China Law Blog

Yi fen qian, yi fen huo.
You get what you pay for.

But simply paying more money to a supplier without first making sure that the supplier has the proper infrastructure (physical and "ethical") to deliver as contracted, or at least is taking those steps, is wasteful and foolish.

The same goes for employees, no matter yours or someone else's. Without the proper mindset of diligence and respect for one's own product as guiding principles, more money is just more money and brings an employer nothing in addition. As an older former partner of mine used to say disparagingly of attorney authors of poorly-written briefs, "He just doesn't care." Does anyone want to employ someone who doesn't care, who is not "careful," i.e. careless, i.e. without care? Will paying more money suddenly turn a careless worker into a careful one? It might, but only until the prompt point when that employee reckons he needs more money to continue being careful.

While I would love for my clients to offer to start paying me more, either way, there's no substitute for having someone on the ground and making sure the vendors are doing the inspections they're supposed to be doing, monitoring them unannounced and frequently. Even the mere presence of your own staff on the ground often means your product gets moved through faster even when your orders aren't huge at that particular vendor (squeaky wheel gets the grease) and I think this is particularly true of China.

The problem I find is that you will find a lot of vendors who are being pressured if not by you, by other clients to bring pricing down so they may seek profits whereever possible - even when you're the better client. This often means skirting over inspections - which incidentally really don't necessarily cost that much. I have even suggested in the past that we tie certain targets to additional payments to vendors which was wholly rejected by my China colleagues as being a signal to vendors that you have more money in your budget in which they can charge you without necessarily doing the extra work.

Worse, given that your readership I'm sure comprises mostly of foreign clients, you will find that often there can be a very large discrepancy between pricing to domestic firms (or firms that have local offices or even just appear Chinese - yes Chinese people can often be racist) and firms that they export to. In my experience many of the vendors will often start pricing up to 15% higher off the bat if they know you are a foreigner or they are working directly with a foreign buyer overseas. So I'm not sure offering more money helps if there's still no adequate way to ensure they are doing what you want them to do.

Would break this issue into two pieces: (a) Ethics; (b) Expediency.

(a) If someone has been acting dishonestly, giving that person a pat on the back is not appropriate. You wouldn't reward a family member, friend, or employer, for being dishonest with you. Why do it for a supplier?

(b) What is the most expedient thing to do? If an operator is really dishonest, allowing a price increase is not necessarily going to change any behaviors. Must look at the situation. The reality is that many western companies are working on relatively thin margins, or at least they operate in a competitive market (and if price is not an issue what is the company doing in China?). Also, if a western company quickly agrees to a price increase, it may only prompt further attempts to raise prices.

Paying workers more can be used as a way to get them to work longer hours with greater duties, and it does concentrate the mind when the job is at risk. Whilst I do not believe that better pay can make a poor quality worker better, it can make a good worker work harder in worse conditions.

"Penny wise, pound foolish" - I think that's a good one sentence summary of your opinion.

I've heard of studies that say below a certain income level (a middle class level), as income goes up, so does happiness, but over that level there's no correlation between income and happiness. I suspect the same is true for paying suppliers, employees, etc.

A couple of things:

It is important to be fair with pricing (and provide incentives if possible, for example a base price plus a 'bonus' for getting it done in a certain amount of time well within quality specs) from the get-go - and of course to do one's due diligence.

What many seem to conveniently forget is that it is just as important for suppliers to get a healthy margin as it is for those sourcing. Being willing to pay more for good service and quality is can only help you if done right - you can be sure it is important to the supplier. However, this is a delicate balancing act in avoiding being ripped off.

Two quick points:

On employees, of whom I have hired and fired a few, I do think that higher pay can correlate to better performance. As you noted, it makes it easier to attract and retain good talent. It also makes it easier to drive people a little bit harder and demand a higher standard of performance.

My second point has to do with products. I'm no longer in the business world, so allow me a slightly more prosaic example: plastic picture hooks. In Beijing it seems that there is only one brand of plain, white plastic adhesive picture hooks. It is very inexpensive, too inexpensive in my opinion at 1 RMB per hook. The problem is that they are cheap and ineffective, necessitating the purchase of a new picture hook every week as my pictures routinely fall due to the poor quality of the product. I would gladly pay 10 RMB for a hook that actually works. When I discussed this with the shopkeeper, he didn't think any of his other customers would pay so much for such an item, consumers in Beijing being notoriously, ahem, price conscious, but that he would be happy to charge me 10 RMB for the hooks he had if it would make me feel better. Quite the cut-up is he.

The larger point is that this concern for price drives down overall quality as manufacturers rush to the bottom to supply the lowest-cost goods possible.

Now I'm talking picture hooks here, but I can see a pattern in which my picture hooks, in some small way, fit in with the problem foreign firms face sourcing products in China.

If companies bought products based on quality of merchandise as well as cost, factories would have more incentive to produce higher quality goods because they could do so secure in the knowledge that there would be buyers who would ignore low ball prices and pay a little more for quality.

Just my 2 cents.

I have known a lot of people who, feeling that their salaries were lower than average for their industry, qualifications and experience, underperfomed in their jobs. (But I haven't known too many people who were satisfied with their pay and then received a pay increase and subsequently performed much better.)

If a Chinese manufacturer felt that you were under-paying them, I would guess they would be less diligent about the quality of the product.

Dan,

I think you raise a good and important distinction, and overall I think we are one the same or similar page.

To the extent that "paying more" means money spend on greater due diligence, better contracts, quality control monitoring with your own person, etc., rather than just throwing money at the overseas supplier assuming he/she will act ethically and perform better, then yes, that form of "paying more" has a much better chance of resulting in higher quality product. My post did not go into this level of detail, but I agree with you on this point.

Where things break down, though, is that such items as due diligence, better monitoring, etc. require buy in, commitment, benchmarks that people in the firm will be held accountable for, do it day in and day out, etc., and that is where most firms still get it wrong, not because they don't mean well, but because it takes so much time and hard work to enforce these things.

And lucky for you and me, said firms then need to hire guys like us to fix their messes that they thought this form of "paying more" would take care of (while then blaming "the legal system and lawyers" for their own poor judgment and inability to follow up and enforce the very benchmarks they put in place - but blaming lawyers rather than self is another issue and I won't go there).

Same holds true for hiring and paying employees. Higher pay "may" result in better performance IF, and I highlight IF, the higher expectations that go along with it are clearly communicated (orally and in writing) to said employee and done so on a consistent, drum-beat basis, benchmarks are established to measure those higher expectations, and said benchmarks are enforced (a real problem here because it takes time, hard work and a willingness day in and day out for the firm policeman on this issue to hold people accountable and be willing to come to work every day and be disliked by his/her colleagues at the firm, rather than liked).

And this, in my view, is what most firms fail to do in connection with said raises and why said raised rarely result in better performance. It just takes too much time, effort and resources to monitor and hold people accountable to do the ethical thing and up their game in a way that equates to their higher pay. This, in turn, is a large reason why labor law attorneys exist -- because employers communicated an inconsistent message to said employee (or no message at all), their due-diligence, benchmark setting and monitoring, etc., was poorly executed.

You raise a good point about higher pay helping retain people. But that ignores that the replacement employee may perform even better. However, like you I am a realist -- it takes a lot of time and work to go out and hire new people day in and day out, and at the end of the day as managers and owners we need to be working on other things to move the firm and its business forward.

Cheers from Cal Poly.

I think, as I stated in my comment for Dr Chris Carr's post, paying more/less is only a [small] part of quality/performance control. Not until we hold the management--ultimately the foreign corporation--accountable, can we really see true improvement.
Of course, when the foreign entities are held accountable (i.e. responsible for lead paint and poisonous pet food instead of passing blames to Chinese), they WILL find way to ensure quality/performance, may it be monetary incentive, inspirational speech or violence, not necessarily material.

Paying more probably doesn't turn someone from being unethical to being ethical, but it does make it more likely that you will get someone ethical.

For example, if you bid too low or have schedules that are just unreasonable, someone who has ethics will tell you this, and if you insist, they just won't do the deal. By contrast, someone who is less ethical will just tell you exactly what you want to hear in order to make the deal and then worry about the consequences later.

The same goes with staffing. An ethical person will tell you what they can do, what they can, and how much the really want for you do get them to do what you want them to do. An unethical person won't.

I think, as I stated in my comment for Dr Chris Carr's post, paying more/less is only a [small] part of quality/performance control. Not until we hold the management--ultimately the foreign corporation--accountable, can we really see true improvement.
Of course, when the foreign entities are held accountable (i.e. responsible for lead paint and poisonous pet food instead of passing blames to Chinese), they WILL find way to ensure quality/performance, may it be monetary incentive, inspirational speech or violence, not necessarily material.