BusiNESS TodAY. VOLUME6, NUMbER 7.

CASE STUDY

COMPENSATIONCRISESSYNOPSIS: Ajay Malhotra, the 45-year-old vice-president (human resources and organisationaldevelopment) of the Rs 30O-crore automobile ancil-lary, Cooks Industries (Cooks), was thoroughly con-fused. A benchmarking project he had commis-sioned had revealed that the compensation Cooksoffered at every level of the company was muchlower than the average in its industry as well as arepresentative sample of other industries too.There were other disturbing findings as well: Cookshad too many designations, which translated into asurfeit of hierarchical levels. Its salaries had a

FOR THE UMPTEENTH TIME THAT DAY, AJAYMalhotra stared at the bulky report on his table. Andsighed deeply-much too deeply, in fact, visibly startling

his secretary who was sitting right across the table. Ever sincethe findings of Amam Consultants' (Amam) compensationbenchmarking project had reached Malhotra, the 45-year-oldvice-president (human resources and organisational dev-elopment) of the Rs 300-crore Cooks Industries (Cooks), hehad studied it ad nauseam. Invariably, the report generatedcontradictory feelings each time: clarity, on the one hand, andconfusion on the other.

A Pune-based automobile ancillary firm, Cooks producedkey engine parts-pistons, piston rings, engine valves, fuelpumps, carburettors, and bi-metal bearings-for the majorsin the automobile industry. Set up in 1985, the company hadbeen promoted by two technocrats, Ram Prakash, 45, andShantanu Kamble, 44, who had grown Cooks into a profitableentity that had reported net profits of Rs35 crore in 1995-96onsales of Rs275 crore. Itssuccess was partly due to a clear delin-eation of responsibilities between the two promoters, who hadfirst met as students at the Indian Institute of Technology atKanpur. While Prakash was the expert in metallurgy andmechanical engineering operations, the cutting-edge wasprovided by Kamble, who had also done his masters inbusiness administration from the Indian Institute of

Management at Ahmedabad.Five years ago, from the proceeds of a Rs 3O-crorepublic

issue, Cooks had undertaken a major upgradation of its tech-nology, modernising its plant and machinery. And, at present,it employed 450workmen, who operated in three shifts, as wellas 100 managers. In a market dominated by a number ofregional units, Cooks had become one of the few automobileancillaries in the country with a national presence. Of course,the company had been helped by the resurgence in the auto-mobile market, which had grown at the average rate of morethan 25per cent in the last three years due to the entry of a largenumber of transnationals, leading to an upswing in the for-tunes of the ancillaries too. In fact, their growth, at about 33 percent last year, had outpaced that of the industry that had

high level of tax-free cash reimbursements, whichwas at variance with the prevailing corporate trend.And there were perceived disparities between thepay-packages of the various functions in the com-pany. What Malhotra was still not clear about, how-ever, was how he should transform Cooks' organi-sational and compensation structures. WhileCadbury India's G. Sridhar, Cerebrus Consultants'Anita Ramachandran, and Sandoz' Rajen Mehrotraall agree that Cooks needs to do so, they differabout how Malhotra should go about it. Which ofthem would you agree with?

spawned them. The reason: in addition to the OriginalEquipment Manufacturing segment, the ancillaries alsocatered to the requirements of the replacement market, whichaccounted for 60 per cent of the demand for automobile parts.

Two additional factors had placed the automobile ancil-lary manufacturers on a sound footing. One, they were alldriven by owner-technocrats, who had once worked forautomobile-making firms and possessed high degrees ofhands-on engineering skills. Secondly, many of their custo-mers had floated joint ventures with foreign manufacturerswith well-structured vendor development policies. So, theytoo actively supported firms, like Cooks, with finance andtechnology, inviting them to tie up with their global vendors.No wonder the subject of our case study had been riding thecrest of a wave of commercial success over the last three years.

But every lining had its clouds. In 1996, Cooks' employeeturnover rate crossed 15per cent-shooting up from between2 per cent and 3 per cent in the early 1990s. In particular, theexpertise required to manage the production function wasbecoming rare. Most engineers were chucking their jobs up toseek greener pastures abroad, particularly in West Asia andAustralia. Many were also setting up- their own units withinthe country. Both Prakash and Kamble were concerned atwhat they initially thought was a blip, but had become a trend.More than 30 front-line engineers had left Cooks since mid-1995,and even the service functions-like finance-had hadtheir share of departures.

That's when Malhotra-who, after an earlier stint as thehead of personnel for a pharmaceuticals transnational, hadjoined Cooks as general manager (human resources) fiveyears ago-came into the picture. When Prakash asked himto examine the issues involved, Malhotra had been quick topoint out that one of the reasons for Cooks' high employeeturnover was low managerial compensation. "The grade struc-ture at Cooks, as it has evolved over the years, is archaic andneeds to be improved," he argued. Prakash agreed: "Ifwe havebeen out of touch with the trends in managerial compensation,let us set the situation right."

Which is why Malhotra quickly commissioned Amam to

109BUSINESS TODAY. APRIL 7-21,1997

BusiNESS TodAY. VOLUME6, NUMbER7.

CASE STUDY

Idertake a salary benchmarking study for Cooks in Novem-Ir, 1996.In all, the survey covered 32 firms: 11 from the auto-pbile ancillary sector, six from automobiles, four each from!nsumer products and infotech, two from pharmaceuticals,ree from financial services, and the other two were multi-bduct companies in the engineering sector. Of these firms,he were transnationals, four were family-managed, and themaining 19 were public limited companies in the private[Ctor.Amam's survey provided extensive data-no less than1° pages-on compensation trends and salary structures!ross various levels of the corporate hierarchy in all theseLJIls.And the analysis had, of course, been carried out bothlIel-wise and industry-wise.

Moreover, at each stage, there were comparisons high-

f.hting Cook' ranking vis-a-vis the other companies on para-leters like total employee cost to company, vari-ble pay, and basic salary. Apart from competitive~nchmarking-comparisons with its direct com-!=titors in the same industry-Malhotra hadpecifically asked for generic benchmarking, orpmparisons with similar players in other indus-

jies. After all, Cooks had lost technical talent to~e heavy engineering sector too. And there hadIlso been instances in the past where Malhotralad tried to recruit professionals for the service~nctions, but had been unable to attract any~lent. The reason: Cooks' inability to offer salaries.t par with what they were already earning in these

i~ctors. As he flipped the pages of the report,~alhotra tried to cull the highlights from theplethora of information in front of him.

Based on the total cost to company, the Amam~eport placed Cooks at No. 29 at the lowest level!If Grade 10, and 23rd at the highest level of~rade 1.The basic issue was that Malhotra neededro upgrade the pay packages that Cooks offered

lts managers at every level of its hierarchy. Butfnis was the easy part as the report was quitepnsightful at this level. It pointed out, in unam-IJiguous terms, where Cooks stood on each~lement of managerial compensation in relation~o its contemporaries. This data had enablediMalhotra to understand, for the first time, Cooks'~osition both in terms of competitive as well!asgeneric benchmarking.

But, at another level, Malhotra was cluelesssince he could not find a handle to start formulating an actionIplan. The more he analysed the report for directions on hisfuture course of action, the more complicated the issues[,Seemed to be. Even as he grappled for a common point ofreference, he felt that the survey confronted him with fivefundamental dilemmas:DESIGNATIONS:There were also some hard decisions to be taken

regarding designations, which had always been a tricky issueat Cooks. Malhotra recalled how, six months ago, he had triedrecruiting a manufacturing head for a product group at thePune plant. After an extensive head-hunting exercise spanningsix months, Cooks had found the right candidate for the job:

Grade

Anjan Kumar Saxena. Employed with a heavy engineeringfirm in Mumbai, Saxena was willing to make the move to Puneon a marginal increase in salary because the city happened tobe his home-town. The only snag: he had already been desig-nated general manager by the organisation he worked for.Ideally, Cooks would only offer him the designation ofdeputy general manager in Grade 2 which, of course, was quiteunacceptable to him.

Rather than lose a good man, Malhotra had taken anon-the-spot decision to by-pass company policy and offerSaxena the designation of general manager. While this hadclinched the deal, it had also resulted in upsetting all ofCooks' other general managers. Such instances were fairlyfrequent in the company, and Malhotra knew that he had to dosomething about bringing Cooks' designations in line with

COOKSINDUSTRIES'GRADEAND

Designation

CorporateOffice

10 AssistantOfficer

Officer!Mgmt Trainee

Engineer9

8 Executive SeniorEngineer

SectionInCharge

AssistantManager

DeputyManager

7 SeniorExecutive

AssistantManager

6

5 DeputyManager

4 Manager Manager

3 SeniorManager

DeputyGeneralManager

GeneralManager

SeniorManager

DeputyGeneralManager

GeneralManager

2

'Driver Allowance: Rs 2,000 PF:ProvidentFund LTA: LeaveTravelAllowance

those in the industry. However, the very thought of doing sowas quite distasteful to him. Because, together with Prakashand Kamble, Malhotra firmly believed that a designation muststrictly represent the nature of a job. He was wary of those whoviewed designation as a matter of status. While the AmamReport showed that the rest of the corporate world was liberalin designating any functional head as a vice-president,Malhotra thought that Cooks' conservative approach wasbound to make it unattractive to potential prospects.HIERARCHIES:The Amam Report also revealed that Cookshad far too many hierarchy levels. A 100gradestructure wasunnecessary as the survey showed that the industry norm had

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BUSINESS TODAY. APRIL 7-21,1997

BusiNESS TodAY. VOLUME6, NUMbER 7.

become four or five levels. For the last one year or so, Malhotrahad been toying with the idea of cutting down the levels to alesser number. However, he was only too aware of the fact thatthis would create frustration and disgruntlement in managersas a flat structure would, obviously, reduce their opportunitiesfor quick promotions.

Malhotra recalled a number of companies-particularlyDarshan India, a consumer products company based inMumbai which had squashed itshierarchies fiveyears ago, andhad to then cope with a managerial exodus of scary propor-tions-which were facing problems in retaining key managersfor want of growth avenues within the organisation. Privately,Malhotra did not agree with the concept of a flat organisation.However, trends indicated that there was a move to reduceorganisationallevels to five or six-the average level bench-

COMPENSATIONSTRUCTURE

internal parity of salaries. For instance, in a number of compa-nies covered by the survey, professionals in staff functionsreceived higher gross salaries than the technocrats who were,after all, the life-line of an engineering business. Malhotra didnot miss out the unstated point of the survey: every technocratworth his salt viewed this as unfair. Wasn't there a way ofcreating internal parity between the various functions withinCooks' organisational structure?TAXATIONPOUCIFS:Cooks' salary structure incorporated a highlevel of cash reimbursements, paying out cash against thevouchers submitted by its employees under heads such asconveyance, education, and periodicals. Employees foundthat attractive, and it was also a well-accepted practice incorporate India. However, the Amam Report showed that therewas a discernible trend towards a lesser proportion of salaries

being paid as cash reimbursements.Increasingly, it was becoming common

for companies-particularly transnationals-toresort to a consolidated salary rather than break-ing it up into various kinds of allowances. And thetax-burden would then be borne by individualemployees themselves. However, how wouldCooks' employees react to a lower level of cashreimbursement-and a higher incidence of taxa-tion even though income tax rates were falling?LEADER-FOLLOWER:Since the Amam Report indi-cated that the salaries at Cooks ranked 29th at

the lowest levels, and 23rd at the highest, therewas no doubt that Cooks had to undertake a com-

plete and radical upgradation of managerialremuneration. Which raised a new question:should Cooks turn "into a leader in the remu-neration game and offer the highest packages inthe industry?Orshould itstaya follower?

Ofcourse, the answer was linked to the capac-ity to pay-another issue that merited scrutiny byits top managers. No doubt, Cooks had beengenerating attractive margins, and would, hope-fully, continue to do so in future. Being a leader inthe market for its products, it did make sensefor Cooks to project the image of a premium pay-master in the employment market as well.But Malhotra was not sure where Cooks should

position itself at the top.So, should Cooks offer the highest pay-

packages in the industry and create a high-wageisland so that people would find it difficult to leave the com-pany? Left to himself, Malhotra felt that he would follow theaverage trend in the industry, and position the company as aslightly above-average paymaster. Or should he continue topeg Cooks' salary structure as slightly below average, attractingand retaining peopie on the basis of the excellent businessprocesses that the company was already known for? It wasn'teasy for Malhotra-or Prakash and Kamble-to decide.

marked by the survey. Shouldn't Cooks too fall in line by reduc-ing itshierarchical levels?SALARJFS:Whenever there was a need to recruit techni-cal people, Cooks had, traditionally, looked within theengineering industry. Of course, this was not so in the caseof non-technical personnel-maintenance, finance, andhuman resources-for whom there were no barriers for

mobility across industries. And this was one of the reasonswhy Malhotra had designed the survey to cover a repre-sentative sample of sectors rather than sticking to the engi-neering industry alone.

But this had generated another set of issues in terms of the

. Case Study ByANEETA MADHoK,Professor (OrganisationalDevelopment), Narsee Monjee Institute of ManagementStudies. Refereed by the BUSINESSTODAYPanel of Referees

111BUSINESS TODAY. APRIL 7-21.1997

'"

HRA MonthfyA(Rs) Af'tJ\UaI (%otQasit;f

J ("10ofBasic) Conv.yanceEducationPtiriodlcafs LTA M.dlcal

30% 750 100 - 20% 8.33% 10% 10%

30% 1,000 100 - 20% 8.33% 10% 10%

35% 1,250 130 - 20% 8.33% 10% 10%

35% 1,500 150 50 20% 8.33% 10% 10%

40% 1,750 150 50 20% 8.33% 10% 10%

40% 2,000 150 50 20% 8.33% 10% 10%

40% 2,250 300 100 20% 8.33% 10% 10%

40% 2,500 400 150 20% 8.33% 10% 10%

50%Car

500 200 20% 8.33% 10% 10%(non-AC)

50% Car(AC» 750 300 20% 8.33% 10% 10%

BusiNESS TodAY. VOLUME6, NUMbER 7.

CASE STUDY

Solution AI BELIEVETHAT COOKS

should hold the AmamReport in abeyance forthe moment. Far too

often, companies bringabout changes in theelements of their HRinfra-

structure, such as designa-tions, grades, salaries et aI,without articulating theassumptions driving theneed for such a changeand, more importantly,without taking the view0f the customer-in thiscase, the individual emp-loyee-into account.

More fundamentally, as part of evolving an action plan,Malhotra should reflect on the role of the HRfunction at Cooks.Does HRhave a strategic role to play? Isit perceived as a criticalsuccess factor? Is it a regenerative process? Or is it merely asystem maintenance function? Equally, what is the core aspira-tion of Cooks in upgrading salaries: retaining people, attractingtalent, or what? Should the company evolve its own pay-for-performance plan? In the larger context, Malhotra's approachmust be governed by a holistic view of using HRas a tool forbuilding Cooks into an institution.

Specifically, the consultant's report has been helpful, but

G. SRIDHAR.Director (Human Resources),

Cadbury India

Malhotra should undertake an Employee Satisfaction Surveyin order to understand its employees' perceptions beforetaking any decision on the various posers. Such a survey willno doubt confirm Amam's findings as far as compensationis concerned. But if the survey throws up a fairly high satisfac-tion level among Cooks' managers on the prevalent desig-nations and hierarchies, there is little reason for change. Inany case, these decisions must stem from the company'sown business strategy rather than with a view to keeping upwith the competition. For instance, the strategic objective ofgetting closer to the customer provides its own compellingreasons for delayering.

Since Amam's report has projected the company's com-pensation levels in poor light, the need to upgrade salaries isbeyond question. But there is little merit, even when the com-pany can afford it, in aiming to be the trend-setter in compen-sation levels. Securing leadership in areas which directlyimpact business-marketshare, technology, product innova-tion, skill levels of people-is a far more worthwhile objective.At the same time, a company cannot afford to be out of linewith contemporary trends in compensation levels. (]early, thebenchmarking study has shown that Cooks is out of line. Mal-hotra should, therefore, quickly work towards positioning thecompany in the median range. Ifeel that the positioning shouldbe implemented at two levels: between the 12th and the 16thrank among the 32companies benchmarked in the survey, andbetween the 3rd and the 4th rank in its own industry segment.And that should meet Cooks' objectives.

Solution BCOOKS IS A LOW

salary-paying com-pany which is trying tounderstand the newtrends in compensationand, in the process,coming to terms with theneed to upgrade itssalaries. This is a classic

dilemma amongst cor-porates today. My adviceis that Cooks should firstget its priorities right.Instead of dealing withseveral issues at one go, itshould focus only on itskey concerns.

One: becoming competitive in its industry segment. Evi-dently, this means that Cooks should analyse itself as a poten-tial employer at a wider level rather than just looking at merecompensation. First, in the light of the Amam survey, whereshould Cooks position its compensation levels? This is tricky inthe Indian context where compensation is not entirely job-based, and the salary variations across industries'are wide. But,

ANITA RAMACHANDRAN .CEO,

Cerebrus Consultants

...

for a company like Cooks, the comparisons should be lateralwith the automobile and engineering industries. Thus, Mal-hotra should not worry about industries like consumer goodsor infotech, notwithstanding the propensity among profes-sionals in non-technical functions to move across industries.

A related question: should Cooks position itself as the top-paying firm in its segment? It is important to bear in mind thatwhile low compensation spurs managerial mobility, high com-pensation is no guarantee for either low employee turnover orhigh morale. Employees view compensation only as a thresh-old factor beyond which a number of other considerationscome into play: the financial health .of the industry and of thecompany; the potential for personal growth; perceived marketvalue of the experience in the company; the working environ-ment et al. Similarly, a company need not take a blanket posi-tion at all levels. Depending on the company's strategy andrecruitment needs, salaries at both entry- and middle-levelsmay be positioned differently. This is where the need forprioritisation becomes important.

This brings me to the second issue. Should a company con-tinually worry about exceptional salaries in the market? No, itneed not worry unless it is a target company because of itsspecial image, training, or the quality of its managers. Com-panies pay exceptional salaries for several reasons. One reason

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112 BUSINESS TODAY. APRIL 7-21,1997 .........

BusiNESS TodAY. VOLUME6, NUMbER 7.

is the cushian effect: high salaries may .often mask mare seriausproblems in the arganisatian. Or it'cauld be better managementpractices that enable manpawer ratianalisatian and apera-tianal efficiency ta, tagether, enhance the affordability ta pay.That is why Malhatra shauld view the issue well beyand thenumbers. Ta my mind, it is enaugh if Caaks tracks salaries in itsawn industry segment and keeps itself ~breast at that level.

Third, Caaks is clearly at the battam .of the rung. It shauldupgrade its salaries. But it need nat bather abaut all the nan-technical staff. For the limited number .ofmanagers it may needin nan-technical functians, Caaks shauld fix its jab-relatedsalaries as per market trends. The alternative is ta campromisean the quality .of managers. The chaice is largely situatianal,and is linked ta the .overall strategy. One aptian, which I wauldrecammend, is ta identify its key managers and pay them tap-af-the-market salaries. Care must be taken ta incarparate an

appropriate perfarmance linkage. In fact, Caaks must factor ina large campanent .of campensatian far performance. It is amistake ta take key perfarmers for granted, and pay a dis-caunted salary an the assumptian that ematianal issues suchas banding will hald them back. Emplayees are baund ta lase

their self-warth and mave an.

On the issue .of crashing levels and flatter structures, thereis merit in broad-banding. There is na easy answer ta the issue.of psychalagical stagnatian arising aut .of the lack .of proma-tianal avenues. Multiple designatians within a single grade is.one approach. But it is impartant ta bear in mind that, in thelang term, unless a campany grows and provides far thepersanal growth .of its managers-bath in terms .ofcampensa-tian as well as individual develapment-it cannat hald an ta its

. managers in any case.Anather issue that needs ta be cansidered in this cantext is

whether the crashing .of grades will help achieve .objectivessuch as the flexibility ta pay mare far certain jabs even whilemaintaining relative grade parity. The risk is that the campanymight ratianalise the wrong jabs due ta a law grade structure,which wauld .only aggravate the problem .ofretentian. As far asdesignatians at Caaks are cancerned, they da nat seem ta beaut .of line with the engineering industry. Designatians areimpartant in this cauntry as a hiring play. But they lase theirappeal in a campany that has the patential far bath organisa-

tianal and p~sanal growth.

Solution CREIMBURSEMENT

against cash vauch-ers shauld nat farm part .ofthe manthly salary .ofmanagerial persannel. Allreimbursements shauld

be against actual expen-ses incurred for the can-

duct .of the campany'sbusiness. For instance,the tax benefit an educa-tian allawance in the

event .of an emplayee'schild studying in schaal.or callege is quite clear.But it must be nated that

the tax benefit is .only mar-

ginal. Equally, .offering tax-free manthly benefits an canvey-ance allawances and the reimbursement .ofexpenses incurred

an buying periadicals are bath grey areas. Malhatra shauldrecammend that these must be discantinued. The practice .of

giving HauseRentAllawance (HRA)can,hawever,be retained.The manthly remuneratian shauld be the tatal .ofthree cam-

panents: basic, HRA,and a campasite allawance, which tats upall the allawances currently being paid in cash. The campasiteallawance, which shauld be taxable, wauld be a percentage .ofthe basic salary applicable ta a particular grade and must natvary, as it daes at present, with individual emplayees. One fall-aut .ofthis will be an increase-even if marginal-in the cast tacampany .of an emplayee. It alsa leaves the aptian .oftax plan-ning ta the individual. Here, individual emplayees can claim taxreliefs an, say, HRAprovided they are incurring that expenditureby paying a manthly rent far their accammadatian.

RAJEN MEHROTRA....Vice-President,Sandaz (India)

T

As far as designatians are cancerned, Malhatra shauldexamine the need far same number-crunching. The tatalnumber .of managerial persannel is 100, and it is likely thatthere is scape for reductian here. An exercise an theratianalisatian .ofdesignatians must be undertaken. This canbest be facilitated by reducing the prevailing H)-gradestructure ta five or six grades. A lesser number .ofgrades willhelp in ratianalising designatians taa. There has been a lat .ofdesignatian inflatian in the carparate sectar, and Caaks shauldbe wary .ofjumping anta this bandwagan. Designatians shauldbe a reflectian .of jab descriptians and the functians per-farmed. The broad categories shauld be .officer, executive,manager, and vice-president, with same slabs, in particular, inthe manager categary.

Amam's findings indicate that the salary structure atCaaks needs revisian taa. Three factars need ta be kept inmind. First, Caaks shauld campare the salary structure .of itstechnical peaple with thase .ofthe six heavy engineering units,and .ofthe peaple in itsservice functians, like HRD,finance, andmaintenance, with thase .of the 11 units in its awn industrybenchmarked in the study. lt wauld be faalhardy ta usethe financial services sectar as a guide ta the salary structure inthe finance divisian.

Secand, Caaks shauld analyse the quartile value .of thesalary from the benchmarking data and ascertain the additianalcast ta the campany in the event .ofa revisian. Based an the quar-tile value, the salary structure cauld be warked aut keeping inmind the capacity .of the campany ta bear the additianal cast,nat .only naw, but, mare imJ1ortantly,in the future taa. Third,Malhatra shauld identify the jabs that carry a premium,either because .ofthe skill-levels t embady .ordue ta a shart-age .ofpeaple. And the m

,

ar

,

ket adjus ent .01::.<tlariessh~ b~dane .onlyfor thase key jabs. ~

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113BUSINESS TODAY. APRIL 7-21,1997