Community » HR Forums » Human Resources » Case Studies» Case Study : Variable Pay Component
Case Study : Variable Pay Component

May 27, 2007 12:53 AM 1
Total Posts: 52
Join Date: November 10, 2006
Rank: Manager
Post Date: January 1, 1970
Posts: 52
Location: United States

Case Study : Variable Pay Component

Dear Professional Colleagues,

Let us have an open  end discussion on the much hyped area of variable component of compensation. Since several companies are following the trend as their part of cost saving initiative and to reward the high end performers alongwith keeping a tab on other normal performers..

The Case Of Variable Pay --

Nitin Arora was wrapping up for the day, when his phone rang.

"Hi, Nitin, Anil here. Can I pop in for a few minutes?"

"Yes, if you can be here in two minutes flat" Arora said.

"You got it," the other man said and hung up.

Anil Mathur was a Brand Manager at Care Soft, a large fast-moving consumer products company. In fact, it was Arora who had, as the Chief of hr at Care Soft, recruited Mathur from a medium-sized company in Mumbai. Over the years, they had built up a good rapport. In any case, Arora was known to be one of the more friendly top executives in the company. He had to be; he was after all the hr guy.

Arora had a vague idea of what Mathur might want to discuss, but he decided to frame his replies as he went along.

As promised, the 36-year-old brand manager was in Arora's room in less than two minutes.

"When was the last time we had a semi-formal meeting like this one?" Arora asked his guest.

"I don't remember, may be six months ago," Mathur replied.

"8:30 on a Friday evening, you've made me stay back. So this had better be important," Arora pretended to threaten his colleague.

"You are darn right, this is important," said Mathur. "I am unhappy with my pay hike for last fiscal."

"But you got your letter a month ago, why are you bringing it up only now?" Arora asked.

"I have been thinking about it, and trying to find out if I am the only one feeling let down by the new variable pay scheme," said Mathur.

A little over a year ago, Care Soft had decided to replace its fixed compensation system with variable pay. In fact, the whole exercise was done in three months flat, and implemented with little advance notice to the employees, 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. An article in the in-house magazine and an e-mail from the CEO announced the scheme.

The company, which had a turnover of Rs 1,200 crore the previous fiscal, hadn't yet moved to stock options, but it had introduced a profit-sharing plan. The variable component, usually paid out annually, was linked to the performance of both the individual and his team. Understandably, individual performance had a higher weightage than team performance. That apart, there were peer incentives for team and individual performances. These rewarded performance in kind-a paid holiday, gift vouchers, or gifts.

Since the concept of variable pay was new to Care Soft, it had decided to implement it at only the senior and middle management levels, apart from shopfloor workers-leaving out the junior management. The senior management-starting from a general manager to the CEO-had a variable component ranging from 15-40 per cent. Those below had just 5-15 per cent in variable pay.

Mathur, as a brand manager, came in at the general manager level. And last year had been particularly bad for the toothbrush division he headed. Volume sales had dropped by 5 per cent, and rupee sales by 15 per cent because of price cuts, promotions, and discounts. Besides, a new toothbrush that had been slated for launch in the second half of last year hadn't been launched. This was a low-end brush that was expected to rake in Rs 1 crore in sales.

Fiscal 2001-02 was the first full year of variable pay, and Arora could tell that the executives weren't happy with it. Already, a VP and another general manager had made their displeasure known to Arora. Mathur leaving would not only encourage the other two to follow suit, but also impact the new pay plan.

"My performance targets were unreal," continued Mathur. ''Show me one company that has increased its toothbrush sales and I'll walk out of this room and never complain."

"True," said Arora. "But look at it from the organisation's point of view. There are other units that have taken a hit, with the result that our sales for last year were down. We've tried to do the best under the circumstances."

"Probably, but why penalise me for somebody else's fault," Mathur complained.

"I don't understand."

"I am referring to the new toothbrush that my team was supposed to launch in the second half of last year," Mathur explained. "We couldn't introduce it because the design team sat on it for a long time, and then the engineering team took its own sweet time bringing it into production. By the time we were ready to go, we realised that the launch expense wouldn't be worth it. The variable component in my compensation is 20 per cent and it's been a double-whammy for me. The fact that we didn't meet our targets ensured zero-increase in my incentives, and the increase in base pay doesn't even beat the rate of inflation."

"Anil, don't forget that most of us in Care Soft are in the same boat. That said, I do think we have an issue here. Here's what I can promise: I'll put forth these issues to the compensation committee. I cannot promise anything else."

Both men looked at the clock on Arora's table. It was well past 10.

"I have to pick up medicines for my son," said Arora. "If I don't find a chemist open now, I'll be signing my divorce papers tomorrow." Both men laughed and parted.

On Monday, the first thing Arora did was to call his CEO, Rishab Patel, and advise him to convene a compensation committee meeting.

"This week I have a diary so full that a knife wouldn't go through it," the CEO told Arora. "Do me a favour, Nitin. I'll send out the meeting request, but could you handle it?"

"But how can we decide on anything without you being there?" Arora asked.

"Don't. Flesh out the issues and keep them ready for me. Let me finish with our foreign partners' visit this week."

"Should we have the meeting next week in that case?"

"No, go ahead. We can have a second meet next week."

One thing that had irked Arora all along was the fact that Patel seemed inadequately concerned with hr problems. He was more concerned about what he called "strategic issues".

By afternoon, Arora had got a confirmation to the meeting request sent out by Patel. The committee would meet on Wednesday pre-lunch. (''Can't tackle hr post lunch,'' somebody had wise-cracked in acknowledgement.)

Care Soft's compensation committee comprised, apart from Patel and Arora, the CFO Narayan Shastri, coo Niranjan Roy, Director (Marketing) Utpal Sinha, a principal from the consulting company that had drawn up the new compensation structure Anurag Kesaria, and an independent director, who was a chartered accountant by profession, and widely regarded for his management wisdom Raman Behl.

The agenda for the meeting had already been circulated the previous day. Therefore, all the men were aware of the issues at hand.

"How widespread is the discontent, Nitin?" coo Roy set the ball rolling.

"I have reason to believe that it is quite widespread," said Arora, "although only a handful of people have taken it up with me so far."

"In that case, may be we are over-reacting," said Shastri. "We need to give the new system more time. After all, it's just a year old."

"I don't think one can possibly over-react to such an issue," noted Behl. "The worst thing that we can do now is to let the morale take a hit."

"I agree," said Arora.

"I couldn't agree more," added Sinha, Director of marketing. "I just can't afford to lose any of my men. And certainly not good men like Anil Mathur. I don't care if we have to pay him more."

"That's not a good idea," pointed out Arora. "We cannot be seen as being selective in our rewards. The whole idea behind variable pay was to motivate people across the board with the promise of greater rewards for better performance. We cannot make changes arbitrarily."

"Then, may be we didn't implement the new structure properly," bristled Sinha. "Or may be we should simply revert to the old fixed system, which according to me worked just fine."

"You are right about poor implementation," consultant Kesaria said. "But it would be a strategic mistake to bring back the old system. After all, the reasons why we introduced variable pay still hold. The business environment is changing, and we cannot afford to reward people based on the quaint notion of entitlement. Executives have to justify what they earn."

"Besides," the Chief Financial Officer, Shastri, intervened, "variable pay is a great way to control costs and improve productivity. Not to mention that such a system automatically attracts high-calibre people."

"Yes, when the going is good in the market, there is no problem with variable pay," noted Sinha. "But when the markets crash, like they have now, your profits shrink. Do you then ask people to forget all the hard work they've done, and say 'sorry, can't give you any increments because we've had a bad year'. Believe me, it will take less than six months to clean out talent from this company. Don't forget that the next year is going to be equally bad for FMCG companies."

"The IT industry is not only benching people, but asking them to take pay cuts," pointed out Shastri.

"May be," retorted Sinha. "But how many code-jocks can join insurance, banking, pharma, 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."

''Actually it is worth looking at what is going wrong with the system," said Behl. "As I understand it, 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.''

"As far as I can see," said Kesaria, "it seems to be a problem of implementation. May be we didn't communicate adequately, perhaps we need to tweak our measurement systems, review them more frequently and reward people closer to the date of their achievements."

"That is a good idea," said Behl. "Money may not be the only reason why people work, but it is one of the biggest reasons. Besides, a change like this needs significant lead time. It's a cultural change and people must be prepared for it."

"I would have loved to do this over a period of one year," defended Arora. "But I was asked to implement it within three months of the board deciding on it. Besides, where is the top management commitment to this initiative? Who is the champion of this variable pay? I could be, but it will have more credibility if the CEO also showed that he was committed to it."

"Meanwhile," Behl refocused the discussion, "we need to figure out a few things. One, how to convince people like Mathur that variable pay will actually help them in the long run. Two, how to achieve a buy-in across the organisation. And three, how to rectify some of the errors we may have made in its implementation. Finally, here's the worst-case option, whether we really want to scrap variable pay and return to the fixed system."

What should Care Soft do?

Whole hearted answers shall make this an interesting debate ; )

Warm Regards