Challenges in Implementing Novel Systems for Shop Floor Employee Compensation
28 February 2024
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 environment, trust must be built, and this is not something that can happen overnight. There must be absolute faith in the novel system, and this should be translated into a steadfast commitment to staying the course even when there are pressures to give up. This is a critical starting point.
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. 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.
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.
For more details, visit on - https://www.elgi.com/in/
