Factory benefits to paying workers more: The critical role of compensation systems in apparel manufacturing

Abstract

While many stakeholders believe worker wages in global supply chains are too low, there is disagreement about what, if anything, can be done to raise wages. Through a two-year quasi-experiment in an operating apparel factory, we assess the effects on productivity and profits of raising worker wages with a redesigned compensation system. We show that, even within current factory margins and constraints, important wage gains (4.2-9.7%) are possible and profitable. Productivity increased 8-10%-points while turnover decreased markedly. Workers were motivated by the potential for increased wages from an accelerating group rate as well as increased engagement and sense of fair compensation. Workers focused their increased effort on reducing quality defects and tardiness, two behaviors which individual workers largely control. Additional productivity-increasing behaviors were constrained by skill, position, and conflicts arising from free riders. Advanced apparel manufacturing demands a more engaged workforce; this research provides early evidence that compensation systems can be a critical tool to meet multiple needs.

Working conditions and factory survival: Evidence from better factories Cambodia

“…The surprise finding is the impact of compliance with payment of wages on survival. Generally, findings in the literature indicate that wage compliance is associated with a fall in profits or increased probability of closure (Distelhorst, 2020; Freeman & Kleiner, 2005; Harrison & Scorse, 2010; Lollo & O’Rourke, 2020).…”

“…Such innovations raise both productivity and labor costs, resulting in an ambiguous impact on profits. Lollo and O’Rourke (2020), conducting a pay incentives experiment, found that pay incentives increased wages by 4.2%–9.7% and productivity by 8%–10%, yet profits still declined (though why profits declined when unit labor costs are declining is unclear). Similarly, Freeman and Kleiner (2005) found that the shift away from incentive pay reduced productivity but reduced labor costs by a greater amount, resulting in an increase in profits.…”

Dynamic Inconsistency and Incentive Design: Insights from Behavioural Economics for HR Managers

“…In a field experiment among apparel workers (Lollo & O’Rourke, 2020) found that raising wages in a transparent and fair compensation system raises worker satisfaction, reduces turnover, and increases productivity and profits. In another field experiment at a consumer durables enterprise in India, Chung and Narayandas (2015) varied the sales force compensation scheme and found that conditional compensation in the form of quota-bonus incentives improved performance.…”

prevailing wage system toward the potential of trade unions in local situations

“…Finally, approval of a wage increase of 20% was reached, the directors reported that this was actually a suitable solution, because the Japanese word for 2 times, nibai, is the same as the word, niwani, which is 20%. The board of directors at least asked that this question was enough to make the union leadership resign from excessive participants on their first orders (Lollo & O'Rourke, 2020). Whatever the wisdom of this story, this anecdote has portrayed the slackness of trade union development and a lack of experienced and trained leadership (Greaney & Tanaka, 2020).…”