c_b_presentation_-_asia-pac_mgmt

8/7/2019 C_B_Presentation_-_Asia-Pac_Mgmt

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2010 All Rights Reserved Vardhnam Consulting

Compensation &Benefits

A Strategy Perspective

G V P RajanDirector (Vardhnam Consulting)


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Agenda

An introduction to Strategic Compensation

An Industry Case Air India

Implementation Issues Case on Internal Inequity

Discussion/Questions



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What do you understand by C&B?


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Why C&B?

Compensation is a critical area of humanresource (HR) management, and one that cangreatly affect company and individual

performance. To be effective, compensation must be perceived

by employees as fair, competitive in the market,accurately based, motivating and easy to

understand. It must be linked to company performance and

growth strategies.



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External factors influencing C&B

Acceptable norms

Traditions

Values & beliefs

Favorable policies

Taxation laws

Interest Rates

FDI, growth rates Industrial

production

Attractiveness

Barriers to Entry Price Wars

Cost of switchingjobs

Industry

Competition

Markets

NationalEconomy

NationalCulture

Society

Legislation

Govt.

Policies



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Internal Factors influencing C&B

Financial Power How deep are your pockets?

How long would you be cash-rich?

Corporate Strategy Vision, Mission, BusinessObjectives,

HR Strategy Management Commitments

Fairness, Equity, Transparency, Consistency

Policies Hire/Fire



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Case Introduction: Air India

About the Company

National Aviation Company of India Ltd. (NACIL) was formed in Aug2007.

It involved the merger of two state-owned carriers Air India andIndian Airlines.

Post merger the entity came to be known as Air India Post merger, Air India, the combined entity has around

32,000 employees and 16 Unions

About Financial Performance

Air India posted a net loss of Rs.5,551 crore in the year ended

March 2010 against the previous years net loss of Rs.7,189 crore. Air India has a total debt of Rs.40,000 crore, including Rs.18,000

crore of working capital loans.

In November In the last 15 days, Air India has operated nearly 1,500flights from Delhi, of which over 1,000 failed to take off or land on time



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Air India Case: Financial Performance

2010-11* 2009-10* 2008-09*

Operating revenue 6493 5577 6732

Operating Expenses 8563 7606 9370

Operating Profit/Loss (2070) (2029) (2638)

Total Revenue 6702 5661 6804

Total Expense 10152 8746 9930

Net Profit/Loss (3450) (3085) (3126)

EBITDA (976) (1257) (2216)

All figures in Rs Crore* Apr-Sept


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The Early Phase a bad beginning The scheme was introduced in May 1996 to retain a section of the

skilled category employees who were threatening to leave for betterpastures.

Employees were insistent that they should be paid remuneration at

par with their counterparts in private international carriers orthreatened to resign.

The company then introduced the "shortfall allowances" to payadditional money to pilots

Under this scheme, senior pilots were guaranteed higher paymentsthan their juniors even if they did not fly the same number of hours.This was calculated on a monthly basis.

However, the management finally settled for a half-yearly calculationto give more leverage for equal flying hours to pilots.

The PLI parameters, which are different for various categories, arebasically linked with aircraft availability, dispatch reliability and on-time performance.


Air India Case: The C&B linkage-1


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What employees felt about PLI? The Productivity Linked Incentive (PLI ) scheme was launched

when the airline's fortunes began dipping.

After seven consecutive years of profits, the airline reported an

operating loss of Rs 413 crore in 1996-97. In that year, Rs 74crore was paid for better productivity!

The losses started declining after that, but the PLI paymentsstarted soaring. The outgo on PLI increased to Rs 134 crore for1997-98 when the operating loss was Rs 193 crore.

The very method of computing these incentives is being

questioned. The criteria for the PLI scheme was opposed bysome senior officials even when before it was launched.

The scheme is a fallout of the demand for higher wages madeby Air-India pilots.




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What employees felt about PLI? "We did not realise the implications of the criteria which

allowed only a small section of employees to get a lion'sshare of the incentives, said an employee

Officers and staff of the engineering and engine overhauldepartments get substantially higher PLIs than employeesin other departments.

Pilots do not get PLI but are paid "shortfall" or "bypass"allowances which are substantial.

There is a school of thought which maintains that theseincentives should be linked with profitability. "If thecompany does not make profits, how can it afford to giverewards above salary levels?


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The Recent Phase from bad to worse. In 2009, following a strike, the government rolled back a 50% cut in

productivity-linked incentives that account for 30-50% of the salary ofAir India employees; the move would have saved the airline Rs.700crore a year.

In December 2010, Air India has decided to increase the incentivespayable to about 2,300 of its officers. This hike would be in the form ofPLI that varies from 120% (for Deputy Managers) to 30% (AGMs)

In the coming months, the 2,300 AI officers, including managers,senior managers , deputy manager, assistant managers etc, will bepaid arrears (dating from April 1 2010) in installments.

This would put an additional burden of Rs 60 Cr annually on the wagebill.

Increasing employee salaries instead of imposing wage cuts asdemanded by the government is an inexplicable move for an airline,with a Rs 19,000-crore debt burden, which banks heavily on thetaxpayer's money for survival.




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Managements Reasoning

According to airline sources, the reason for thehike was the huge disparity in salaries of Air Indiaand the erstwhile Indian Airlines (IA) officers.

"An AI assistant manager gets a PLI of about Rs8,000, while his IA counterpart gets Rs 18,000.

Similarly , an AI manager gets Rs 25,000 as PLI,while his Indian Airlines counterpart gets Rs52,000,

The CEO has been a failure when it came toreducing PLIs or the Wage Bill


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What should have been done?

"When the airline CEO talks of rationalization

of salaries, he is only talking of increasing

salaries. Since the disparity between officer's

salaries in AI and IA is huge, every effort

should have been made to reduce IA PLI by a

fair amount so that AI officers don't need to

be given huge hikes, a senior ministryofficial



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Recommended Corrective Actions

The government has a plan to infuse Rs 5000 cr as a bailout package over a period of three years, starting in 2009-10.

In Feb 2010, it has infused Rs 800 crore in equity and the

next package of Rs 1,200 crore is expected to be cleared inthe coming months.

Cabinet Committee of Economic Affairs said in Octoberthat it wouldnt happen because the airline had not met itstargets.

The rider is that Air India (AI) should reduce itsexpenditure and especially slash its wage bill



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The impact of C&B on Company

Air India failed to achieve the key target of

rationalization of wages.

Air India spent at least Rs.3,000crore on paying

salaries of 33,000 employees in 2009-10 further

increasing the wage bill.

The existing C&B policy has made it difficult for Air

India to tread a recovery path


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Learning for an HR Professional

Compensation Plans are deeply inter-linked with Employee Performance

Organizational Productivity

There is a need to maintain Internal Equity to prevent dissatisfaction Harmony and peace within organization

Salary negotiations/agreements must be tied to financialperformance to prevent inflated wage-bills

Before Merger HR due-diligence needs to be rigorous to

prevent unwarranted scenarios Pay practices must be consistent, must not discriminate,

and must not be arbitrary Implementation Issues


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So how should we plan C&B?

Steps to design a pay-structure


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Step1: Job Analysis

Job analysis is the process of studying jobs inan organization.

The outcome of this process is a job

description that includes the job title, asummary of the job tasks, a list of theessential tasks and responsibilities, and adescription of the work context.

Also included are the knowledge, skills andabilities needed to perform the job.



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Step 2: Job Evaluation

Job evaluation is the process of judging the

relative worth of jobs in an organization.

The outcome of job evaluation is thedevelopment of an internal structure or

hierarchical ranking of jobs.

Job evaluation helps to ensure that pay isinternally aligned and perceived to be fair

by employees.



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Step 3: Pay Policy Identification

Pay policy identification is the process of

determining whether the organization wants to

lead, lag or meet the market in compensation.

The pay policy or strategy will likely influence

employee attraction and retention.

Pay policies can vary across job families (i.e.,

groups of similar jobs) and job levels if the topmanagement feels that different strategies can be

effective in different areas of the organization.



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Step 4: Pay Survey Analysis

Pay survey analysis is the process of analyzingcompensation data gathered from otheremployers in a survey of the relevant labormarket.

Gathering external pay data (e.g., base pay,bonuses, stock options and benefits) is essentialto keep the organizations compensationexternally competitive within its industry.

Employee attraction and retention can beimproved by maintaining externally aligned paystructures.



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Step 5: Pay Structure Creation

Pay structure creation is the final step, inwhich the internal structure is merged withthe external market pay rates in a simple

regression to develop a market pay line. Depending on whether the organization wants

to lead, lag or meet the market, the marketpay line can be adjusted up or down.

To complete the pay structure, pay grades andpay ranges are developed



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Implementation Issues: Compensation

Internal and External Equity If people leave because of internal inequity, the problem

is worse and is difficult to rectify. HR systems are primarilyresponsible for this

If people leave because of an external inequity, there arestill good chances to reduce attrition. Both Corporate andHR strategy need to be fine-tuned.

Discrepancies Crop more in case of a large spread out organization and

can cost dearly to rectify Scenario analysis for 10-15 years with best and worst

situations needs to be rigorously taken to estimate thefinancial implications



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Implementation Issues: Compensation

It is easy to follow the law but difficult to be consistent If people leave because of internal inequity, the problem is

worse and is difficult to rectify. HR systems are primarilyresponsible for this

If people leave because of an ex

ternal inequity, there are stillgood chances to reduce attrition. Both Corporate and HRstrategy need to be fine-tuned.

Discrepancies Crop more in case of a large spread out organization and can

cost dearly to rectify

Scenario analysis for 10-15 years with best and worst situationsneeds to be rigorously taken to estimate the financialimplications



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Implementation Issues: Benefits

Employee benefits are non-financial form of

compensation offered in addition to cash salary

to enrich employees lives.

Problem will arise when you begin to decide what

benefit to give to whom and on which basis?

Though benefits do not directly influence

performance but their absence can lead to lowsatisfaction, absenteeism an turnover (DeCenzo

and Robbins; 2007)



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Implementation Issues: Benefits

The outcome is that employees perceptions

are misplaced and they often consider it as a

right rather than as special gesture by the

company

A personal touch from HR is needed to make

benefit administration successful.


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Pay anomalies, Internal Inequity, -disatisfaction

Legal cases involving such discrepancies often

center around the principle that it is moreegregious to violate and be inconsistent withyour own pay practice than it is to follow thelaw. In this example, correcting thediscrepancy could cost the company tens ofthousands of dollars.



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C&B: Planning Issues

How to value the work inside the organization sothat pay is awarded fairly?

Approach business strategy, culture & work

content Job family

Evaluation method job based/skills based

Pay strategy

Pay structure Compensable factors skill, responsibility and

effort degree and weight



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What are Salary Grades?

Salary grades enable an organization to

determine where jobs can be placed in a

hierarchy. They help define pay levels, provide

scope for pay progression and offer a basis for

managing relativeness. Grades, in effect,

communicate the career and pay

opportunities available to employees



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Types of Grade Structure

Narrow Graded Structure

This is a sequence of job grades (>10) with

narrow pay ranges (20-40 percent) betweentwo consecutive grades. It is generally

recommended for a large bureaucratic

organization with well-defined hierarchies. Pay

hikes do not depend much on performance.



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Broad Band Structure

This structure was formulated to match the reward with thecontribution. Here, typically 4-6 bands exist with a bandwidthranging from 50-75 percentor more. Band boundaries are usuallydefined by a combination of job evaluation and market rates. A

reference point is created for each band, around which paymentranges are built.

The bands have an overall description of the jobs allocated to them(for example, senior management, technical support, etc.). Itintroduces a lot of flexibility, as lateral career development can beawarded. On the flip side, it is largely dependent on market rates,

which could lead to inequalities of labor markets within theworkforce. This structure can flourish in companies where the focusis on improvement and lateral development. For startups with asimilar vision, it can create a good start.



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Job Families

In this approach, there are typically 3-5

separate familiessuch as Business Support,

which includes IT, finance, HR and admin.

Each job family is further divided into around

5-7 levels.

This structure is used when there are different

market groups that need to be rewarded

differentially.



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Elements of C&B

DIRECT

1. Base pay - decided on the grade2. Variable compensation - based on performance3. Special allowances:

HRA (tax exemption can be claimed),

Convey-ance, Medical claims (tax exemption can be claimed),

LTA (tax exemption can be claimed)

Coupons (tax exemption can be claimed)

Overtime

Contingent pay (skill-based pay, competence-related pay, service /contribution-related pay)

4. Bonuses, profit sharing, merit pay5. Retirals (PF, gratuity, super annuation), based on the base pay6. Benefits like dental, insurance, vacation, earned leaves, etc.



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