HIGHER wages do not have to mean higher business costs.

A cafe in Melbourne managed to achieve the reverse when it introduced gain-sharing last year.

Its story was told by Australian expert Peter Gahan, who was in Singapore last week to teach local small and medium-sized enterprises (SMEs) how to do the same.

The cafe in question was hit hard when food prices soared after floods in Queensland last January. The price of bananas, for example, shot up from A$2.50 (S$3.30) to A$18 a kilogram.

The managers of the cafe told the staff that if they came up with ideas to help cut costs, half of the cost savings would be given back to them in the form of bonuses.

The 45 employees, many of them part-timers, began generating ideas. One idea that worked was to use the same perishable ingredients for the food on lunch and dinner menus so as to cut waste.

They did not always meet savings targets, but in the months that they did, the employees, who are on the minimum Australian wage of A$14.50 an hour, received an extra of up to A$90 a week.

Associate Professor Gahan of Monash University told Insight: 'The cafe thus weathered the storm without having to increase prices which would threaten its business.'

He added that the staff 'became almost partners in the business' - they started caring about the business in a new way and thinking about their jobs in terms of improving the cafe's business model.

Prof Gahan was in Singapore to speak at a series of seminars organised by Spring Singapore and the Singapore National Employers Federation.

He spoke to companies about productivity gain-sharing, a way to motivate workers so as to improve their performance. It works by involving workers in improving business processes, and rewarding them when the organisation achieves cost savings.

Prof Gahan specialises in research on high-performance work systems and labour relations. Through his work at the non-profit Asian Productivity Organisation based in Tokyo, he advises regional governments on ways to grow SMEs and boost their productivity.

Most companies, he said, pay bonuses based on profitability rather than productivity.

But a company can be productive yet not profitable. It can, for instance, improve its processes to become more productive but its revenues may take a hit when external factors cause the prices of its products to fall.

Because businesses have control over their productivity, introducing gain-sharing is a forward-looking effort that can help them become more competitive and profitable in the future.

Prof Gahan said gain-sharing does not have to be hugely complicated or involve huge investments in new technology. It could comprise simple initiatives that give rise to productivity growth.

Despite the benefits, gain-sharing has not taken off much outside of the United States, where it originated in the 1930s. That could be due to various 'upfront sunk costs' involved in implementing such programmes, Prof Gahan said.

For example, bigger companies might have to spend a long time consulting and negotiating with diverse groups of employees and then setting up formal structures like committees.

Companies also need to train workers and managers to think about their roles 'not in a traditional command and control way, but how they can collaborate and solve problems together'.

There might also be costs involved in bringing in external consultants to help design the necessary rules and pay structures.

'Unless employers can get a handle on what the benefits of gain-sharing might be, they are understandably reluctant to make that upfront investment,' he said.

But the benefits can be significant if companies stick with the process. That is especially so for companies in labour-intensive industries, in which there might be limits to mechanisation.

Studies show that companies which have used gain-sharing programmes for less than five years report a 7 per cent to 8 per cent increase in productivity a year. Those that have implemented the programme for more than five years improve their productivity by an average of 18 per cent a year, said Prof Gahan.

Governments can step in to help reduce the upfront costs for businesses. In this aspect, Prof Gahan thinks the Singapore Government is on the right track as it funds productivity-related consultation for SMEs.

Its $40 million Inclusive Growth Programme also gives grants for investments in high-tech equipment and the redesign of jobs to help workers become more productive and earn more.

While observing that one cannot legislate productivity and workplace collaboration, Prof Gahan noted: 'You can build the capabilities required through training programmes, advertise or promote success stories.

'You might not get a majority of companies to take it up, but if you can get a growing number to do so, then it gradually gets embedded in business culture and the benefits will outweigh the costs.'