Salary inequities at Acme Manufacturing

Joe Black was trying to figure out what to do about a problem salary situation he had in his plant. Black recently took over as president of Acme Manufacturing. The founder and former president, Bill George, had been president for 35 years. The company was family owned and located in a small eastern Arkansas town. It had approximately 250 employees and was the largest employer in the community. Black was the member of the family that owned Acme, but he had never worked for the company prior to becoming the president. He had an MBA and a law degree, plus five years of management experience with a large manufacturing organization, where he was senior vice president for human resources before making his move to Acme. A short time after joining Acme, Black started to notice that there was considerable inequity in the pay structure for salaried employees. A discussion with the human resources director led him to believe that salaried employees pay was very much a matter of individual bargaining with the past president. Hourly paid factory employees were not part of this problem because they were unionized and their wages were set by collective bargaining. An examination of the salaried payroll showed that there were 25 employees, ranging in pay from that of the president to that of the receptionist. A closer examination showed that 14 of the salaried employees were female. Three of these were front-line factory supervisors and one was the human resources director. The other 10 were non management. This examination also showed that the human resources director appeared to be underpaid, and that the three female supervisors were paid somewhat less than any of the male supervisors. However, there were no similar supervisory jobs in which there were both male and female job incumbents. When asked, the Hr director said she thought the female supervisors may have been paid at a lower rate mainly because they were women, and perhaps George, the former president, did not think that women needed as much money because they had working husbands. However, she added she personally thought that they were paid less because they supervised less-skilled employees than did the male supervisors. Black was not sure that this was true. The company from which Black had moved had a good job evaluation system. Although he was thoroughly familiar with and capable in this compensation tool, Black did not have time to make a job evaluation study at Acme. Therefore, he decided to hire a compensation consultant from a nearby university to help him. Together, they decided that all 25 salaried jobs should be in the same job evaluation cluster, that a modified ranking method of job evaluation should be used, and that the job descriptions recently completed by the HR director were current, accurate, and usable in the study. The job evaluation showed that the HR director and the three female supervisors were being underpaid relative to comparable male salaried employees.

discuss the situation with them. so this part of the problem was solved. To call the three supervisors into his office. The HR director told Black that the female supervisors had never complained about pay differences. Questions: 1. He was afraid that if he gave these women an immediate salary increase large enough to bring them up to where they should be. What would you do if you were Black? 2. To gradually increase the female supervisors salaries. Why would you suggest Black pursue the alternative you suggested? . the company could be found guilty of sex discrimination and then have to pay considerable back wages. 2. How do you think the company got into a situation like this in the first place? 3. and jointly decide what to do. To do nothing. He knew that if the underpaid female supervisors took the case to the local EEOC office. the male supervisors would be upset and the female supervisors might comprehend the total situation and want back pay. 4. Black believed he had for choices relative to the female supervisors: 1.Black was not sure what to do. To increase their salaries immediately. 3. The HR director agreed to take a sizable salary increase with no back pay.

200 crore the previous fiscal. Over the years." "But you got your letter a month ago. "I don't remember. but it had introduced a profit-sharing plan. hadn't yet moved to stock options. the whole exercise was done in three months flat." Mathur replied." Arora pretended to threaten his colleague. In fact. "When was the last time we had a semi-formal meeting like this one?" Arora asked his guest. this is important. Arora was known to be one of the more friendly top executives in the company. recruited Mathur from a medium-sized company in Mumbai. may be six months ago. So this had better be important. Anil Mathur was a Brand Manager at Care Soft. but he decided to frame his replies as he went along. "8:30 on a Friday evening. Arora had a vague idea of what Mathur might want to discuss. In any case." said Mathur. As promised. it was Arora who had. if you can be here in two minutes flat" Arora said. they had built up a good rapport. Anil here. who were not altogether surprised since the word had gotten around as soon as the hr consultancy was hired to draw up the new compensation structure. The company. why are you bringing it up only now?" Arora asked. An article in the in-house magazine and an e-mail from the CEO announced the scheme. and trying to find out if I am the only one feeling let down by the new variable pay scheme. Nitin. He had to be. the 36-year-old brand manager was in Arora's room in less than two minutes. A little over a year ago. "I am unhappy with my pay hike for last fiscal. "Hi. was linked to the performance of both the individual and his team." the other man said and hung up. he was after all the hr guy. In fact. "I have been thinking about it. when his phone rang. usually paid out annually. Care Soft had decided to replace its fixed compensation system with variable pay. as the Chief of hr at Care Soft. you've made me stay back. "You are darn right. a large fast-moving consumer products company. The variable component.Variable Pay Nitin Arora was wrapping up for the day." said Mathur. Can I pop in for a few minutes?" "Yes. . and implemented with little advance notice to the employees. Understandably. which had a turnover of Rs 1. "You got it.

And last year had been particularly bad for the toothbrush division he headed. That said. I cannot promise anything else. Since the concept of variable pay was new to Care Soft. as a brand manager. a VP and another general manager had made their displeasure known to Arora. but also impact the new pay plan. there were peer incentives for team and individual performances. There are other units that have taken a hit. and discounts. apart from shopfloor workers-leaving out the junior management. promotions." Both men looked at the clock on Arora's table." "Anil." Mathur explained. and then the engineering team took its own sweet time bringing it into production. a new toothbrush that had been slated for launch in the second half of last year hadn't been launched. The fact that we didn't meet our targets ensured zero-increase in my incentives. Besides. The variable component in my compensation is 20 per cent and it's been a double-whammy for me. "My performance targets were unreal. These rewarded performance in kind-a paid holiday. it had decided to implement it at only the senior and middle management levels." "I am referring to the new toothbrush that my team was supposed to launch in the second half of last year. Mathur leaving would not only encourage the other two to follow suit. don't forget that most of us in Care Soft are in the same boat. came in at the general manager level. and rupee sales by 15 per cent because of price cuts." continued Mathur. . Here's what I can promise: I'll put forth these issues to the compensation committee. This was a low-end brush that was expected to rake in Rs 1 crore in sales. Those below had just 5-15 per cent in variable pay. "But look at it from the organisation's point of view. ''Show me one company that has increased its toothbrush sales and I'll walk out of this room and never complain." "True. The senior management-starting from a general manager to the CEO-had a variable component ranging from 15-40 per cent. gift vouchers. but why penalise me for somebody else's fault. We've tried to do the best under the circumstances. Already. It was well past 10. Fiscal 2001-02 was the first full year of variable pay." "Probably. or gifts. That apart." Mathur complained. "I don't understand. and the increase in base pay doesn't even beat the rate of inflation. By the time we were ready to go. I do think we have an issue here. Mathur." said Arora. with the result that our sales for last year were down. "We couldn't introduce it because the design team sat on it for a long time. and Arora could tell that the executives weren't happy with it.individual performance had a higher weightage than team performance. we realised that the launch expense wouldn't be worth it. Volume sales had dropped by 5 per cent.

." said Shastri." One thing that had irked Arora all along was the fact that Patel seemed inadequately concerned with hr problems. the CFO Narayan Shastri. Flesh out the issues and keep them ready for me. Nitin. "I have reason to believe that it is quite widespread. He was more concerned about what he called "strategic issues"." "Should we have the meeting next week in that case?" "No. On Monday.) Care Soft's compensation committee comprised. I'll send out the meeting request." "I don't think one can possibly over-react to such an issue. "The worst thing that we can do now is to let the morale take a hit. Therefore. The committee would meet on Wednesday pre-lunch. "although only a handful of people have taken it up with me so far. Director (Marketing) Utpal Sinha." "I agree. Arora had got a confirmation to the meeting request sent out by Patel. all the men were aware of the issues at hand. apart from Patel and Arora. Let me finish with our foreign partners' visit this week. By afternoon. (''Can't tackle hr post lunch. may be we are over-reacting." noted Behl. and an independent director. After all. The agenda for the meeting had already been circulated the previous day. "Do me a favour." "In that case.'' somebody had wise-cracked in acknowledgement. the first thing Arora did was to call his CEO. it's just a year old. We can have a second meet next week. "How widespread is the discontent. "Don't." said Arora." Both men laughed and parted. "We need to give the new system more time. coo Niranjan Roy." said Arora. I'll be signing my divorce papers tomorrow." said Arora. Rishab Patel."I have to pick up medicines for my son. "If I don't find a chemist open now." the CEO told Arora. go ahead. but could you handle it?" "But how can we decide on anything without you being there?" Arora asked. and widely regarded for his management wisdom Raman Behl. and advise him to convene a compensation committee meeting. Nitin?" coo Roy set the ball rolling. "This week I have a diary so full that a knife wouldn't go through it. a principal from the consulting company that had drawn up the new compensation structure Anurag Kesaria. who was a chartered accountant by profession.

" said Kesaria." noted Sinha." consultant Kesaria said. Shastri. intervened. can't give you any increments because we've had a bad year'. Executives have to justify what they earn. banking. even shop-floor workers-whose variable pay is linked to productivity-are affected since the company has cut back on production to liquidate dealer inventory. It's a cultural change and people must be prepared for it. "it seems to be a problem of implementation. And certainly not good men like Anil Mathur. and say 'sorry." said Behl. a change like this needs significant lead time. After all." "That's not a good idea." defended Arora." added Sinha. it will take less than six months to clean out talent from this company. Do you then ask people to forget all the hard work they've done. "But it would be a strategic mistake to bring back the old system. which according to me worked just fine. may be we didn't implement the new structure properly. review them more frequently and reward people closer to the date of their achievements." pointed out Arora." "Then. when the going is good in the market. We cannot make changes arbitrarily. or any other industry as marketing heads or even CEOs? And asking people to deliver 15 per cent growth in a market that is shrinking is the surest way of losing them. pharma." "Yes. May be we didn't communicate adequately. but it is one of the biggest reasons. "But I was asked to ."I couldn't agree more.'' "As far as I can see." the Chief Financial Officer." "I would have loved to do this over a period of one year. Director of marketing. the reasons why we introduced variable pay still hold. and we cannot afford to reward people based on the quaint notion of entitlement. your profits shrink. "May be. there is no problem with variable pay. but asking them to take pay cuts. Don't forget that the next year is going to be equally bad for FMCG companies. The whole idea behind variable pay was to motivate people across the board with the promise of greater rewards for better performance." said Behl. like they have now." pointed out Shastri. Not to mention that such a system automatically attracts highcalibre people." "Besides. "Money may not be the only reason why people work. "I just can't afford to lose any of my men. "Or may be we should simply revert to the old fixed system. Believe me. I don't care if we have to pay him more." "You are right about poor implementation. "variable pay is a great way to control costs and improve productivity." bristled Sinha." ''Actually it is worth looking at what is going wrong with the system. The business environment is changing. "As I understand it. "We cannot be seen as being selective in our rewards. perhaps we need to tweak our measurement systems." retorted Sinha." "The IT industry is not only benching people. Besides." "That is a good idea. "But how many code-jocks can join insurance. "But when the markets crash.

here's the worst-case option.implement it within three months of the board deciding on it. "we need to figure out a few things. And three. Two." Behl refocused the discussion. but it will have more credibility if the CEO also showed that he was committed to it. Besides. how to convince people like Mathur that variable pay will actually help them in the long run." "Meanwhile." What should Care Soft do? . whether we really want to scrap variable pay and return to the fixed system. where is the top management commitment to this initiative? Who is the champion of this variable pay? I could be. One. how to achieve a buy-in across the organisation. Finally. how to rectify some of the errors we may have made in its implementation.

(Pl. including last year’s bonus amount as well). Then the increments next year would mean: Performance Linked increase (covers incidence of inflation also) on existing CTC : i. increase on 95 % or 100%.(Corresponding to what performance Level. . We have given increments in two components: Fixed increase on existing CTC.) Whether the Variable Performance Bonus (Linked to performance) given in a particular year is included in CTC for the purpose of: Deciding salary of new recruit within the range of the company levels in a particular grade. Package of new recruit.e. in a grade).e. which are outlined below and we want to clarify as to what are industry practices (in your company pl. 3. Because of first time introduction in our case it was high: 60 % : 40 %. Annual Performance Linked bonus (Calculated as certain %age of avg.g. This year we want to make it 92 %: 8% But we are facing certain issues in the second year.) Giving increments next year? e.) at different performance Levels on 95% or 100%(i.Performance Linked Variable Bonus We are a medium sized Engineering/ Manufacturing co. Now would it mean calculating bonus amounts (as %age of avg. Current Ratio of two increment components. If yes how it is given and how much. clarify) Calculation of performance linked Variable Bonus levels (Last year we calculated it as % age of averages in a grade). If it is included then whether variable bonus forms part of comp. if the ratio of guaranteed pay to variable pay is 95 : 5 % . The ratio of two components (Fixed : Variable :: 60 %:40%) The resultant Compensation structure is now guaranteed pay to Variable: 95%: 5%. Last year we had introduced the system of Performance Linked Variable Bonus for our officers in Engineering segment of business.