Mike Dershowitz
Mar 13 · 15 min read

At first, it may seem like an added cost, but paying a COLA actually will cost you less and produce better results than you expect. Here’s why.

Original image by Sanja Gjenero via Picspree

The erosion of economic power has been the driving force behind much of the social unrest that has gripped various societies over the last few centuries. Many of the great economists, including Piketty, Keynes, and Robinson, have rightly observed that societies in which economic power is significantly imbalanced have had or will have social unrest.

Citizens’ loss of economic power can have a large impact on their daily lives and feeling of personal security. When people feel they have no power to change the status quo, they take to the streets and try to change by force that which they cannot otherwise change with the little political and economic power they possess.

Employers, especially of those workers earning between the minimum wage and the middle-class wage, have the ability to prevent the erosion of the economic power of their workers, and at less cost than those workers earning the middle-class wage or above.

They can do this without spending more money on wages, but by simply reconfiguring how they calculate and give those Agents yearly raises, by switching from tenure raises to a COLA, much like governments do (COLA stands for Cost Of Living Adjustment).

In the BPO industry, the overwhelming majority of Agents employed are earning between the minimum wage and the middle-class wage. When inflation or other macroeconomic factors change, like increases in sales tax that overwhelmingly affect the poor, the Agents’ monthly household economics are negatively affected by base erosion.

(NOTE: Base erosion is defined as your purchasing power at the start of a period of time versus your purchasing power at the end of whatever period you’re measuring. Inflation always erodes purchasing power.)

BPO employers, including my company, Rethink Staffing (“RTS”), have the ability to prevent the erosion of, if not increase, the economic power of Agents over the lifetime of their employment with the BPO firm.

BPO firms can do this by replacing the current system of tenure raises — whereby Agents are rewarded for the number of years they serve the employer in the same job — instead of being rewarded for performance in their existing job. This is a crucial difference, since what creates real economic gains for people living in this income band is actually the ability to earn above the middle-class wage, by performing well and getting that next job.

If they do this, the BPO firm will reap two forms of economic benefits. First, work quality and work ownership benefit, through a more engaged workforce, that accrues to the top line through client retention. Second, reduced attrition, training, and redundancy costs, which accrue to the bottom line.

The Agents fare even better. With the firm preventing the erosion of their economic power by the use of a COLA, the Agents’ lives are more stable because their household economics are stable. It creates better living situations for Agents, and reduces or eliminates a large amount of stress. For those living in this wage band, a huge burden caused by the possibility of economic calamity has been eliminated.


Why a tenure raise system is harmful to the BPO industry

BPO employers, both in the US and in the developing world, have mistakenly linked tenure raises to better work quality and productivity by their agents. For years, BPO firms have used tenure raises as a reward to people who are able to survive long term within their environments. If they can survive, BPO managers reason, then they’re a good employee who can probably do a higher-level job. And so, only after survival are they rewarded with a better job that has greater economic security.

This is a flawed strategy that has led to much misery in the people who do not survive, turning Agents who are hired as wage earners, into itinerant workers — hopping from one call center to another. The slang in the industry is “hoppers.” The misery in this case is shared misery, as this system has also rewarded the BPO industry with yearly attrition rates north of 100%, and daily absenteeism greater than 10%.

But that is what the industry has created, especially in the developing world where the American obsession with Happiness, which at least gets US managers to question if their workers are Happy, is virtually non-existent.

This lack of caring about “Agent Happiness” has created a pernicious cycle of legions of people trying to “survive” long enough to get to that 6-month, or year mark, or two-year mark, so they can hope for a tenure raise, and maybe a chance at a job within their company where they will have more economic security.

Constantly running to survive produces a workforce that will always do the minimum required, because the point isn’t to perform well but simply to survive to that next mark in time. When a person is in survival mode, there is no “Agent Happiness.” More specifically, there is no happiness at all for the Agent, who lives in fear for losing his or her job, and whatever minimal economic security it may be currently providing. There is no way a person struggling to survive can render good customer service or be engaged with their job.

The industry is not foolish, however. Employers know that tenure raises drive work to the minimum. As a counterpoint (foolish as it may seem), they have created the all-mighty “SLA” (Service Level Agreement), a set of statistics meant to drive Agent performance to quality and production standards that the client demands for the work being performed.

I would never tell you that SLAs shouldn’t exist, but I don’t believe they are all-mighty. In fact, SLAs tend to exacerbate the survival problem, since missing a metric or milestone in SLAs is one of the key reasons Agents don’t survive long to reach their next tenure mark.

SLAs are so flawed, in many cases, that they are practically unachievable. And so, the Client and BPO vendors are locked in a perpetual struggle where the SLA is missed, the Client complains, and the vendor says they’ll do better. One of the ways the Vendors “do better” is by going over each Agent’s SLAs. Those that make the cut, stay; those that don’t — don’t. And, the attrition rate goes up. You reap what you sow.

But in the end, Agents are locked in a struggle for survival. I ask you, is living to survive fun? Or is surviving a life of finding temporary joys sandwiched between crisis, and putting yourself on auto-pilot as you churn through the daily requirement of your labors. This type of life would not be fun for anyone, and it’s certainly not fun for Agents. Please remember THAT the next time you call your bank or cell phone company.

Providing agents, from the start of their employment, with economic security, and later ensuring that their economic power isn’t eroding if they choose not to take a higher-level job, is the only way to reverse the survivalist mindset that the BPO industry has created.


Why everyone wants a government job

In the developing world, government jobs are the most prized. The stability that they offer has anchored millions of families around the world, as the person holding the government job is often the breadwinner, and is certainly the economic anchor within the extended family units that are common in poorer populations.

In the developing world, governments set floors for wages that are often above-market wages in the private sector. There are a number of problems with this compensation strategy, but foremost, it breeds complacency for those that would otherwise have to compete and perform well to achieve the same wages available for a similar position in the government.

Unlike in the private sector, government jobs do have a limit, and the people that rise to the top of government departments will make less than their private sector peers. This is why many in the US complain about the “revolving door” between government and the private sector, and how it breeds corruption.

While those pundits are not wrong, from a strict perspective of a person maximizing their individual economic utility, it’s actually quite logical: Those who want to serve in government do it to get a better job in the private sector upon ending their time in government, or they go back and forth as they seek to become financially secure for their family.

Even though workers in the government receive a COLA every year, government jobs also have a big flaw. In most cases, these workers are in a job that has no performance requirements save for keeping your boss happy. Thus, they have no incentive to perform above the minimum, a level of mediocrity so pervasive in this sector, broken only by the exemplary performance of the most interested and self-motivated workers. Citizens that interact with government workers like this, as most of us on the planet have, can attest to how “minimum” is the best word to describe how work is generally done in government offices.

In societies without strict governance or guidelines on government worker performance and responsibility, government workers are sometimes able to charge citizens implicit rents for the services they provide during the normal course of this work. These implicit rents are usually in the form of bribes, small gifts, or “expediting fees.”

While sad, this is quite common, and this is another key motivation to attain a government position. However, implicit rents are rarely good for an economy (or a society), and those societies where petty or large corruption is prevalent will always be plagued with bigger problems because of the lack of incentive to change the status quo.

These are the primary reasons why a government job is so highly sought after. Stable pay pegged to inflation (so there’s no erosion in economic power), a job that’s hard to lose for performance reasons, and the potential for earning implicit rents, without repercussions. Of all these benefits, of course, the only one that I agree with is the use of a COLA, so that government workers’ economic power is not eroded by inflation.


Abolishing tenure raises, and the life of an Agent with a COLA

A COLA is a very simple concept. There are many formulas to calculate it, but the simplest is to peg wages to inflation. At Rethink Staffing, we’ve adopted a six-month cycle for a COLA. Every six months, we take the official inflation rate in the countries where we operate, and we give everyone a raise the month after those rates are released, equivalent to the rise in inflation.

The purchasing power of an individual, group or firm is a core economic concept. We are all economic actors in many markets. When we enter a market to buy or sell, we enter that market with a certain amount of purchasing power. The greater the purchasing power with which you or your company enters that market, the more power you have within that market to buy or sell what you want in a way that economically benefits you or your organization.

Unlike a COLA, when employers give only tenure raises that are not tied to economic conditions, it places the burden of carrying the economic risks associated with rising inflation on the agent, instead of on the company. To use a simple example:

If I’m an agent making 20,000 Philippine pesos per month, and a kilogram of rice costs 1,000 pesos (hypothetically), that kilogram of rice would cost me 5% of my monthly salary. If inflation is at 7% in a year, like it was in 2018 in the Philippines, then that kilo of rice would now cost me P1,070.

Why the extra P70? Because under a tenure raise system (assuming my employment has been stable), I still make 20,000 pesos per month, but rice now costs more. I have lost 70 pesos with which to buy other things, or to save or invest. That rice now costs me 5.35% of my monthly salary. My economic power in my economy has been eroded because I still need to buy rice, and now it requires more of my monthly salary to buy the same rice as before.

Purchasing power is how people survive their daily lives in a market economy — how they buy food, clothing, shelter, fuel, movie tickets, etc. It’s how they can afford to send their kids to a private school instead of a public one. When the Agent works for a company that has a COLA, and not tenure raises, no matter what happens, at least their purchasing power stays the same. They know that if the price of rice rises too fast, they will be insulated from it. At worst, they may only have to wait six months until their next COLA.

Every six months, their economic power is reset. Imagine what that does to a person’s individual psychology and how they feel about their lives and their jobs. People working within this income band are already facing a host of risks to their daily lives — personal safety, sanitation, sickness, poor shelter, and inflation (which generally is worse in developing economies). But, if they have sufficient economic power in the places they go and live their lives, and if that economic power is stable, at least pegged to inflation, think about how that can change their thinking about their lives.

Knowing you have stable economic power means that instead of thinking about crises and calamity, you’re thinking about the future and what you want to work to achieve. You’re thinking about saving, upgrading your housing, and maybe sending your kids to an excellent school. You’re managing your household budget with certainty, instead of the uncertainty created by the tenure raise eroding wages and the “hopper” culture that most agents are caught in. Economic power certainty is the only way people can plan and make good choices — which is the only way people can get out of poverty and stay there.

Most importantly, once Agents are insulated from an erosion in their economic power, they can focus on their jobs. When they focus on their jobs, they perform better. When they perform better, their value increases to their employer, and they get offered higher level work and promotions because the employer is also gaining by the elevated performance of the Agent.

Typically, raises given to employees gained through merit are almost always higher than tenure raises. This is because of the alignment of incentives between the BPO supplier and the Agent. If the agent performs better, the client notices and offers higher level work or a promotion. That higher level work or position is a higher billable rate to the client from the BPO supplier. There is nothing bad in raises.

Now the BPO supplier has an employee that is more valuable, so they have to align that employees’ value in the compensation offered for that next position. As a result, they can afford to offer the Agent more money, but in this case the gain is not just a tenure raise of a few percent. Promotion raises are significantly higher — again because of the value alignment between the BPO firm, the BPO client, and the Agent, of putting a performing person in a higher paying job that bills at a higher rate. Everybody wins.

Furthermore, merit-based increases accelerate the gains in economic power of the Agent. Because merit raises are often above 6%, the Agent sees significant growth in their economic power — without the corresponding increase in inflation!

Merit raises increase their base salary faster than inflation can erode it, and thus, protects and builds their economic power. Significant increases in economic power is what truly changes the way people live, and the progress they make their lives.

Finally, don’t forget that the money trickles down throughout the society in which the Agent is living. This multiplier effect is especially true in the developing world, but in most families stuck in intergenerational poverty, the person with the most economic power is often expected to help. The Agent that gains more and more economic power becomes the tide that lifts all of the boats of their family, in the turbulent sea of our world.


Conclusion: How a BPO company specifically benefits by adopting a COLA

In the simplest economic definition, the purpose of corporations is to externalize risk and engage in business activity in order to maximize profit generation. In this article, I’ve argued that a BPO business should go against that basic tenet of a corporation and take on inflation risk from their Agents by giving them a COLA, instead of a tenure raise.

In the last section, we’ve already covered the psychological benefits to the agents themselves. But the improvement in the psychological conditions of your Agents trickles down to your bottom line, even though you’re taking on more risk. How?

First, if you adopt the six-month COLA schedule like RTS had, your people get a raise every six months. Have you ever worked anywhere where you received a raise every six months consistently? Can you imagine how much more the average Agent will value their job and work harder to keep it? If you’re a BPO leader reading this article, think about how much money you are spending on training (that you can’t bill back to the client) because you’re training new people to replace those who left.

Second, this positive psychological context extends to the core metrics your clients care about that currently cost you money, specifically training costs which are typically non-reimbursable by the client.

We know from our experience that the COLA system reduces attrition. Six months is a short enough time horizon where the future risk problem is mitigated. If an Agent is close to leaving for another position, another COLA is just around the corner, even if it’s small. It gives them a reason to stay.

Third, your absenteeism will go down. Anytime a person’s economic power is increasing, they always become more loyal to the source of that economic power. Upton Sinclair once said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

Sinclair was talking about managers who overlooked dangerous conditions in 1900’s meat packing plants in Chicago, but the sentiment is still true no matter who we are. Our job is our economic anchor — the more it provides for us, the more we value it and work to keep it.

And with that increased value to the Agent comes additional benefits to the employer. It’s called employee engagement. The agent is more interested, more committed, and more dedicated to their job. Under these conditions, what happens to those all-mighty SLAs? They go up, specifically in the area of productivity and quality.

Fourth, your people will be happier when they’re at work because they know their economic power will not erode. This means that they’re actually coming to work, happy. And what happens when they know that if they go to work, they will be happy? Well, you know, they actually come to work! This means that your daily absenteeism will go down. How much money did you spend last month in “redundancy” Agents (Agents who are employed, but not part of contracted headcount, to account for those that don’t show up, so the contracted work can still get done)?

Finally, if you have US or European clients, deliver services in the developing world, and are worried about currency risk, remember this macroeconomic fact: If inflation is too high where your delivery center is located, the currency will devalue, thus you’ll be able to buy more of that currency with the same dollars or euros that are priced into your contracts.

The currency devaluation will offset the inflation, and the end result is that they cancel each other out, and you won’t feel the currency risk on your bottom line. Macroeconomics externalizes the risk of the COLA for you.

In conclusion, all four of these improvements are currently the hidden, and not so hidden, costs that are eroding your bottom line, whether or not you know it or want to admit it. The simple fact is that when working with lower income workers, the firm should redirect its economic power to prevent the erosion of Agent’s economic power by using a COLA and abolishing tenure increases.

The economic benefits to the Agent, the BPO firm, and the BPO client are myriad. But more importantly, the Agent will simply be happier; happier Agents mean happier BPO clients. Happier BPO clients are those that buy more from you, thus increasing your top line.

So instead of choosing a policy that protects your bottom line — choose one that can increase your top line while it also increases your bottom line.


AUTHOR’S NOTE

Throughout 2017, I avoided authorizing raises, knowing something was wrong. Then, I abolished tenure increases at the end of 2017, and I envisioned the COLA for our workforce in the summer of 2018. It took us until Jan 1st, 2019 to settle the policy and roll it out. While many of our agents who had been with us since 2016 and 2017 had taken on higher level work, or been promoted into management, those that were in the same position had not received a raise in 2+ years, and so they received “catch-up” COLAs dating to their start date. In the most extreme cases, people were given 15% — 18% raises on that day. Its impact on RTS’ bottom line? Overall costs went up only 1.8%. But, we had just done three years of catch ups in one fell swoop.

Trust me, your COLA will cost less.

Fair Trade Entrepreneurship

Fair Trade Entrepreneurship Magazine is written and developed by social impact entrepreneur Mike Dershowitz, in collaboration with his marketing and editorial team.

Mike Dershowitz

Written by

Mike is the CEO of Rethink Fair Trade Outsourcing, a company that makes use of free markets for good and not evil. Visit www.rethinkstaffing.com for more info.

Fair Trade Entrepreneurship

Fair Trade Entrepreneurship Magazine is written and developed by social impact entrepreneur Mike Dershowitz, in collaboration with his marketing and editorial team.

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