The Productivity Conundrum: Remedies

One of the  aims of this blog is not just to point at problems, but also to explore some of possible solutions.

Any comments and discussions are welcome of course. My solutions are not necessarily the best ones.They are simply ideas that were either published by many others or that came up in my mind and there are probably more ways to create the necessary changes. Where possible, changes that are already happening in the world to improve the situation willbe mentioned. Some relating to this topic can be found at the bottom part of this blog.

Whether we actually need or want higher productivity as a social goal, is being questioned and discussed more frequently in recent years. Good discussions can be found in the Degrowth movement, doughnut economics and other avenues. At a certain point it will get a place here in the blog as well of course.

In order to improve productivity there is a complex solution that can be stated simply: a better division of the profits. Higher rewards for their work will motivate the large majority of people. (Note, we do not use consumers. For some strange reason most of us still consider themselves primarily as people.)

It is not simply about just paying more in bonuses and salaries. It’s about a fair sharing of the profit or results of an organization. Do the CEOS of large conglomerates really deserve multi million euro or dollar rewards? If the company made targets set by its board, shouldn’t everyone in the company share the rewards? Was this really performed only thanks to one person or group of top managers? CEOs that already receive a salary of over a million a year (dollar or euro does not make much difference in these size of salaries) do not need or deserve additional rewards. If the company achieves part of the targets and they are rewarded with 10-20% of their yearly salary and the targets that were not achieved get deducted from this amount, that might fairer. Even just 10% of their salary is several times the yearly median income of a household in most modern developed economies. There is nojustification and it will demotivate many people from delivering to an organization any improvements that do not improve their own lives directly.

To make also clear: targets should NOT be made up of maximising shareholders value. It is by now evident that this is not a measure that optimises efficiency. It mostly contributes to maximizing short and medium terms financial results. These are not alligned with healthy busniess thinking. Almost anyone (this author included) that has worked for a company listed on the stock exchange could tell of many incidents they experienced in which decisions made noi economic sense, but helped the distributiuon of renumeration. Efficiency can not be considered on a single firm level but needs to be considered on larger scale, that of affected society and stakeholders in a broader sense. Employees, suppliers, customers as direct stakeholders. The towns, cities and villages affected around the company’s locations and its stakeholders residences as well as the province, state or country where these reside as society. All need to be considered. Even more so now and incoming years in face of automation and AI.

It is about employees feeling they get a fair share of the cake. A share of the profit and a share of bonuses that reflect their contribution. The CEO of SHELL received as part of his bonus a total of over 300.000 shares. SHELL has 86,000 employees world wide. Would it be better to give each employee between 1 and 6 shares maybe? Or 1 and 4 shares, instead of giving all of these to one person. He is already receiving a huge reward in the form of a base salary representing 30 or 40 times the median income of a Dutch household. After bonuses, it comes to 300 times median income. That does not even take into account all the people working for SHELL in many oil rich countries with mostly poor population.

SHELL is just an example. There are organizations with much larger and others with smaller differences but it is a typical example. Even companies that distribute to all employees (at least those in rich countries) such as some found in the famaceutical industry, maintain very significant rewarding differences.

CEOs do not take any real personal financial risk. Even if we are to accept the myth of deserving extraordinary rewards for extraordinary risks taken, that does not apply .CEOs can not  lose anything except some value of the shares they received above and beyond their salaries. That is not a risk. Losing their pride or reputation might not be pleasant, but will not lead them to financial ruin. At most a change in life style.

While we are at it. Not only employees need to share in gains and profit. As many stakeholders in an organization as can be taken into account should be considered. One simplified way to do that is to make sure companies pay their fair share of taxes anywhere they generate profits. At least in most of the developed democracies, government will be able to use the funds for the whole country, thus including anyone with the faintest claim for being a stakeholder.

If CEOs can claim to be rewarded beyond their salaries, so should the professors that taught them at university and the person cleaning the street they live in that makes sure their intelectual capacities developed properly or that they do not fall prey to sickness for lack of hygiene.

If employees would know that they stand to be fairly rewarded for gains resulting from higher efficiency and not punished as they supposedly made themselves or some of their colleagues “redundant” with the introduced improvements, they would contribute more and productivity would increase. If they would feel secure that improving efficiency would not result in them or their colleagues losing their jobs due to the increased gains, but get rewarded, they would contribute more.

We should also be sure that gains in productivity really can be called such. No firm or organization operates in a vacuum. If a firm buys a new machine that replaces a team of 3 or 4 people for example and only one of these people remains in the company to operate it while the others lose their jobs. That might increase efficiency for the firm itself. For society it may be a net loss, at least until those fired can find productive occupation again. But this theme probably deserves a whole blog all of its own, maybe several. So for now, it will not be expanded upon.

Another suggestion to improve rewards to labor are a maximum wage ( lately published in more detail – The Case for a Maximum Wage, Sam Pizzigati,2018). A CEO’s income should not be more than an agreed multiple of the lowest salary in the company, or the median income of an employee in the company. So a CEO being awarded a raise by him/her self or by the board, can only happen if everyone’s income increases. And while at it, please do consider other stakeholders and alternative modes of reward.

A personal note:

Being an entrepreneur myself, I am fully aware of the fact that the company would not have existed without me, but it would never have been profitable without everyone’s input. Each doing what they do better than I could have ever done it. In these early years of the company, they get generous bonuses at the end of a profitable year. When the company is stable enough and hopefully still profitable, they will receive a share of the profit or a share of the company. And eventually, one day, they will also receive most or all of the company they help build. If I thought what I’m doing is a risk I can’t withstand, I wouldn’t have started the company. So I practice what I preach.

Some positive developments:

Many countries have been increasing minimum wages in recent years. Many states in the US, UK and many others, rich and poor. The credit belongs to economist Alan Krueger who has recently passed away. He was the first to show empirical evidence that demonstrates how higher minimum wages actually increase employment and welfare. Contrary to the ruling view many of us have beed trained with, including this author.

On top of that, many countries found out that the minimum wage set by law, was still too low to live from. That does miss the point of setting a minimum. Waht’s the point if itisn’t evben enough to supply one’s basic needs from? Many governments have now signed up to bringing the minimum wage to be a living wage. (Mostly but not exclusively, within the OECD countries. Search the website fior more information)

The maximum wage has not become law anywhere, but did lead lawmakers in several US states to legislate preferential treatment to companies with low multiple ratios. That comes into effect with the awarding of public contracts (by tender or otherwise) or by additional taxation. (https://inequality.org/action/corporate-pay-equity). They thus start sending signals of what is desired and acceptable by society these days.

If the aim is to increase productivity, lower inequality would definitely contribute if implemented by methods mentioned above or similar.

Goals set by the US such as the milnium goals, are also contributors.They helped alleviate many from poverty, increasing their health, improve education and allof these did improve productivity in many countries.

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