Case Study: Differential Pay Policy - Differences And Indifferences
Amidst the chaos, the COVID-19 pandemic has brought yet another pertinent aspect into ambit - differential pay. Companies in the Silicon Valley led by Service Now, VMware et al decided to reduce the differential pay as per the working location of the employee. However, Israeli firms in the US or US companies operating in Israel refused to enforce this since it was argued that while home rental costs varied significantly in the US, it was more or less the same in Israel. With companies gradually tilting towards WFH, will differential pay remain to be a contentious issue in the ensuing days?
Dr. Ahalya Varma is a compensation specialist and is invited by Cleancare, a surgical equipment manufacturing company with cross-border operations, to resolve the crisis of differential pay policy. Cleancare has a competitive pay policy which is economically viable as well as motivating and rewarding to the employees. However, Cleancare peruses a differential pay policy creating a large gap and Ahalya needs to use her expertise to resolve this crisis.
Dr. Ahalya Varma (Ahalya), a Professor of Human Resource Management and Organisational Behaviour at a reputed B-School in Hyderabad was invited by an Indian firm that has cross-border operations to provide a compensation model following an ethnocentric approach. Before visiting the firm, she performed her desk research to gather certain vital details.
Cleancare is a Hyderabad based surgical equipment manufacturing company that began its operations in the year 2000. Within ten years, Cleancare rose to fame and began cross-border operations with manufacturing units in 9 different countries. The International manufacturing units were engaged in manufacturing devices for sleep apnea, cardiac rhythm management devices, and robotic surgical systems. Cleancare continuously reviews its compensation strategy in order to remain competitive in the market as well as to engage in talent attraction, motivation, retention, and reward best performers.
Manufacturing robotic surgical systems is not only challenging, but also highly profitable as it is technology-driven, and provides up to 98 percent realisation of the product from core raw materials. Cleancare is presently the world leader and is able to meet the market demand with non-stop production in all the units spread across nine countries.
Mr. Srikant Amanaganti, the Founder and CEO of Cleancare, strongly believed in an ethnocentric approach. He founded Cleancare soon after he completed his Engineering from IIT Chennai. Today, the firm has 180 employees in Hyderabad and 360 employees in all manufacturing units across countries. He was aware of the fact that international organisations largely believe in aligning pay and performance.
As on date, the company is following a Uniform Compensation Policy wherein 75% is the fixed pay with 25% variable components. The structure of the variable component is fairly simple since it calls only for 100% attendance and compliance with the production plans. With the present structure of compensation variables, 100 percent of Cleancare’s incentives are paid as additional wages. However, the HR department was always on its toes as the onus of developing a compensation practice to enable the organisation to be competitive lay on it. Added to this, the compensation practice should be able to attract talent to the organisation vis-à-vis retaining the best performers.
Ahalya spoke to Mr. Rajeev Lochan (Rajeev), the global HR Head of Cleancare for an appointment to gather information about the compensation practices. The following day, she visited Cleancare’s registered office in Hyderabad. Rajeev received her politely and they both sat down in a consultation cabin to discuss the matter while sipping a cup of coffee with a marshmallow cake.
Ahalya endearingly sipped coffee, and said, “the coffee is nice as also the cake… thanks for this.” Rajeev nodded approvingly.
Ahalya asked, “Rajeev, tell me what objectives does the present compensation practice achieve? And what is it that I am expected to do?” Rajeev adjusted his voice and said, “our compensation practice is formulated to attract qualified and talented applicants, to provide flexibility to respond to the departmental needs, to improve employee morale, to be fiscally responsible, to support a healthy environment with good promotional opportunities, to maintain salaries which are competitive externally and equitable internally, to motivate the workforce to be more innovative, to ensure fair and just compensation administration.” Rajeev paused and looked at Ahalya who is seriously listening to him. He continued, “compensation tools such as job evaluation, performance management system, job restructuring, reward programmes are diligently followed to fulfil the objectives just stated.”
Ahalya asked, “Rajeev, tell me about your compensation policy and what does it focus on?” Rajeev began, “our practices maintain salary ranges that are consistent and within the economic requirements of the organisation; equal pay for equal work irrespective of religion, gender, age, disability, orientation, ethnicity/caste is another area of focus; our salaries match the labour market and we respond favourably to labour shifts; salary surveys enable us to adjust pay ranges as needed; compensation policy is a transparent document and is accessible to all; our compensation structure maintains adequate compliance with employment laws.”
Ahalya was seriously taking down notes and she was adding some points wherever she deemed necessary. Then, she raised her head and asked Rajeev, “everything seems fine, then how should I help? What should be my contribution?”.
Rajeev smiled and continued, “we at Cleancare pursue a different compensation policy for Senior Executive and managerial employees. Executive compensation is broad-based with stock options, giving huge intrinsic benefit. Not only this, periodic pay-outs of organisational performance-linked bonus benefits all the executives, making it possible for them to get additional 20-25 percent of their gross compensation. For instance, Cleancare’s factory in London suddenly earned the displeasure of the corporate governance body, which questioned Cleancare’s differential compensation practices. The London unit largely employs Malaysian workers who are unionised. Getting a cue from the corporate governance body, the unions also issued similar notices to the company headquarters, asking for pay equity.” Rajeev sighed deeply and there was silence. Ahalya broke the silence…. “Okay, now I understand” …. Rajeev was still silent. Ahalya stood up and Rajeev shook hands with her.
Ahalya came home and sat seriously at her writing table and began thinking. For organisations, globalisation has exerted two influences – market globalisation and the need for reducing the cost of production. However, relocating the production facilities to low labour cost countries may not be feasible. Thus, organisations need to expand their plants and offices to anywhere in the world and recruit people both from the local markets and also depute their own employees as expatriates to these countries. Now, compensation design should be for third country nationals as also the locals. The compensation should be framed strategically so that the compensation cost discrepancies do not defeat their business goals in global markets. Now, wage-related laws are different from region to regions and this variation influences the compensation design. International compensation has cultural issues, variation concepts, repatriation issues, and various approaches to international compensation.
Case Study by Dr. Prageetha G Raju. She is Associate Professor-Business Management, Department of Business Management, Symbiosis Law School, Hyderabad Centre, a constituent of Symbiosis International (Deemed University). She can be reached on [email protected]
Analysis By Ravi Mishra , Senior Vice President-HR for Global Epoxy Business, Aditya Birla Group.
Cleancare, a surgical equipment manufacturing company, with operations in nine countries, has emerged as a major player globally within ten years. Once an organisation reaches such size and spread, it becomes very challenging to sustain and grow. Shrikant, the Founder and CEO of the company, strongly believes in an ethnocentric approach and a uniform compensation policy wherein 75% should be fixed, while 25% would be variable components on the basis of performance.
It is obvious for Ahalya to be upset when Rajeev chose to narrate the principles of compensation policy in an academic way. She wanted to know the model adopted by the organisation with an area of focus so that she can suggest a suitable intervention to make it more meaningful.
When Ahalya started drilling Rajeev, stating that she has nothing to offer if everything was hunky-dory, he opened a Pandora’s box by revealing that a different compensation policy was practised for senior executives and managerial employees. This emerged to be a contentious issue that pushed the management as also Rajeev when notices were received at the London factory by the corporate governance body and also from the Malaysian workers’ union.
If an organisation aspires to grow beyond a point, it must spread its wings outside its domestic boundaries, and this is how Cleancare managed to make a footprint at the global level. Companies normally choose the production facility with several considerations, but two major factors are market globalisation and reduction of production cost. Relocating the production units is not always feasible from countries where the cost of labour is low. Hence, the management adopts the strategy of hiring local labour i.e. the country in operation and balancing with the parent country, for instance, India, as expatriates. This was a smart way to reduce manpower cost. In general, compensation policy is always based on local policies and practices, and there cannot be two different principles or models.
Over a period of time, people have become more aware of their rights, benefits and entitlement. We have witnessed unrests in many countries against differential compensation plans and practices and employment of expatriates. Herein, the bone of contention is wages, which is not based on equity as a universal practice in principles. Now the company must focus on the compensation policy on equity, basis the governance of the third country. The cost advantage for the organisation is to derive more towards other factors such as supply chain, availability of raw materials, infrastructure availability, consistency in economic policy and political stability. As against playing with the advantage of compensation on their side, Rajeev should focus more on automation, artificial intelligence and machine learning to reduce the headcount and increase productivity, yield and a fool-proof quality specification.
Many a time, one has observed that managers do not use their analytical minds to come out with new and fair practices. Instead, they adopt an astuteness and device short cut means. Ahalya is thinking in the right direction of focusing on a fair policy and practice on compensation for a peaceful work environment and let people be motivated so that they can contribute for the best interests of the organisation. Minor savings on the part of compensation with foul pay will not only spoil the image of the company but poses a huge risk for its operation and long-term sustenance. The company should plan towards reducing the expatriates and engage more local people and follow the norms, practices, and culture of counties in operation.
Analysis By Rohit Shenoy, Head Organisation and Talent Development for Sterlite Power - a Vedanta group company.
Cleancare is a successful multi-country business in the profitable robotics surgical systems space. Through the discussion with the HR Head, Rajeev, it was clear to Ahalya that Cleancare has most of the basics in place in terms of their compensation strategy.
The current situation appears to be more an issue of communication and not compensation. Here are some aspects that Ahalya could explore further with Rajeev and resolve the current crisis for Cleancare in London, and also strengthen their global compensation strategy for the long term.
Ideas for immediate resolution of the crisis :
1. Executive and managerial pay cannot be the same as that of unionised workers. Ahalya could suggest that Cleancare relook at the top executive compensation and make the programme more transparent. They could also declare payouts externally to increase transparency.
2. Along with the above action, from a workman perspective, they could focus on sharing profits with workers through gain sharing programmes on top of the current incentive plan. Payouts from gainsharing components need not be too high but will build commitment in the workers.
For the longer term, Ahalya could explore the below steps with Rajeev:
1. Currently everyone across Cleancare has the same variable pay percentage i.e. 25% of Total Compensation. Ahalya could suggest modifying the current incentive plan so that employees lower in the hierarchy have a higher fixed component and managers and senior executives have a higher variable component. Also, the criteria for the payout of variable pay could be more nuanced and aligned to business strategy and metrics instead of the prevailing simplistic calculations. They could face challenges in some countries. While globalisation has increased the use of variable and incentive pay around the world, some cultures do not readily accept the practice of linking pay to individual or group performance. Other roadblocks to pay for performance include funding for the incentive pay pool, defining performance parameters and targets and pay equity. When done right, pay for performance effectively allocates limited rewards and retains top performers. To overcome this, they could identify countries where this policy can be implemented with relative ease.
2. Apart from short-term incentives, Cleancare could include long term incentives for managers and senior executives in alignment with their long-term strategic plans. Long-term incentive plans can vary from 3-5 years. Such plans typically include equity-based incentives, viz. stock options, restricted share grants, phantom stocks or employee stock appreciation rights (ESARs). Cleancare could commence such incentives wherein awards are closely linked to the achievement of company goals and objectives for a period of 3-5 years.
3. From an overall principle perspective, multi-national organisations like Cleancare have 3 options for managing compensation–
a) A truly global pay system that is as consistent as possible across all operations, regardless of the countries or regions involved.
b) Homegrown pay systems that are completely customised to the location.
c) Hybrid models that combine elements of both approaches
With Cleancare having clear company level principles and limited scale of operations, a hybrid option would be optimal. They could have an overall company level compensation policy and principles and align the actual compensation components etc. to local culture and country norms to stay competitive in that country and take advantage of the countries’ unique laws and situation.
As mentioned by Dan Pink in Drive, “The best use of money as a motivator is to pay people enough to take the issue of money off the table.” This could be an overarching guiding principle for Cleancare to be flexible in the actual payout across each of the 9 countries they operate in. Once they get the salary right enough to remove it from the discussion, Cleancare could focus on the other motivators through total compensation, work culture and other intangible differentiators.
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