Could voluntary progressive wage system actually work?

By: Dr. Goh Lim Thye

Compensation strategies are crucial in shaping relationships between employers and employees in the fast-paced world of work. Malaysia’s National Economic Action Council (Majlis Tindakan Ekonomi Negara, or MTEN) presented a Progressive Salary Policy paper, as proposed by Minister of Economy Mohd Rafizi Ramli, on August 7, 2023, to serve as a shift towards recovering the labour market and leading to a more balanced wage distribution. Therefore, asking what a progressive wage system is and the implications of making it voluntary is timely.

A progressive wage system is a framework that ensures that workers’; skills, responsibilities, and experience are fairly and reasonably compensated. It usually entails establishing a minimum wage that rises as workers’ experience or skills improve. Such a system is intended to prevent wage stagnation and to ensure that employees are fairly compensated for their efforts. Singapore proposed making the Progressive Wage Model (PWM) mandatory in 2012 in order to improve wages and working conditions for Singapore’s bottom 20% of income earners. According to The Straits Times Singapore (2022), under the PWM model, approximately 19,000 full-time lower-wage retail assistants, cashiers, and assistant retail supervisors will see annual pay increases ranging from 8.4 percent to 8.5 percent over the next three years.

Will the proposal to make the progressive wage system work voluntarily?

If a progressive wage system were voluntary, some employers might implement it, while others may not. Implementing a PWM could be motivated by companies’ desires to; maintain positive reputations, attract and retain skilled workers, and foster fair and ethical work environments. Such forward-thinking employers recognise that a motivated workforce is a valuable asset that can propel their company to new heights. Furthermore, voluntary PWM implementation could encourage healthy competition among businesses, encouraging them to raise their compensation standards to remain competitive. There is, however, a flip side to this scenario. If many employers opt out of a PWM system, worker exploitation and wage inequality concern may exist. Workers in such companies may continue to be paid less and have fewer opportunities for advancement. Such a scenario could result in growing disparities between those who receive fair compensation and those who are left behind. Therefore, finding a happy medium between voluntary adoption and equitable compensation is critical for employees and businesses.

On the other hand, mandatory annual salary increases may appear appealing for closing income gaps and improving employee morale. This strategy, however, comes with its own set of challenges. Mandatory salary raises may impose financial burdens on small businesses, jeopardising their viability. Increased production costs may cause inflationary pressures, resulting in price increases that affect consumers. Furthermore, the risk of employee complacency looms large in the face of guaranteed annual raises. Some employees may lower their performance standards if they are not encouraged to excel. Policymakers should consider the big picture before advocating for mandatory salary increases. Improving employee skills and competencies can result in long-term job growth and wage increases.

Thus, incentive-based compensation remains an appealing option for employers among the available options. Such a strategy, tailored to the specific nature of; businesses, industries, and corporate objectives, provides various benefits, such as; performance bonuses, commissions, profit sharing, stock options, and quality-based raises. This approach not only rewards exceptional performance but also serves as a deterrent to free riders in the workplace. Nonetheless, a study published in the Human Resource Management Journal offered a more nuanced viewpoint. Employees that are paid based on performance work harder; however, they also have higher stress levels and lower job satisfaction. It is, therefore, critical to strike the right balance between incentivising performance and protecting employee well-being. Incentives should align with individual and organisational goals in carefully designed incentive-based compensation plans.

Several factors influence the effectiveness of compensation strategies. Employer attitudes, market dynamics, labour demands, and government interventions are all factors that may influence the outcome. While the voluntary progressive wage model may improve worker compensation and encourage healthy employer and employee competition, it may also increase wage inequality and exploitation. As policymakers navigate this complex landscape, it is critical to prioritise equitable compensation while considering employers’ and employees’ various needs and constraints. Government intervention should be carefully calibrated to achieve a balance between raising income levels and ensuring economic stability.

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The author is a Senior Lecturer at the Department of Economics, Faculty of Business and Economics, Universiti Malaya. He may be reached at ltgoh@um.edu.my