Article: More bang for the buck: Strategies to manage wage costs

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More bang for the buck: Strategies to manage wage costs

Know more about how reviewing existing compensation structures may give employers an opportunity to make wage costs more efficient without necessarily impacting jobs
 

There seems to be a knee jerk reaction from some businesses to cut down the manpower

 

Manpower rationalization has implications which may not necessarily be positive for an outfit in the long run, especially in the Indian economic space and ethos

 

Know more about reviewing existing compensation structures may give wage costs more efficient without necessarily impacting jobs.

The current economic downturn brought about by actions many a mile away, has unexpectedly brought corporate India, which has been riding a unidirectional wave over the last decade, face to face with a new realization. A country which is not used to the Hire and Fire approach is suddenly faced with the reality of pink slips. Are we adequately prepared to handle the situation? This article attempts to explore the challenges that Corporates in India are facing during the global recession, with respect to People Management. We will evaluate the approach that companies could adopt to manage wage cost and productivity challenges as well as identify some opportunities that could be leveraged during this time.

The global financial crisis has reached our shores, as is evident by the slowdown in the industrial growth and increase in top-line pressures for, in particular, businesses which are dependent on the sale of their products/ services to the economies facing the severity of the crisis. For the organisations facing profitability challenges, one of the big cost heads under scrutiny is the wage cost and as a direct consequence, review of the manpower. There seems to be a knee jerk reaction from some businesses to cut down the manpower.

Impact of Corporate Rightsizing

Our view is that Right-sizing, whilst the correct option for a number of organisations, may not be the best first option. Manpower rationalization has some implications which need not necessarily be positive for an organisation in the long run, especially in the Indian economic space and ethos.
 

  • Reduction in headcount creates organisational anxiety. This can lead to loss of valuable contributors and high performers who may take flight in times of uncertainty. This may constitute loss of key talent which may be difficult for companies to replace
  • The air of uncertainty and negativity damages employee morale, which in turn aggravates the problem by adversely impacting the productivity of the existing workforce
  • Headcount reductions can also impact the Company’s ability to attract talent in the future because of an erosion of its employer brand. The employer brand is a critical determinant of competitive advantage in a talent starved market like India and once eroded, may take years to re-build
  • From a Cultural perspective, Indian employees place a higher value on job security. Corporates have to be careful taking a hire and fire approach so as not to bear long term consequences of adverse public perception

So what should one do to manage wage costs and at the same time not bear the long term adverse consequences? For us to explore alternate approaches, it is important to analyse the significance of wage cost levels in the Indian context.

The Wage War That Was

Over the last few years, led by bullish Industrial Growth and the much talked about talent shortage, the corporate world in India has been witness to rampant escalations in salary levels.

Firstly, one of the drivers for this escalation has been the talent war being waged on campuses for entry level staff. Over 1998 – 2007, the average rupee salary at Tier 1 Business Schools almost trebled. From INR 3.5 Lakhs as average salary for category A Business Schools in 1998 to INR 13.3 Lakhs, that means a 300% increase. This entry level hike had a multiplier effect, leading to increments across the board as companies tried to ensure the right compensation gap between junior, middle and senior management levels.

Secondly, a number of new sectors and players started operations in the burgeoning economy. Insurance, telecom, Oil and Gas, Retail, Biotech, Education and Media are some examples of sectors that were opened to private participation in the last decade or so. This led to a significant increase in number of jobs being created. The talent pipeline was not up to speed with this increase in demand causing a breakdown in hiring salary norms. Employment offers which were traditionally pegged at a 20-25% increase, moved to upwards of 40% as new employers tried to woo talented staff from traditional industries. While this strategy may be justifiable to gain entry into the tough talent market, it led to a ripple effect on wages across sectors, with existing industries ring fencing their talent, by raining salary increases. These factors led to a compensation market which was becoming increasingly untenable for the average employer and maybe the time was ripe for a correction.

Our view is that in the extremely bullish compensation market, this economic slowdown can be viewed as a time for corrections. A review of the wage bill across sectors is perhaps a necessity in these times; however this need not necessarily translate into rationalisation of manpower.

Alternatives to downsizing to reduce pressures in cost and maximizing talent pool

Interestingly these tough times can also be opportune moments for organisations to set their house in order. The advantage of the tough external environment is that it results in a reduction in the risk taking propensity of the staff and grounds their aspirations to a more reasonable level. In this period your internal environment is likely to be more amenable and accepting of change.

There are a number of mechanisms that organisations can adopt to optimise the wage bill or manage increments within that same/ reduced wage costs while maintaining headcount.

Looking at your compensation Structure

A review of the compensation structure with emphasis on the analysis of fixed versus variable components of pay and a review of long versus short term rewards can be compensation centric interventions that organisations can carry out to optimise the wage bill.

Fixed Versus Variable

Organisations need to have the right pay mix across fixed and variable components of compensation; secondly ensuring that the variable components are clearly linked to business and individual performance will not only help reduce the fixed cost impact in tough times but will also provide the desired motivation to the workforce to drive superior organisational performance. Just restructuring the compensation to build a degree of variability linked to Business Results can help bring the wage bill down during these tough times. The other advantage of these times is that employees are also likely to be amenable to put a share of their earnings at risk, because the other alternative of a pink slip may not seem as palatable. For example, some companies have been able to reduce their wage bill by 10%, while increasing their top performers take home by 25%. This combination can be achieved by looking at the industry trends, looking at internal pay structures and determining the right % to fix as variable pay, this process requires a strong performance management system in place and individualized measures for each level of employees based on their control over the results.

Long Term Rewards

The use of long term rewards like retention bonuses may be another useful compensation mechanism to protect key employees/ talent in the company. This does not put any immediate pressure on the costs, at the same time it provides the proverbial monetary carrot. This approach sends a message to the key employees that they are important to the Company. For example, there are companies that are announcing a long term retention plan for its key employees, through which they stand to gain a windfall financially, based purely on continuing in the services of the company for the next 3 years.

When this is not enough

So what if the above options fails to increase productivity and you still have pressures to reduce headcount? In that case you need to approach rationalisation of manpower in a structured manner. Identify the headcount flab using segmentation to earmark non value adding positions or roles which can be cut with less impact on the business. Then identify staff in these positions and their existing performance and potential. Target low impact positions and low performing individuals for reduction in head count. Make sure that the rationale, criteria and approach is transparently communicated. Provide support services like severance pay, outplacements etc. to make the exiting employees cope with the situation. Remember even if they are not part of your headcount, your alumni are strong determinants of your employer brand. Make sure that the rightsizing does not erode your employer promise significantly.

Also keep in mind that the worst enemy of productivity and morale during these times is the informal grapevine and rumours that start doing the rounds. This, along with the slew of information which employees are exposed to from the media generates anxiety. It is contingent on employers to ensure that the workforce is kept informed of the business scenario, future plans and projections. Information from credible Company Sources lends a level of comfort and confidence to the employees. HR Professionals can play an important role in driving communication on business imperatives throughout the Organization and at the same time ensuring that the information is not a “spin doctored” representation of the business health. At the end of the day the employees are closer to reality and nothing will erode Organizational credibility faster than them figuring out that an incorrect picture of Company Health has been shared with them.

Conclusion

Manpower reduction may be a viable approach to reduce wage bill burden, but it is not the best first step to take. Reviewing existing compensation may give employers a method to make wage costs more efficient without necessarily impacting jobs. Also whilst not immediately apparent, the slowdown provides a good opportunity to directly and visibly impact long term business needs. Efforts towards upgrading talent, restructuring the organization & enhancing productivity of existing idle Resources to strengthen organisational capability & processes, all positively impact future competitiveness of the business. The challenge for the CEOs and HR Heads is to effectively balance the short term needs of profitability and productivity in the time of the slowdown and leveraging the long term opportunities that these times present. A lot of smart Companies are doing just that!

Topics: #TotalRewards, Compensation & Benefits, Employee Engagement, Performance Management

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