The owner or the voter in this case is the principal and their representative is the agent. The reason for the problem is simple. The agent is often in a position, without the principal being properly aware, to act in ways that benefit the agent and hurt the principal.
Expensive projects paid for by the public purse that then turn out to be badly built (Norochcholai power plant is a recent example in Sri Lanka) and extremely lavish spending on office decor and luxury vehicles of senior management (also a regular feature in Sri Lanka and the world over), are simple examples of the principal-agent problem at work.
Question facing plantation workers
This principal-agent problem may also be faced by tea estate workers with regard to the trade unions that represent them in collective bargaining.
The existing collective agreement between plantation companies and workers (represented by their agents, the unions) was up for renegotiation after March 21, 2013. Each agreement is signed for two years ending in March and usually the renegotiation drags on for several months before the next agreement is hammered out.
For instance, the previous agreement that was due for negotiation after March 2011 was signed only in June 2011. This year, however, the collective agreement was signed in record time- on April 4, just four days after it was up for negotiation.
In this case, the principal (that is the tea estate workers) have a legitimate question. Was this a case of their agents being super-efficient, or does the haste indicate that the interests of the principal was compromised? This question deserves some analysis.
What did workers get, how does it compare with past?
As pointed out in a previous Verité Research Insight, the payment scheme to workers follows an unusual structure. There is a guaranteed payment the worker gets per day worked (called the basic wage). But if the worker manages to work more than about 18 or 19 days a month (calculated as 75 percent of the 25 or 26 days offered), then all the days worked are rewarded at a higher rate (called the theoretical wage).
Table 1 shows how these have been increased by the present agreement and how that compares with increases in the previous 10 years.
Table 1: The present collective agreement compared to the past record
Table 1 shows that on both the basic and theoretical wage, the present agreement gave the workers an effective annual increase that was very much less than what they received in the previous 10 years (8.2 percent, instead of 14.5 percent on the basic, 9.7 percent, instead of 16.6 percent on the annual).
In fact, the increase they got was less than 60 percent of what they would have been expecting on the basis of the past negotiations. If all that was received in terms of an increment was the average increment in the past ten years, the agreement would have had a basic wage of 537 (instead of 480) and a theoretical wage of 700 (instead of 620).
In such a context, it is not a surprise that other representatives of workers that were not party to the agreement have immediately cried foul and queried the basis of the agreement.
Over-kilo rate is illogical
The default expectation of a day’s work is 18 to 20 kilos. The over-kilo rate is a payment made for increased productivity. It is paid when a worker plucks more than about 20 kilos a day. It is to the advantage of the management and the workers to incentivise this productivity. The worker earns extra for extra work and the plantation companies can increase production, without any addition to their fixed costs.
The cost to plantation companies for the 20 kilos picked, by a worker who works at least 19 days, is Rs.31 per kilo. Offering Rs.20 per kilo for the extra kilos then is hardly an incentive, it is in fact a disincentive.
If the worker simply returns the next day to pluck that tea, she is effectively paid Rs.31 per kilo, so why should she want to work longer hours today? The questions that workers could ask is this: If firms are already committed to paying Rs.31 per kilo through the wage (without even factoring the fixed costs), why would the trade unions agree to an over-kilo rate of just Rs.20?
The concept of legitimate expectations is a legal term that describes an expectation that people can have of governments and other related parties in terms of being treated fairly. On the simple arithmetic, workers could be said to have had a legitimate expectation of a salary increase in the range of 537 (basic) and 700 (theoretical). But the arithmetic is not the only consideration in forming legitimate expectations.
The increase in the cost of essentials in the lives of plantation workers is also a legitimate consideration in wage negotiations. Four important cost items are likely to be kerosene, flour, transport (to access healthcare and educational facilities which are increasingly outside the estates) and electricity. The revised pricing strategies of government have meant that the cost of these items have increased dramatically in the last couple of years and at a much higher pace than the average reported inflation.
Super efficient or principal-agent problem?
Therefore, it would seem that the plantation workers can reasonably feel disappointed. The collective agreement negotiated seems to have been agreed in haste. It fails the legitimate expectations of workers and it does much worse on the increments than past agreements. This points to the plantation workers facing a significant principal-agent problem.
Because workers tend to be uneducated and lack information, they are not likely to be able to solve this principal-agent problem on their own, without the intervention of other proactive agents. Rs.160 a month is deducted from workers’ salary each month for to pay for the upkeep of some of the major unions. However, the present analysis suggests that their money may not be buying them the best representation.
(Verité Research provides strategic analysis and advice for governments and the private sector in Asia)