Article: From Minimum Wage to The Productivity Linked-Wage System (PLWS): The Case Study of Malaysia

 1.0 Introduction

Globalisation has drastically affected the labour market in terms of developing career prospects and raising real wages (Dreepaul-Dabee & Tandrayen-Ragoobur, 2022). Although several developed nations have benefited from global expansion, some emerging economies are still struggling to improve their labour market conditions and lower the poverty rate (Dreepaul-Dabee & Tandrayen-Ragoobur, 2022).

As a result, numerous developing nations have implemented or increased their national minimum wage to decrease salary inequality, enhance workers’ standards of living, and reduce poverty rate. This is pertinent in today’s era of high inflation. 

Generally, the minimum wage (MW) can be referred as the minimum amount of compensation which cannot be reduced by a Collective Agreement (CA) or any individual contract and urges employers to pay the income earners for the work/task accomplished during a particular period (ILO, 2014).

In other words, the minimum wage is the frequently used policy measure to aid low-paid employees by providing a contractual compensation base (Redmond, Doorley & McGuinness, 2020). According to the Global Wage Report of the ILO, the minimum wage is a commonly used mechanism to protect earnings and the purchasing power of low-paid employees and their families (ILO, 2022).

Indeed, the significance of minimum wage as an instrument for social justice can be emphasised as 90% of the ILO Member States have minimum wage systems in place to safeguard low-income earners against the severe losses of purchasing power (ILO, 2022). Nonetheless, minimum wage is a basic salary without incentives or bonuses, which is also not linked to employees’ productivity. Therefore, this article aims to understand the situation of minimum wage from the past till the present, while also examining how minimum wage has evolved from the introduction and execution of the PLWS in Malaysia.

2.0 Minimum Wage from the Global Perspective

In recent years, the COVID-19 outbreak and the high cost of living have substantially affected wages and purchasing power across many regions. Therefore, developed and developing nations have established and strengthened minimum wage systems to combat insufficient pay and encourage decent work.

For instance, a study by Dustmann, Lindner, Schonberg, Umkehrer and Berge (2021) cited that the German government enforced a national minimum wage in January 2015 for the first time in the country’s history in order to combat declining wages at the bottom of wage allocation and the reduction in trade unions significance. In addition, the government established an initial level of €8.50 per hour, which directly impacted the wages of four million employees whose earnings were less than €8.50 prior to the enactment of the minimum wage (Bruttel, 2019). Nonetheless, the national minimum wage has been revised by October 1, 2022 (Appel, 2022), intending to benefit over six million individuals employed in Europe’s largest economy.

Furthermore, the National Minimum Wage Act of 1998 set a binding minimum wage across the United Kingdom and came into force on April 1, 1999 (BBC, 2022; Hafner, Taylor, Pankowska, Stepanek, Nataraj & Stolk, 2017). Additionally, the national minimum wage was introduced at £3.60 per hour for employees over the age of 22 and £3.00 for those aged between 18-21 (Statista, 2022; Pyper, 2018; Edwards & Paul, 1999). Nevertheless, the UK’s government reviews and records a new wage to ensure that employees receive economic compensation that covers basic living expenses.

Since the 1990s, Indonesia, as one of the Southeast Asia nations, has executed a minimum wage policy with frequent changes (Chun & Khor, 2010). Nevertheless, due to fuel, food and accommodation inflation, the minimum wage across the nation will increase by a maximum of 10% by 2023 (Medina, 2022; Sihombing & Jiao, 2022). Likewise, Japan has also increased its minimum wage to ¥1,072.00 per hour in order to aid low-income households in coping with the high cost of living (World Economic Forum, 2022).

Thus, it can be seen that minimum wage is one of the widely debated policy initiatives in the global labour market (Bruttel, 2019), which aims to protect workers from unfavourable working circumstances. The figure below displays the monthly minimum wage rate of some selected countries in USD.

3.0 Background of the Minimum Wage Policy in Malaysia  

Prior to 2011, Malaysia was a nation in which wages were determined and set by market forces, Collective Bargaining (CB), individual mutual agreements between parties, and the Wages Councils Act of 1947, which primarily applied to limited sectors (e.g., port, cinema, security guard and others). Nonetheless, the Act was replaced by the National Wages Consultative Council Act (NWCC) 2011 in order to revise the minimum wage order (Yeoh & Wen, 2022), particularly by covering the low-income group in private sector whose earnings were below RM2,500. Thus, as cited by Ahmat, Kim and Arendt (2021), in 2013, the Malaysian government introduced a particular minimum wage policy to enhance the standard of living for its citizens.

As previously stated, the minimum wage order was enforced in January 2013 with a monthly payment of RM900 for Peninsular Malaysia and RM800 for Sabah and Sarawak (DOSM, 2022). In 2016, the rates rose to RM1000 and RM920 for Peninsular Malaysia, Sabah and Sarawak, respectively (DOSM, 2022; Lotova, 2016). In the same year, the Malaysian government ratified the Minimum Wage Fixing Convention, 1970, with ILO, making it the 53^rd member State which has ratified this crucial Convention (ILO, 2016).

In 2019, the government raised the minimum wage to RM1,100 nationwide (DOSM, 2022; Ramasamy, 2018). While in February 2020, the government mandated an increase to the minimum wage to RM1,200 in 57 city councils (Shankar, 2019). Following this, the Minimum Wage Order Law in Malaysia will be revised every two (2) years. Hence, from 1 May 2022, the rate was raised to RM1,500 nationwide (Lim, 2022; Povera, Radhi & Ying, 2022; Hani, 2022).

The primary objective of the establishment of the NWCC was to revise and review the minimum wage rate for employees every two (2)years (Salim, 2022). Nevertheless, this gap may lead to a higher inflation rate and increase the cost of living, specifically among the B40 group. Therefore, the Productivity-Linked Wage System (PLWS) is another micro policy and guideline introduced by the Malaysian government in 1996, which can be used as a voluntary tool by employers to reform wages in their organisation.

4.0 Briefing on the Productivity-Linked Wage System in Malaysia

Productivity has always been one of the fundamental aspects of the nations’ economic development as well as the citizens’ living standards. Indeed, productivity and wages increase when the nation becomes more competitive and developed. Employees need to acquire significant gains from increased productivity in order to acquire a better standard of living through higher compensation (Bahman, Muhammad, Imansah, Sin & Besar, 2020). Therefore, Productivity-Linked Wage System (PLWS), as a voluntary system by employers, was introduced in Malaysia to empower employees and employers by enabling them to benefit from fair rewards, enhanced productivity and improved performance (Bahman, Muhammad, Imansah, Sin & Besar, 2020).

In 1996, the wage system known as PLWS was executed once the National Labour Advisory Council containing the Malaysian Employers Federation (MEF), Malaysian Trades Union Congress (MTUC), as well as the Ministry of Human Resources, approved the establishment of the Guidelines on Wage Reform System (Nathan, 2018). In general, PLWS is a flexible and competitive wage system that allocates wealth based on the employer’s and employee’s performance as well as their productivity to enhance the firm’s shared prosperity and competitiveness (Star News, 2021).

In essence, this wage system establishes a closer relationship between the performance of employees and organiations by ensuring that wage increases are in accordance with productivity improvements (Sofia, 2022). Indeed, enforcing PLWS was a priority under the Shared Prosperity Vision 2030 and Malaysia Productivity Blueprint to raise compensation and form a future workforce by harmonising organisational policies, encouraging employees, boosting job satisfaction, advancing career pathways, fostering an honest relationship between both parties and facilitating skills-related specialisations (Star News, 2021).

Therefore, PLWS can be pinpointed as a wage system which boosts cooperation and forms a stronger sense of belonging to the firm among employees, leading to a healthier and more productive workforce. For instance, the National 2022 Winners of PLWS Companies reported that the low-income earners (B40 group) earned more than RM1,500 with additional financial incentives, which aid them in improving their quality of life and combatting the high cost of living.

5.0 Benefits of Implementing Productivity-Linked Wage System

According to the Economic Outlook Report (EOR) 2020, the PLWS offers a more flexible wage system to overcome economic turbulences, ensure job resilience, and reduce the likelihood of layoffs during downturns (Bernama, 2019). The EOR (2020) further claimed that PLWS enables employees to look forward to achieving higher bonuses in economic booms. While this wage system also enables organisations to manage their cost better and remain viable by revising wages rapidly without resorting to drastic cost-cutting actions (Lee, 2019).

Additionally, the Ministry of Human Resources reported that a study conducted in 2013 indicated that employees were more inspired and had higher job satisfaction through enforcing PLWS. Simultaneously, the profitability of companies increased by 10%, productivity by 15% and wages by 10% (Lee, 2019). Therefore, the career opportunities and working circumstances satisfied employees, besides being more committed to the enterprise.

6.0 Example of Malaysian Companies that Implemented the Productivity-Linked Wage System

Example 1:

Wira Ukur Consultant (WUC) is a small firm under the definition of SME in Malaysia, established in October 1990. This company is a professional firm located in Kelantan and registered with the Land Surveyors Board Surveyors Malaysia. The owner of WUC could successfully retain the talents, sustain its business, enhance organisational productivity and keep workplace harmony, especially during a crisis, by providing minimum wage along with the implementation of PLWS. This enabled employees to achieve financial incentives.

Example 2:

The Malaysia Productivity Corporation (MPC) has intensified efforts and actions to raise awareness of the PLWS and e-Shared Prosperity Organisation (eSPO) Acknowledgement Certificate. Indeed, it would encourage several enterprises to become shared prosperity organisations under the Shared Prosperity Vision 2030 (Bernama, 2021).

KPJ took advantage of this opportunity by acquiring its eSPO Acknowledgement Certificate. PLWS became the principal element in the hospital’s talent management, the formation of stable relationships among the staff and clients, as well as the growth and development of the hospital. Therefore, parties have developed together by acquiring mutual benefits through embracing PLWS (Bernama, 2021).

Example 3:

In March 2009, Bumi Emas Services (BES) was established in Miri Sarawak as a secretarial service firm offering a wide range of services (BES, 2022). As the company falls under the small industry category, talent retention is highly crucial. Therefore, retaining talented individuals and enhancing morals among employees to be more productive is one of the significant results obtained from the enactment of PLWS.

Undoubtedly, the PLWS guideline enabled the company to encounter a win-win situation by boosting the productivity and effectiveness of employees, resulting in customer satisfaction and retention. According to BES, the constant support of the firm’s top management delivered the assistance to form this system. Therefore, the company’s productivity rate through PLWS has improved by 30% since its participation in the programme (BES, 2022).

7.0 Overall Discussions and Conclusions

The minimum wage primarily seeks to reduce poverty, accelerate technological advancement at the workplace in line with IR4.0 and reduce foreign labour reliance. This is highly crucial in order to move from a labour-intensive to a high-tech nation (The Straits Times, 2015). Nonetheless, the adoption of PLWS in Malaysia is geared at improving employees’ payment skills to move from the minimum wage.

Despite positive findings, the PLWS enactment rate remains low due to a lack of awareness and high implementation costs (Bernama, 2019). Nevertheless, efforts in the country will continue to expand the enactment of PLWS to assure that incomes correlate with productivity levels. At the same time, the Human Resources Development Corporation would persist in focusing on upskilling and reskilling programmes and encouraging more employees to be trained and prepared (Bernama, 2019).

Overall, PLWS is a tool offered by employers to improve the income share, while its engagement with the minimum wage enables employees’ career development and improves employee welfare and justice. Indeed, minimum wage and PLWS are pivotal policies in Malaysia. Therefore, these two policies can support the nation in achieving its high income status, all while boosting productivity and raising standard of living. 

**The author would like to acknowledge and say thanks to Ms. Nazanin Dara, a Ph.D. Student from the University of Cyberjaya who assisted me in this research project. **

 Professor Dr. Balakrishnan Parasuraman is a Professor of Management/HR/Industrial Relations at the Faculty of Entrepreneurship and Business, Universiti Malaysia Kelantan (UMK) based in Kota Bahru, Kelantan. He is a member of the International Honor Societies of the International Employment and Labor Relations Associations (IIRA) based in Geneva, Switzerland, Malaysian Institute of HRM, and International Employment Relations Association, Sydney, Australia.