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ICMR Center for Management Research

Compensation Management
This case was written by Aarathy M and Sirisha K, under the direction of Niharika A, ICMR Center
for Management Research (ICMR). It was compiled from published sources, and is intended to
be used as a basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation.
2004, ICMR Center for Management Research
ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India
Email: [email protected].
www.icmrindia.org

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Compensation Management
CASELET 1
Employees of SVS Pharmaceuticals were a worried lot. With the news that the company
was going to merge with Vindhya Pharma, all of them were worried about what would
happen to their jobs, and the other benefits as a result of the merger. There were all kinds
of rumors regarding layoffs and reduction in pay and benefits. Vindhya Pharma was a
leading firm with operations spread across Asia and Europe. SVS Pharmaceuticals had a
strong hold in marketing and distribution in India, and so it was considered to be a merger
of equals. Amid all the confusion, the employees received a message that the CEO would
like to address them regarding the merger.
The next day, the tensed staff assembled in the conference room. The CEO, Sharath
Kumar started the proceedings by sharing with the employees the reasons for the decision,
and the advantages for the firm, if the merger was completed. He felt that as a result of the
merger, the firm would be able to explore various areas of research because Vindhya
Pharma had the resources to finance such research and developmental activities. Even as
Sharath Kumar was speaking, the employees had just one question in their mind, what
would be the impact of this merger on their jobs and their pay packages.
To their relief Sharath made it clear that a benefits team would be formed that would have
representatives of both the companies. He requested the employees to be patient as it
would take some time to clearly decide and bring in an effective benefit plan. As per
Sharaths statement a benefit team was formed.
Later in the afternoon, a meeting of the benefits team was called. The team was headed by
the VP-HR of the merged company, Vinod Sharma, who stated that since it was a merger
of equals, they had to develop something that was the best for the new company, even if it
were time-consuming. The team felt that the best way to go about it was to merge the best
of both companies benefit plans or create a new benefit program that would reflect the
culture the new company was trying to nurture. Sharma felt that the latter option would
take a longer time. He also stated that their aim was not just to design a new benefits plan,
but also to make sure that the employees were knowledgeable and comfortable about the
changes in the benefits programs. Before concluding the meeting, the VP made it clear to
the team that people were of paramount importance to them and if the benefits program
did not help in retaining them, then the merger would serve no purpose.

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QUESTIONS FOR DISCUSSION:

1. The benefits team has to devise a benefit program that would satisfy the employees of
both the firms. Can you suggest some steps for the benefits team to function
effectively?
2. The head of the benefits team stated that it would take the firm more time to create a
new benefits plan than merging the benefits plan of both the companies. Why would
creating a new benefit plan take more time? What should be the action plan for the HR
team?

CASELET 2
Girish Pradhan is one of the many HR managers who have seen the ups and downs of
retaining employees with stock options. In December 2000, at the peak of the IT boom, he
joined the human resource department of Visiotech, one of the largest independent chip
design firms. When Pradhan joined the firm, it was unlisted, but was on the verge of
launching an IPO. The firm expected Visiotechs stock to soar rapidly after the IPO, as it
was one of the leading chip designers.
This gave Pradhan a terrific recruitment tool as the stocks attracted many prospective
candidates. People were willing to join the firm at salaries that were 30-40% lower than
their existing salaries because Visiotech was offering stock options as part of the total
compensation package. But the dream was short-lived. In just a few months, as the
stockmarket came crashing down, and the firms stock was no longer sought after in the
market, its options turned worthless. Pradhan realized that the employees were no longer
interested in stock options and it was difficult to attract and retain talented employees
using the companys stock options.
Even senior management employees in the 45-48 age group people with a greater risktaking capacity were shying away from options. Pradhan planned to analyze the situation
and identify the means of attracting and retaining employees. After considering the market
situation and the existing trends, he came to the conclusion that the most common demand
was for a performance cash bonus. From his analysis, he also found that with higher
spending on lifestyle products and a greater need for free cash, employees seemed to
prefer the cash based pay to ESOPs. Employees also felt that ESOPs took time to mature,
and also that there was some risk involved in the returns.
But implementing a performance bonus plan based on cash would put Visiotech under
enormous strain as the companys manpower costs were already 40-50% of sales and any
further increase would squeeze the margins. As it is, the tech meltdown had already
shaved off a major chunk of the margins. Moving to a fully cash based compensation
system would also have a major impact on the profit and loss accounts of the company.
Another option that Pradhan could consider was the move to a variable pay structure,
under which the pay was now linked to company, individual and team level of
performance. But when he planned to finally implement variable pay, one of his
colleagues suggested that the system of options should not be written off as the market
was catching up.
3

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QUESTIONS FOR DISCUSSION:

1. What are the reasons for the declining role of stock options in Indian companies?
2. Pradhan seems to be in a confused state as to what kind of compensation packages he
has to design to retain and attract employees. Can you suggest any guidelines to
Pradhan for using compensation to attract employees?

CASELET 3
The northern division of Gautam Appliances met every month to analyze its targets and
the actual sales. Shravan Kumar, a jovial and friendly manager who was respected by all
the sales personnel, headed the meeting. His suggestions and other contributions during
the meetings always helped sales personnel exceed their targets. He also gave a patient
listening to employee problems and suggestions. During one such review meeting, one of
the sales executives, Pavan Kumar, raised the issue of the uniform compensation system
being implemented by the management. He felt that despite their achieving a greater
percentage of the sales target than the southern division, they were not being compensated
appropriately. The incentives being received by the employees of both the regions were
also the same. There were times when the northern division achieved double the sales of
the southern division. But the management did not recognize or acknowledge this. Pavan
felt that it was demotivating for them to work hard and put in extra effort when the other
division was not matching their performance, but were getting the same compensation.
Shravan explained his inability to provide a solution to the problem as it was an
organizational issue. He told the employees that despite his suggesting to the management
that they adopt the performance-based variable pay system, they had not considered it. He
said the management believed in the standard pay system based on the number of days the
employees worked. However, he assured the employees that he would put forward this
suggestion to the top management at the next meeting. The meeting was adjourned and the
sales personnel left the room in a state of hope.
After a month, when the staff assembled again for the review meeting, Shravan was not
his usual jovial self. The employees realized that the management had not reacted
positively to the idea of performance-based compensation packages. Shravan tried to
convince the employees that the management was looking into this issue and would
resolve it as quickly as possible. However, even two months later the sales personnel did
not receive any information from the management on this issue. The next two months saw
a very high employee turnover rate in the northern division of Gautam Appliances. The
employees who remained also did not put in their best efforts. Their sales performance
came down drastically. At the monthly meetings, the top management questioned Shravan
about the poor performance and the high employee turnover. Shravan made it clear to the
management that even at this stage if they did not consider rewarding the employees for
their performance, they would be losing a valuable employee base. He suggested that they
should at least consider giving employees incentives to reward their performance. After
two days, Shravan was called and asked to present his views on designing an appropriate
performance-based compensation system for the organization.

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QUESTIONS FOR DISCUSSION:

1. The organization was following the traditional method of compensation. What are
these methods and how do they function?
2. Shravan requested the manager to provide the employees with at least incentives based
on the targets being achieved. What are the various incentive schemes that can be
implemented?

CASELET 4
In a speech to the employees, the chairman of Praveen Metals said that to survive in the
dynamic market, they must be able to switch gears and perform differently in response to
change. According to him, traditional job titles and descriptions indicated a restricted set
of work duties. Paying employees according to these structured duties led to rigidity
during times of change. Paying employees according to their competencies seemed to be a
more rational approach, allowing the organization to speedily change employee
assignments and motivate their employees to gain skills and become more valuable. The
workers would be motivated as they were being paid according to their skill sets.
The chairman felt that by doing this, the employees would gain some control over their
pay. All in all, such a pay system had the potential of being more motivating as well as of
retaining employees. More motivated and performance-oriented employees would be
drawn to such a system because it allowed them to realize their potential. Such people
were often the high achievers and effective employees.
The management initiated skill-based pay in the organization, replacing the earlier system
of job grades based pay. During this transition, employees assisted in writing skill
definitions and benchmarking skills. Jobs, based on job scope and complexity, defined the
benchmarked competencies. The company conducted training sessions and made sure that
employees understood the new system.
Supervisors and team leaders assessed employee application of knowledge. If employees
were applying skills beyond their designated skill base pay level, the supervisors initiated
certification and approval processes to promote them to the next higher level. If
employees performance was below the standard, their pay remained the same. However,
the supervisor and the employee were required to establish a training plan of action.
After a year of operation, employees were asked to provide inputs in three areas: (1) access
to training and job rotation, (2) how well they understood the new plan and (3) their view of
advancement under the new plan. After the implementation, the following results were
identified. Employees who had a positive perception of their access to training and job
rotation during the first year of the new pay plan, were also satisfied with their skill based
pay in the second year. Employees who understood the new plan in year one were also
satisfied with their skill based pay benefits in year two. Overall, these employees felt that the
system was fair. So, from these findings, the management found that both employee
understanding of the pay system and their being able to affect their pay through access to
training and job rotation were important for the success of the skill-based pay plan.

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QUESTIONS FOR DISCUSSION:

1. The chairman suggested the replacement of job grades. Can you suggest some of the
modern approaches to wage determination?
2. According to the Chairman, employees do not have control over their pay by using the
traditional approach. Is it possible for employees to have control over their pay?