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Productivity, Profits, and Pay: A Field Experiment Analyzing the Impacts of Compensation Systems in an Apparel Factory

  • Author(s): Lollo, Niklas
  • O’Rourke, Dara
  • et al.
Abstract

Factory worker pay in global value chains remains a contentious issue. In this paper, we evaluate a two-year field experiment in an apparel factory to analyze altered compensation systems designed to increase worker pay while supporting factory goals around productivity and profitability. Using a quasi-experimental design, with unique data on wages, hours, productivity, quality, and worker engagement, we estimate the impact of three altered compensation systems on pay, productivity, and factory profits. The compensation systems can be described as: 1) an improved productivity-based scheme, 2) a scheme that brings quality and waste reduction into the calculation; and 3) a “target wage” scheme. Overall, the treatments raised wages by 4.2-11.6% and increased productivity by 7-12%-points. Management reported significant financial benefits from the experiment, including increased profits for five of six lines, and avoided costs and productivity losses due to decreased turnover. The factory workers, through focus-group interviews before, during, and after the intervention, reported improved relations with team members and managers. This study demonstrates altered factory compensation can support better factory performance and a better paid workforce, indicating a path towards advanced supply chains with improved wages.

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