of review, shall be eligible for a monthly allowance for the next 12 month. Performance Incentives Allowances shall include the following category of performance as shown in table below. Performance Category Monthly Allowance Highly Effective RM 60.00 Competence RM 40.00 Transformation • Innovation • Partnership Example 10: Monthly Performance Incentives Scheme The company will pay performance incentives based on the qualifying criteria set by the company. Each employee must meet all the criteria to be eligible for the incentives. The amount of the incentives will increase from month to month. For example in an employee can achieved all the criteria for January to December than the total incentives received by the employee will be RM 750.00 (Table 6). However if the employee fail to meet any one of the qualifying criteria in any given month will render the employee to restart at the minimum amount of RM 35 per month upon meeting the qualifying criteria for the month. Qualification Criteria: a. Nil late attendance for that month except with valid late comings reasons needs to be approved by respective Head of Department. b. Nil absenteeism for the month except with valid reasons needs to be approved by respective Head of Department c. Only one (1) medical leave for the month d. Nil disciplinary record for the months i.e. written counseling , warning letter Transformation • Innovation • Partnership Months Monthly Amount (RM) Accumulated Monthly Amount (RM) January 35 35 February 40 75 March 45 120 April 50 170 May 55 225 June 60 285 July 65 350 August 70 420 September 75 495 October 80 575 November 85 660 December 90 750 Transformation • Innovation • Partnership PLWS Model Bonus Based on Profits/Returns Bonus based on Sales/Total Output Six Model Recommended Increment Based on Performance Incentives based on employees quality Incentives Based on Individual/Team/ Company Performance/Target Incentives Based on Skills TransformationInnovation • Innovation • Partnership Transformation, & Partnership 43 HOW TO DEVELOP PLWS Transformation • Innovation • Partnership 44 Establishment of PLWS Taskforce • The company establish taskforce on PLWS implementation comprises of all the head of department and Human Resource Managers as secretariat. Transformation • Innovation • Partnership 45 PLWS TASKFORCE Advisor (Directors) PLWS Committee i. Head of each Department ii. HR Department (Secretariat) iii. Employee representative Production QA Maintenance Safety & Health Sales & Delivery HR / Finance Procurement Transformation • Innovation • Partnership Determining KPI • The company identify 7 critical KPIs that determine company performance • The members will rank from 1-7 the KPIs and will choose the most important KPIs to be deal with. Transformation • Innovation • Partnership 47 Current Company’s KPIs Rank the most critical objective to achieve by the company. No Mission 1 To proactively pursue sustainable growth, provide products, services and solutions of the highest quality and deliver more value to ensure a high level of satisfaction among our customers. To increase 15% domestic market share by the year 2015. 2 We place the upmost importance on the Health and Safety of our employees. To achieve zero accident rate consecutively for 6 months. 2 3 We promote and implement creative, innovative ideas and solutions to produce value added and innovative products and services. To implement one breakthrough kaizen project per department per year. 4 4 We act with absolute honesty, integrity and fairness in all our business dealings and corporate activities in compliance with the laws and regulations. To achieve 100% compliance with all the laws and regulations and code of conduct. 7 5 We recognize, respect and value diversity as a source of strength in building the team, while embracing the importance of both personal and professional ethics in our work, behavior, and lives. To conduct the yearly employee satisfaction survey and take necessary actions. Proactively pursue cost reductions and eliminate operational waste to improve the competiveness of our products. To reduce 10% operating costs by the year 2015 by improving the efficiency of the manufacturing process. 6 7 Objective Rank (1-7) 3 To minimize any environmental impact through To reduce the industrial waste by conserving resources and preserving the quality of 1.5% on yearly basis. Transformation • Innovation • Partnership the surrounding environment. 5 1 6 48 Based on the ranking the company decided to select the KPI To reduce operating cost by 10% in year 2015. Transformation • Innovation • Partnership • All the department were given task to reduce their monthly operating cost by 10%. • The head of department will identify the area, root cause and action plan to reduce the cause by 10%. Transformation • Innovation • Partnership 50 Production Department S/N KPIs ROOT CAUSE ACTION PLAN 1. To reduce overtime cost by 10 %. OT to do non productive job for example repairing job and waiting time during trouble. OT when necessary and spend more for Kaizen and Routine maintenance. 2. To reduce energy cost i.e. natural gas & electricity by 10%. Energy audit and eliminate unnecessary motors and air wiper. Energy audit and provide one year action (PDCA) 3. To reduce consumable & spare by 10%. SCR : Frequent change belt and IPA easy to evaporate Drawing : Dies, capstan ring and contact parts damaged. SCR : Review belt life time and install IPA recovery machine Drawing : Root cause analysis and PDCA activity Transformation • Innovation • Partnership Maintenance Department S/N KPIs ROOT CAUSE 1. To reduce overtime OT to do non productive job cost by 10%. for example repairing job and standby during production. 2. To reduce repair & maintenance cost by 10%. ACTION PLAN OT when necessary and spend more for Kaizen and Routine maintenance. No enough TPM and machine Proceed to do major kaizen activity. part replacement job, Repeating problem same capex and kaizen symptom and situation. activity. Promote root cause analysis activity at Maintenance Department. Transformation • Innovation • Partnership QA Department S/N KPIs ROOT CAUSE 1. To reduce overtime Basic understanding QA cost by 10%. overtime is follow production schedule. 2. To reduce quality control cost by 10%. Over plan on QA budget for equipment accessories and for other's item. ACTION PLAN For QA over time, need to check detail production plan and arrange manpower base on QC Inspector capability. Plan QA budget follow actual expenses from last year. Request Purchasing to get more cheaper quotation for compare. Transformation • Innovation • Partnership Sales & Delivery Department S/N 2. KPIs To reduce transportation cost (outbound) by 10%. ROOT CAUSE ACTION PLAN Machine problemsUrgent delivery. Delivery of small orders under full load capacity. Collection for empty baskets. Pallet collection from northern - high cost/pc. Limitation in outbound forwarding rate due to volume constraint. Negotiation with provider for lower charges. a) Urgent delivery before 10.00am - normal rate. b) Urgent delivery after 10.00am additional 50% of normal rate. If unavoidable, try to arrange for collection of basket. Consolidating with other loose cargoes. Full load collection. Collection for recycling. For HiEssence to dispose. Joint account with procurement for in/out bound forwarding. Transformation • Innovation • Partnership Human Resource S/N 1. KPIs ROOT CAUSE To reduce No proper time management on overtime daily & weekly planning. cost by Ad-hoc activities. 10%. ACTION PLAN Monitor overtime hours according to budgeted overtime hours. Plan and execute project in advance to allow sufficient time for the work to be completed during normal working hours. Transformation • Innovation • Partnership THE COMMITTEE’S TERMS OF REFERENCE (TOR) To identify Key Performance Areas and Key Performance Measure that has an impact on company performance; 1 2 To identify the key player or the PICs (company/department/unit); 3 To facilitate the implementation of the Key Performance Areas; 4 To monitor the achievement of the Key Performance Indicator; 5 To engage the relevant stakeholders for further deliberation on initiative to achieve the targeted KPIs; 6 To develop the linkages between wages and productivity; and 7 To act as a mediator and reconcialter on PLWS implementation. Transformation • Innovation • Partnership 56 Transformation • Innovation • Partnership