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The case puts into limelight a prominent organisation which has recently
ventured into a new category and has setup its first unit towards
manufacturing this product. The business has recently turned profitable,
however margins are still paper-thin. Its been 2 and a half years since the
previous settlement was reached and the management is on the brink of
reopening the wage negotiations with the union.
The question which plagues Vivek and Deepali, managers at X company,
is what is the wage payable to the workers which can be considered fair
and what is the apt framework to arrive at this wage figure.
The various range of options presented in this respect are:
The approach towards identifying fair wage and towards the resolution of
the issue at hand takes into account multiple factors. The labour cost as a
percentage on profits is calculated to be around 34% for X company and
in the range of 10%-11% for the competitors. It is difficult to justify
sustaining such high wages at low profitability levels. As compared to the
competitors the current wage levels can be considered reasonable.
As per Wage effort theory, the worker would reduce the effort if he thinks
that the wage hes getting is less compared to effort hes putting. But
when this gets compounded with the comparison we make with the wage
across the industry, the picture gets clear. Current wages are still the best
among the players playing in the same field. So, sense of being Underrewarded would disappear from the minds of the workers.
Hence, considering the current wage as fair wage (since it isnt a viable
option to go lower), the negotiations shall be held with the union to stall
the increase in wages as transient measure till a certain level of
profitability is attained.
The aforementioned approach might create friction which might lead to a
temporary loss in production. However, this outage has been taken into
account considering that this wont have a huge impact on the bottomline as the current market levels of consumption is less than the potential
production level with respect to the installed manufacturing capacity.
Hence, any dip in production due to disruption could easily be made up for
by other manufacturing units, albeit the higher transportation costs might
cause a small spike in the final product cost.
Question Analysis
Question 1: According to you what should be the fair wage payable
by the Company X and Why?
When we look at the demographics of Company X, we find out that it has
3 types of on-roll workers, they are 12 th, ITI and B.Sc. graduates. Of the
three category only ITI graduates can be considered to be semi-skilled
who are being paid Rs. 20,100 per month while other two categories fall
under unskilled workforce who are paid at Rs. 17000 per month.
Apart from in-house manufacturing, they have contractor manufacturing
facility as well in the nearby region. The contract workers are deployed for
packing, loading, unloading and other miscellaneous activities. These are
unskilled Employees who are paid 66% of the wages paid to the regular
employees.
Now, we look at the data given at the end of the case
Considering only ITI as Semi-Skilled employee,
The Employee cost of Semi-Skilled Workforce comes out to be 2492400
And Employee cost of Unskilled Workforce comes out to be 6392000
Taking Contract Employees as unskilled employees, and their wages to be
66% of the wages of unskilled employees,
The Employee cost of Contract Workforce comes out to be 5049000
Adding all the labour costs, the total Wages is 13933400
The Labour cost as percentage of Sales turnover is 3-5%. Taking the
average 4%, the Sales turnover comes out to be 348335000
Taking Margin as 13%, the profit of the firm is 40073938.1
Hence the Labour cost as part of profit is 34.77% which is really high.
While following the similar steps for the competitor, the labour cost as
part of profit comes out to be just 10-11%.
Here since the data is given for only two competitors, we have taken
Company 2s data for our analysis. Everything has been calculated for
competitors keeping Company 2 in mind.
they would feel happier in the organization even at lower pay. Such
an atmosphere would also make the process easier and would allow
handling of the Trade Union much better
Appendix
The Excel Sheet contains the calculations done to achieve the labour cost as per
the profit of the firms.
Calculation.xlsx