Edition 35, Human Resources

Promote Productivity Payment: National Development Agreement

By: Carlos Osuna and Carlos Amtmann

The purchasing power of Mexican families has deteriorated during the last thirty years and has fallen dramatically due to the economic stagnation. México holds position 108 of the 134 countries in the Gini Index of the income distribution, and the international average is 40.34%. The Mexican index is at 48.2% – in 1950 it was close to 60%-. The trend is to improve, but it would take another 36 years to reach 26%. We fell in competitiveness from the 31st place we had in 1988 to the 66th and we had an approximate growth of 1.89% annually during the last 30 years. We have not reached cruising speed, which is the level Mexico deserves. However, there are ways and means to accelerate the pace.

The salary situation is extremely serious. This is reflected in the analysis of the pension systems: “The small number of workers registered in the social security systems are affected by the few years of contributions to the pension plans and, eventually, by the creation of a fund that is not large enough to be able to obtain an annuity. It can be seen that persons registered in their first working ages would spend most of their active work life outside the social security systems, and therefore they would be making contributions to their retirement plan of approximately twelve years for men and eight for women, which is very far from the minimum pension guaranteed under the IMSS Law in effect. Economic forecasting scenarios show that a constant 4.6% GDP growth rate would be required during a 30 year period (2000-2030) in order for the formal jobs with social security benefits to account for almost 85% of the PEA (Economically Active Population)

The National Technical Committee of the Instituto Mexicano de Ejecutivos de Finanzas (Mexican Finance Executives Institute) is convinced that compensations based on results can trigger domestic demand. It was agreed to consider productivity payments to the workers. “With an average annual 6% and 1.5% population growth rates, income per capita can go in 25 years from $7 thousand to almost $21 thousand dollars a year. But if the annual growth is 4.5%, it would take 37 years to get there, that is, 50% more time”

An agreement is being reviewed by the stakeholders – workers, businessmen and authorities – to amend the Income Tax Law and its repercussion on the IMSS Law. In the agreement, if a company has its workers registered in the IMSS with integrated daily salaries higher than the mean and they received a variable payment based on productivity, it would not be included in the base salary of the quotation. First, in order not to burden companies with more payments expenses and second because with good salaries already registered, the workers would contribute their fair and worthy participation of the IMSS contribution. The initiative has locks to guarantee: that the average salaries of companies vs those set by IMSS on an industry and company size as well as its corporate objective and region where they operate; that there is an annual profits increase and that the productivity payment is registered at the STPS (Secretary of Labor and Social Security).

Results Based on a Mature Strategic Administration Model

It is costly for companies to implement the necessary management systems to monitor objectives, goals and follow up on the results of workers, employees, managers and top management. This administrative cost may or should almost be subsidized to promote productivity and the corresponding payment.

There is a proven existing correlation between productivity payments and the profits of companies (82%). It also generates a higher remunerations virtuous circle, more consumption, higher profits and more taxes collected. It all derives from the same productivity increase, and therefore it would not be inflationary.

To achieve this is not something out of this world or space science. In accordance with the innovation definition, it is an issue of benefitting from the workers’ ideas. A simple example is to sell a shirt with your initials embroidered. This modifies the contribution in 9.49% ($50.00/$527.00) made by the shirt to GDP and also, the seamstress has a job. Use the same example with an ebenist that improves the carpenter’s work, the software, etc; it has to be stimulated, for it to happen!

Tax Incentive

The tax incentive to be promoted, to encourage entrepreneurs to set their own productivity metering systems, would be the Income Tax withheld from workers on the productivity payment – if he complies with the requirements – this can be accredited against the company’s annual income tax as follows: 100% the first year of the plan’s implementation, 75% the second year, 50% the third year and 25% in the fourth year and at the end of the incentive, beginning on the first year in which the company implements and registers it. For the IETU (Corporation’s Flat Tax) and IMSS laws, this payment would be treated as employee profit sharing.

In aggregated figures and also in the example given with real figures of a hotel – shown later – this tax incentive is not a cost for the government treasury. When calculating the average income tax rate on salaries is 7.8% with figures of salaries of the National Accounts System vs income tax collection on salaries reported by SHCP (Ministry of Finance) (2008), we may think that if a $1,000 productivity payment is made, there will be a $922 net amount for the worker. With figures we know that in Household Expenses (INEGI) we spend on food 34% and 3% in medicines that do not pay VAT, but 63% on does that do pay VAT. Then $922×0.63 = $580.86 with $80.12 VAT included, we can state that this amount collected is greater than the $78 income tax amount that the company will compensate with the incentive.

The VAT on expenses and the Income Tax withheld is collected by SAT during the year. The company accredits this vs its annual Income Tax on March of the following year and a small amount for VAT collected. In addition, in the second year of application of the productivity payment plan of the company, the accreditation of the income tax withheld drops to 75% and consecutively thereafter. This is the beginning of the virtuous circle of productivity-gains-payment-consumption and tax collection. An additional incentive is that with the productivity payments in the annual calculation the company improves its own Gini Index (income distribution indicator), and then it can keep 100% of the accreditation of the income tax withheld from the workers on the productivity payment.

Work intermediaries are included in this proposal – provided that the requirements on salaries are registered, the productivity plan increased profits refer to the Company that is the work beneficiary – so that they can implement the incentives mentioned.

Additional Idea in Favor of Severance Workers’ Funds

If the legislator approves the productivity payment method proposed –it can be achieved with two additions to Article 29 of the Income Tax Law– to do something in favor of pensions the proposal is to allow that part of it (for example, 33%) of the productivity payment may be destined to a labor welfare fund after the tax is withheld and remitted. The disbursement of those funds previously established in the plan registered before STPS could be due to three causes: one to offset the workers’ income in recessive cycles when their productivity income would decrease. Two, when they leave the company, and here a table in steps could be agreed upon and that includes the percentage they are taking and the percentage they leave in favor of the other workers to generate loyalty and permanence in the formal system, in accordance with the table that define them based on the workers’ seniority. And third, it is delivered to their Afore account where it will be saved for retirement.

This proposed model invites to a National agreement of all the stakeholders to revert thirty years of economic stagnation, where each participant, whether treasury authorities, entrepreneurs, workers and families will be benefitted by the productivity payment in a joint effort to have better quality of life and a more productive México.

Example, Payroll Accounting Cost

The example that shows the normal salary scheme cost, with 335 participants and several salary levels is taken from a 5 star hotel. The first Column A shows the normal payroll, including the $150 of help for food. In column B a productivity bonus is given to these workers of that amount so that they have a 10% net increase in their monthly income. Column C is the proposal referred to where the productivity bonus is added to their income for Income Tax calculation, but not for IMSS. The fourth column D is payment of the 10% through another Company as a fee that can be added to salaries (see Monthly Payroll Cost Chart).

Because the company wants to give its workers a net additional 10% payment, it has an 11.2% higher cost on the extra money workers receive. Instead the cost of the proposal is 9% more. If you compare the mechanism that pays through another company, we confirm that it is more attractive to take that risk, although there is a charge on the workers’ taxes and is on the border line of illegality. The Income Tax Law establishes in Article 117 that if additional income is added to the salary, an annual tax return has to be filed, even if it does not exceed the limit required, which is $400 thousand pesos.

In order to pay with the payments assimilated to salaries modality through the other Company that 7.7% bonus cost, and compared to the 11.2%, the orthodox modality is 45.71% more expensive and encourages tax avoidance and thus a bad thing is created that damages the worker and the IMSS.

It is better to give the proposed benefit to the company and encourage it to act legally, by allowing this amount to be accredited against the income tax payable by the company, as additional income tax withheld from the worker. It would be an incentive for it to adopt the measuring of productivity and to maintain its salary income at the IMSS at a good level.

As stated in the incentive proposal to make productivity payments. Let us remember that if we have to grow more than 4.5% a year, there are things that have to be changed. We propose a productivity payment because it is not inflationary, it generates a virtuous circle, forces to judge and be judged with ethics and it is paid if workers are more productive.

If the correlation between productivity payment and company profits is high, why the productivity payment does not naturally disseminate? We believe that there are two basic reasons. The first one is economic: the cost of setting up a mature administrative system that allows measuring individual or group performance, that links profits to operational processes. The second is emotional, businessmen are interested in making good profits, to live well and accumulate reserves that help face business or the economy volatility cases, episodes that became more severe after the elimination of the gold standard in 1971, of the issuance of excess money supply, expropriations, expansion of informality and the sudden commercial opening, combined with the armed riots of Chiapas.

The emotional factor shows this in a study of 120 entrepreneurs – bond agents with historical data on their expenses and income since their companies were created – and it reached the conclusion that it takes them between four and five years to reach a stable revenues level. Already stabilized, the increase of revenues stops, until approximately the tenth year in which they once again go to the market to get clients to recover their revenue level. They do not overburden themselves nor do they invest in motivating their personnel to make more money, nor in implementing mechanisms to achieve this, because it costs money.

The objective wanted with this proposal is to contribute with concrete ideas and incentives to stimulate businessmen to commit themselves with the increase of revenues of their companies when they have reached a stability level and they can invest to make them grow, increase their workers’ productivity and if achieved, they may also have access to profits generated by making a work effort to obtain them, and thus encourage the treasury authorities through the promotion of a tax incentive to motivate entrepreneurs to have productivity measuring systems that have to implement a mature strategic management system. This invites all stakeholders to make a national agreement and this creates a win-win virtuous circle where the necessary resources are generated to remunerate and to make both, the corresponding workers’ and the company’s tax payments.

Why Measure Productivity of Human Resources

The control of labor costs reduces variability of the processes, implies to know the availabilities of workers, their skills, their age, their talents and experience. To adapt them to the work line that better suits their persons. The increase in labor productivity is achieved when the supervisor is supported with the existing excess labor information if the resources are optimized.

When the allocation and consumption of resources is known during the production, the labor expense is better understood, as it determines where each labor peso is spent. And because they were realigned based on their skills, personnel improves adherence to the strategy, to labor standards, to internal regulations and to the corporate government quality standards.

Large companies may use sophisticated productivity monitoring systems where the position and performance requirements are measured. “Today digital technology facilitates this work; new lights have been generated to calibrate labor effectiveness of the performance and formulas indicators. For example, costing is based on activities (ABC) or on another one called Overall Labor Effectiveness™ (OLE: Uso Laboral Efectivo), which consists in combining through a mathematics formulation the results on the availability of labor, its yield and the quality of the work and products delivered”.

I To implement these techniques and to better allocate the resources, to make rules and results visible, and afterwards to measure the results achieves the combination of an improvement in the allocation of resources and provokes an increase in the profit margin. Here is an example of the sheet used by a small company to agree on the Objectives and Responsibilities for the period where the ratings by objective agreed upon come from concrete measurements and which are weighed based on their importance.

A Case as an Example

To install a sophisticated objectives and responsibilities system for a medium size Company, let’s say a 355 workers hotel, US$150,000 or $1.87 million pesos would be required.

This 314 room Gran Tourism hotel with two restaurants, a bar, a disco, swimming pool, gym and several conference rooms has a monthly payroll cost of $2.4 million and revenues for $12.0 million with a 60% standard occupation. Its gross operating income is between 40 and 45%, approximately $5.1 million before depreciation and taxes.

Following the example, a 3.2% margin increase, generates a monthly cash increase of $163,200; that adds up to $489,600 every quarter.

Let us compare the implementation cost and the productivity payment proposed, and also the tax incentive to catalyze the process due to the adoption of a culture to measure productivity and improvement.

In order to commit the workers to this improvement, we offer to make a marginal productivity payment. In this example we assume that the increase in productivity deserves a 10% net productivity bonus on the salary. The gross cost of the proposal by not accumulating it to the base salary level at the IMSS is $211.6 mil pesos.

We see that the cost of this 10% bonus would be $262.4 under the current system that is $50.8 thousand pesos or 24.1% more expensive. Instead, the tax incentive included in the proposal allows the compensation of the income tax withheld on the productivity payment versus the annual income tax payable by the company, if it has higher annual income in its tax return. Therefore, this quarter it would obtain a $38.2 thousand peso profit.

Quarterly Summary in the case of a Hotel

If the implementation cost of the improvement system is $1.87 million pesos, this investment is recovered in 5.7 months.  And the best is that the Hotel is able to instill an entrepreneurial spirit in its personnel.  And not only that, there is also a social impact with a multiplying effect that is summarized as follows:

Conclusion

To pay productivity under the plan proposed creates a virtuous circle where the workers and the entrepreneurs, trade and the government income increases and society becomes more organized. It is a social benefit that will be fostered if it is well understood and executed under the proper amendment to the law, and this can only be achieved if the groups interested in Mexico’s progress unite in a national agreement for development, and smooth the way agreeing on the necessary incentives to promote productivity payments.

Technical Note

Chart that explains how to calculate a company’s Gini Index.

The first step is to add the income of each worker in a year, including grocery coupons, punctuality bonuses, savings funds, that is cash equivalent payments. Second, they are in an ascending order, grouping the workers with the same income. Thus in column A the chart gives the amount of collaborators with the same annual income. Column B is the amount of money they make in pesos. Column C is the result of multiplying A x B. Column D is the percentage of workers in each row. Column N gives accumulated amounts. Column E shows the proportion of perceptions per row, while in column P the sums are accumulated. Finally in column Z the result of column N is multiplied by the result of Column O, deducting the previous (see formula). To obtain the Gini coefficient the results of Column Z shall be deducted from the unit.

Formula:

You can download here a pdf with the tables

2 Comments

  1. carmen troyo
    Posted %A %B %e%q, %Y at %I:%M %p | Permalink

    excelente iniciativa, deberian implementarse si queremos un verdadero cambio de fondo en el pais.

  2. Posted %A %B %e%q, %Y at %I:%M %p | Permalink

    Claro que seria exitosa esa iniciativa, para ello se requiere un cambio de actitud. Es sencillo, pero la voluntad de hacerlo la entorpece la falta de valores humanos, la avaricia absurda, cuando en trabajo de equipo todos salen ganando. que bueno que cada uno estemos poniendo nuestro granito de arena en nuestra propia especialidad.

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