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Why Paying More Is Good China Business

By Dan Harris and Steve Dickinson

My friend Chris Carr, dean of the CalPoly MBA program and the brains behind the International Business Tour blog has a very thoughtful post, entitled, "Will Paying More Change Behavior And Make Someone More Ethical?" Thoughtful, but wrong. The post centers on whether paying more gets you better performance and/or better ethics, and Chris pretty much says it does not:

Some suggested that we could solve the problem of too many defective products coming from China by paying more to the Chinese suppliers that make this stuff. I questioned that assumption, and still do. One example I gave in that discussion thread was that if paying people more solved the problem, then why does paying most good employees more still result in good performance, but not superior performance? (See Comment No. 29.) And why does paying most bad employees more money still get you bad performance, and not good performance? (If you feel that more money correlates to higher performance, come see me after you have hired, managed and fired more than a few people, and let?s compare notes.)

Allow me to deconstruct. If you are underpaying your Chinese supplier, you will get bad product. It is that simple. By underpaying, I mean that if you are paying your supplier 1000 Yuan to make copper piping that requires 1000 Yuan in copper, you will get bad piping. Guaranteed. Your pipes will not have 1000 Yuan worth of copper in them. They just won't. Paying 2000 Yuan for the piping will not guarantee you get 1000 Yuan of copper in them, but it certainly does improve your odds. Does anyone disagree with me on this? Paying employees more does improve performance, and it does it in at least two ways. If you pay your good employees more, they are more likely to stay with your company and forsake all others. This allows you to retain good employees and overall company performance rises. The second way is more direct and, presumably, more what Chris had in mind. If you pay people well, they will be enthused about their job, like the company for which they work, and be more willing to give their all. I have seen this in my company's employees and those of my clients and I have felt this myself. Many years ago, my firm had two good sized vessel owning companies as clients. Both would have their vessels repaired mostly in China and Korea. One would bargain the shipyard down to its "absolute lowest price" and then be an incredibly slow pay and the other would not negotiate quite so hard and would always pay on time. My firm handled countless shipyard disputes for both of these companies over the years and I can tell you it was very clear to me that the better paying client was getting much faster and better (and I think, in the end, cheaper) service from the same shipyards. When we would call the shipyard on behalf of the better paying client, our calls would be returned promptly. Not so with the other client. At one point, both clients needed a vessel repaired quickly from the same shipyard and both were told it would take about a month. The shipyard was hugely busy and the better paying client got its vessel back in a month while it took two months for the other client. Is anyone surprised by any of this? And what does "paying more" in the context of China manufacturing really mean, anyway? If it meant just willy-nilly raising the price paid to Chinese factories, I would completely agree with Chris. But I think it also means a willingness to pay more for such things as due diligence, good contracts, and quality control monitoring and nobody will ever convince me that these three things do not greatly increase the likelihood of good product from China. Choose your side. UPDATE: Just saw this post over at Time's China Blog. May help prove my point.

Full post as published by China Law Blog on January 26, 2008 (boomark / email).