Humanistic management and competitiveness

Following tradition, President Duterte released an Executive Order on Labor Day to somehow address the expressed needs of the country’s workers. As expected, most labor groups were not satisfied, claiming that the EO was a mere “reiteration” of existing law and regulations or, worse, “useless.” Some said that the president has reneged on his campaign promise to end the notorious practice of “endo,” which refers to the repetitive hiring of employees under short-term contracts.
I’ll give the president and his labor executives some credit for effort.
Since he took office almost two years ago, I have seen more frequent media reporting about the government’s thrust to regularize more employees: CNN Philippines, Jan. 16: “Labor Dept. orders PLDT to regularize 8,000 workers, pay P66M in claims”; and Philippine Daily Inquirer, April 6: “Up to 10,000 Jollibee workers to be regularized.”
While it’s unclear how many such reports actually materialize into regularized employees, business leaders have argued against regularizing more employees. They worry that more businesses will close because they will not be able to afford the additional expenses for employee pay and benefits. They also worry that the country will attract fewer foreign investors, presumably because these mainly look for low-cost employees. Donald Dee, president of the Employers Confederation of the Philippines (ECOP), argues, “You cannot change the business model all over the world. [If] you want to dissuade investments, [if] you want people to turn away from the country, then you do it. But what they’re asking for does not make sense. It’s unfair.”
The debate on contractualization has been never-ending and has become increasingly complicated. But I think that much of the debate has been muddied by confusion on some basic issues. A major confusion is that some business leaders equate labor rates with labor costs. That is, they believe that paying employees less per unit of time reduces a company’s labor cost. This is not always the case.
Jeffrey Pfeffer, professor at Stanford University and author of “Six Dangerous Myths about Pay” in Harvard Business Review, explains what any student of management accounting knows: labor rates and labor costs are not the same thing.
A labor rate is what an employee is paid per unit of time, say, per day. Labor cost, on the other hand, is what the company spends on labor to produce a unit of output. Labor cost factors in the labor rate, but takes productivity into account. Simply put, a manager who pays employees double the market rate may actually have lower labor costs than the competition because his or her employees are three times more productive!
The simplistic argument against better pay and security of tenure for employees wrongly assumes that employee productivity is fixed. To be competitive, the argument goes, businesses need flexibility in shedding employees based on changes in demand and competition.
Humanistic managers find this argument unsound. They believe that investing in employees is crucial to competitiveness and, in fact, lowers total labor costs because of higher productivity.
Anna Meloto-Wilk, cofounder and president of personal care manufacturer and retailer Human Nature, points out that “truly viable and sustainable businesses should have a clear path toward regularization with the costs of full time employment factored into their operating expenses. Salaries and taxes should be part of operating expenses and any business person worth his salt should be able to factor in those costs and still be profitable over time.”
She further explains why their workers are more productive: “Because our merchandisers are regularized, we are able to train them better. We don’t have to incur the cost of training new workers every five months which impacts our business positively. They are also able to build better relationships with our retail partners and are more confident to make decisions on the floor because of their experience.”
Can humanistic management scale up and be applied to larger businesses?
Mercadona, Spain’s largest grocery store chain, with more than 1,500 stores all over the country, has over 70,000 employees, all of whom have permanent contracts and salaries above the industry average, including bonuses. Furthermore, Mercadona invests heavily in its employees’ training, and yearly staff turnover is consistently below 5%. Its employees give consistently excellent service to customers while maintaining low prices for its goods. Now that is true competitiveness.
Business leaders who insist on being competitive by maintaining cheap and insecure employees are making a dangerous mistake. They are actually making their businesses, and ultimately our country, less competitive. Worse, they deprive their fellow Filipinos of the opportunity to live decent lives.
Humanistic management is a more decent and competitive strategy. Mediocrity is always easier than excellence, but that is a business choice.
 
Dr. Benito L. Teehankee s a full professor of management at De La Salle University. He is vice-chair for CSR of the Management Association of the Philippines, and chair for research of the Shareholders’ Associaiton of the Philippines.
benito.teehankee@dlsu.edu.ph