Fair methods to calculate salaries

Before 1980, three methods were used to determine the level of salaries: Performance-based pay, the law of supply and demand and salary based on training.

Performance-based pay. With performance-based pay, employees were paid a percentage, usually 90% of the added value of their own production. This stimulated companies to teach employees new skills and techniques, since increased product quality implied a higher income for both the company and for the employees.

Performance-based pay was invented by the Roman Empire and used by traditional companies for centuries. With the industrial revolution, it was replaced by the “law of supply and demand.” In 1952, it was reintroduced in the Netherlands for low and unskilled workers and led to the prosperity of the late 1960s and the 1970s.

Performance-based pay encouraged employees to learn new skills and techniques. Thus, production and salaries increased by 2% per year the first ten years. In the mid-1960s, employees discovered some skills and techniques worked better in some situations than in others, and they optimized their production, thus increasing production and salaries by 4.5% per year. In the 1970s, employees began to teach each other, and production and salaries increased by 12% per year. In 1979, a construction worker with 20 years’ experience earned 1000 guilders net per week.

The law of supply and demand was used for dirty, heavy, and dangerous work that no one wanted to do, and in certain industries. The method implied that a company would continue to increase the salary they offered for a particular job, until enough people responded who wanted to do the work.

This method of determining salary had to compete with performance-based pay. People who had been paid based on the law of supply and demand received a lower salary than people who were paid based on performance. But their salary was still higher than that of people who received a salary based on training.

Salary based on training. Companies that did not use the general ledger for profit and loss regularly incurred losses, which they try to keep under control through better administration. Over the past 100 years, companies have been developing more and more complicated administrative procedures for that purpose.

Administrative employees produced information that was not used outside the company. Thus, that information had no sales price. As a result, training was the most practical basis on which to determine salary. Before 1980, that yielded an extremely low salary.

At the end of the 1970s, it was virtually impossible for low and unskilled employees to attend training in the evenings because their work was very heavy, and part-time jobs did not exist. By 1980, companies thought they could use the fact that workers were unable to attend training to reduce their salaries once and for all. By making salaries dependent on the level of training and the number of hours worked, companies were hoping to reduce workers’ salaries to the level of administrative staff. But the system backfired.

In 1980, the salary of a construction worker with 20 years of experience dropped to 2600 guilders net per month. In response, workers started to work slower, and a large segment  of workers in the industry were dismissed in 1981. This led to the crisis of the early ’80s.

Hourly wage, however, caused even more problems, especially in cases where the product of a company is paid per month―for example, through newspaper or fitness center subscriptions.

For hourly wages, a company calculates the average number of hours that must be worked per year to do all work. The turnover the company needs to be profitable is based on that average number of hours. But in some years, fewer hours are worked, and in other years, more. In the cheap years, fewer than the average numbers of hours are worked, so salary costs are less than income, and there is money left. In expensive years, more than the average number of hours is worked, so salary costs exceed income. In the years that the salary costs are lower than average, the company should keep any remaining money for the expensive years. If the company instead uses that money to pay out dividends/distribution of profits, too little money remains to pay salaries in the expensive years. So the company runs up losses and cuts back. This results in reduced turnover, and the company cuts itself back into bankruptcy within a few years.

A similar problem occurs with products that are paid per order. When employees make mistakes, the product is damaged. Then they are paid an hourly wage to repair those errors, while the customer doesn’t pay for the restoration of the errors. As a result, the company regularly incurs losses. In addition, an hourly wage urges employees into rushing, so they make more errors.

For the best chances of survival, companies should pay a fixed salary per day/week/month on the basis of the average production per month (or in the case of a farm, the average production over the last year), regardless of the number of hours worked. Exceptions are employees who are paid for their presence (including security) or to be present at the right time (including nursing), which can best be paid a fixed salary based on the number of days worked.

Ironically, forty years of cutbacks have caused the salaries of employees who perform duties essential to the survival of our society to fall to a level at which it is hardly possible to live. This is especially true for stock clerks and mail delivery personnel. Before 1980, stock clerk was a fully-fledged job with a salary high enough to maintain a family of four.

The problem with high unemployment is that companies are opportunists and think that for every job opening they have their choice from hundreds of thousands of unemployed people who are desperately looking for work and are legally required to take anything they find. As a result, these companies can continue to reduce their salaries.

Smart savings ensure companies become healthy

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