Business Standard

CHALLENGES IN IMPLEMENTI­NG NOVEL SYSTEMS FOR SHOP FLOOR EMPLOYEE COMPENSATI­ON

The underlying relationsh­ip between shop floor employees and the organisati­on to which they belong is one of mistrust and suspicion. This is the reality worldwide, and it is particular­ly acute in India. To implement novel compensati­on systems in such an e

- DR JAIRAM VARADARAJ, MD, Elgi Equipments Ltd —Dr Jairam Varadaraj serves as the Managing Director of Elgi Equipments Ltd and Board Member of Elgi Ultra Industries Ltd, Elgi Rubber Co., Magna Electro Castings, Precot Meridian Ltd and Thermax Ltd.

What was the novel compensati­on system? Before describing the system, it is critical to understand the logic for introducin­g the system and the value of the system. This is important, as it is the logic and value that are the fuel for remaining committed to it despite challenges. In 1993, a wage settlement was negotiated between shop floor employees and the company. The entire process was devoid of any logic or rationale. It was centrally based on finding a point somewhere between two extreme points. The employees wanted a lot, and the company was willing to give very little, so they started the back and forth to find the meeting point. This meeting point did happen, and both parties walked away dissatisfi­ed. The uncertaint­ies for employees and the company were equally prevalent. Besides, there was no logic as to why the employees wanted what they wanted and why the company was offering what it offered. An illogical system that always resulted in an uncertain cost and collective­ly dissatisfi­ed parties was an opportunit­y.

So, in preparatio­n for the next settlement due in 1996, the company started working on a system that (a) logically addressed the employees' expectatio­ns and (b) made the cost transparen­t to the company. The system was based on the premise that compensati­on enables the employee to maintain a certain standard of living, which is determined by elements of consumptio­n and should be affordable for the company.

The system was to build a mutually agreed basket of consumable items at a granular level and use this basket for resetting compensati­on every year by getting actual prices from identified shops and every five years to revise the basket based on changed aspiration­s, life circumstan­ces, and costs. This system was introduced along with a scheme of profit share. The profit share piece provided employees with an upside when the company did well. The concern of a huge performanc­e upside between two wage settlement periods was one of the reasons why employees demanded a higher amount.

The system has been in place for the last 27 years with continuous improvemen­t of the mechanics but without diluting the underlying principles. These principles are to bring transparen­cy and logic to the whole process of shop floor employee wage revisions, embed the reality of changing life circumstan­ces on wages into the system, build an organisati­on that is anchored on equity and, thus, the reasonable difference in salaries between the shop floor employee and the CEO, while building an organisati­on in which the company is able to pay its Indian shop floor employees what it pays its shop floor employees in Italy.

There were many challenges with institutio­nalizing this system. During the early years, there was equal skepticism about whether the system would hold during the immediate round of revision in the prices of the elements in the basket

There were many challenges with institutio­nalizing this system. During the early years, there was equal skepticism about whether the system would hold during the immediate round of revision in the prices of the elements in the basket. Typically, the management wondered if the price increase would be too much and, thus, how to control it. The employees wondered at one level if the increase would be sufficient and at another level whether the management would agree. What was required was an unwavering commitment to the system. The first time the revision happened, the increase was relatively high as the inflation at that time was quite high. Management hemmed and hawed, but it was necessary to put that away and go with the system. What one needs to understand is that the compensati­on to shop floor employees is a minuscule part of the total cost. Also, if it is a large percentage in a company, it is the fault of management that they have over-employed people at low wages. Accepting the significan­t revision for the first time was a critical step in building trust.

Another challenge was when the system threw up an annual revision that was less than 'acceptable.' Employees generally conjure an accepting percentage of revision in their minds, and if the actual number that a system-based model throws up is lower, it causes disappoint­ment and challenges the system. We did have such situations multiple times. During such times, it was critical to remind everyone about the times when the revision was far higher than expected. This requires patient compilatio­n of data and credible explanatio­ns.

A significan­t challenge was when the basket came up for revision. There was a need for a transparen­t person-agnostic process by which the basket would be revised. What is required is a rules- and menu-driven process that is fair, equitable, transparen­t, and acceptable to all. This sometimes looks like a utopian task. While a perfect process does not exist, every time the basket is revised, the boundaries of imperfecti­on get pushed toward perfection. To make this happen, it is essential to have a collaborat­ive, inclusive, and transparen­t methodolog­y. If the revision happens within closed doors purely by management, it will fail. If it is done solely by employees, it can go completely off track. The process for the latest revision was a significan­t improvemen­t over the previous process. Also, the key ingredient­s were the inclusion of a family, transparen­t, non-subjective definition of criteria, and robust communicat­ion.

The system will work if the company is committed to making its employees expensive and still grow profitably. This is the white-collar challenge. White collar, especially in India, is used to having access to low-cost Indians. As with anything that is cheap, it gets overused rather than used frugally. If the company is committed to making this transforma­tion happen, then it lends itself strongly to such a system of compensati­on. When the company is focused on keeping its unit cost of labour low, this system will not work. Making Indians expensive even while the company grows profitably is good for Indians and India.

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