How to Correct Wage Distortion

How to Correct Wage Distortion

Wage Distortion is a situation where an increase in prescribed wage rates results in the elimination or severe contraction of intentional quantitative differences in wage or salary rates between and among employee groups in an establishment as to effectively obliterate the distinctions embodied in such wage structure based on skills, length of service, or other logical bases of differentiation.

Wage distortion means the disappearance or virtual disappearance of pay differentials between lower and higher positions in an enterprise because of compliance

As defined, there are two possible effects in the in- crease in the wage rates:

  1. Elimination or
  2. Severe contraction of intentional quantitative differences in wage or salary rates

There is elimination if the difference in salary between the employees mentioned in the definition is removed. For example, if the difference in salary between employees X and Y is 6.1% which after the implementation of the wage increase became 0%, then there is elimination of intentional quantitative differences.

Say X’s salary is PhP14,006.75 per month while that of Y is Php14,867.50.  After effecting the increase in minimum wage, the salary of X became PhP14,867.50 catching up with that of Y is PhP14,707.08, then

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there is wage distortion by elimination of the quantitative difference.

While there is severe contraction of intentional quantitative difference when the former gap in salary between X and Y is severely reduced. For instance, the previous gap in salary between X and Y is 10%, but when the new minimum wage was implemented it shrunk to 5%. There is severe contraction in this case as illustrated below:

Let us say X’s salary prior to the Wage Order No. NCR 23 was PhP14,006.75 while Y’s is PhP15,407.43 or a difference of PhP1,400.68. Both are workers in NCR.

With the new minimum wage, X’s salary will be below minimum. If the factor adopted by the company is 313, the monthly equivalent of a daily minimum wage of PhP570.00 per day is PhP14,867.50.

When adjusted, the salary of X becomes PhP14,867.50 while that of Y remains at PhP15,407.43 since he is not below minimum. While there seems to be no violation anymore as both are above the minimum wage, closer look would show a problem.

The gap between the two salaries shrunk. PhP15,407.43  – PhP14,867.50 = PhP539.50. Their previous gap was PhP1,400.68 but it is now reduced to just PhP539.50 or it shrunk by 61%. Hence, there is wage distortion which should be corrected.

As to the formula to use to correct the same, it depends upon the choice agreed upon by the management and employees. Thus, closer scrutiny of the suggested formula below is highly recommended.

The Pineda Formula was authored by Mr. Marcelino Pineda, an HR Manager of Nestle Philippines. He is the former member of the RTWPB-IV or the CALABARZON area.

His method provides pay increases for higher-paid employees at a decreasing rate.

Wage Distortion Adjustment = Previous Minimum Wage / Wage of Employee

Mandated x Wage Increase

See Atty. Elvin’s Book Solutions on Wage Order and Minimum Wage Second Edition to learn more about this. The book uses the rates in Wage Order No. NCR 20 but the formula, doctrine, principles, and approaches remain the same.

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