Strategic Wage Management

Introduction ‘Knowledge’ is more important than any other types of

financial and material capital.

Getting finances is not difficult worldwide. But, getting the

right type of people at the right jobs is a hard task.

It is people, who make an organization successful or

otherwise.

Finding suitable human resources, developing them,

retaining them, enriching them and replacing them (if reqd)

is a continuous process of human resource management.

Wages constitute an important cost in any organization,

and hence needs proper management.

Factors affecting Wage Mgt. Organization’s ability to pay – financial strength of the

companies, based on turnover and profitability.

Supply and demand of Labour – forces of demand-supply

operate in decide the wages. Imbalance in the demand-

supply equation causes high / low wages.

Job requirements – skill / responsibility / difficulty of jobs

demand higher wages and vice versa.

Cost of living – high inflation, living conditions of the city.

Trade unions bargaining power – a strong trade union

commands higher wages and vice versa.

Importance of Strategic Wage Mgt

Good employees can no longer be simply considered as

dispensable inputs or easily replaceable.

They are an important constituent of a value chain and

only good employees bring extra value to an organization.

Processes and advanced technology can be matched, but

good human resources are difficult to correspond.

Environment is uncertain and can bring adverse changes

in a value chain. This can make some of the employees

redundant / unnecessary and they must be retrenched.

Casual labour and contractual employees form a large

portion and these must be handled carefully.

Employees, who are ‘high value drivers’ need to be

handled equally with ‘stakeholders or partners’.

Varied age profile, family background, location advantages

/ demerits, income tax provisions, personal choices etc.

make the wage structuring process very complex.

An organization passing through a change (M&A, JV etc.)

requires flexibility in wages policy. Any conflict / friction

between new & old, loyal & professional be avoided.

Wage policy should address the issue of economic phases

like boom & recession. Employees expect same incentives

in recession time also. Hence, this issue is critical.

Importance of Wage Mgt. (contd.)

Voluntary Retirement Scheme (VRS) needs focus. Many

times, good / important people leave and unwanted stay !!

Recruitments are on the basis of CTC (Cost To Company)

basis, which is very attractive for bright and ambitious

candidates. The framework of CTC is very important.

Retention of key employees / value drivers requires much

more than salaries. Motivating them through stock-options,

profit sharing etc. are new avenues.

Retiring experienced (aged) staff and hiring them as

consultants / advisors saves cost as well as opens

opportunity for juniors for early promotions.

Importance of Wage Mgt. (contd.)

General level of wages must be in line with the prevailing

market conditions.

Equal pay for equal work, regardless of person involved.

Formal dispute hearing and redressal mechanism

Wage policy must be a driving force towards performance

and corresponding remuneration.

Promotions / upgradation should increase the proportion

of performance based rewards (i.e. variable pay).

Random / ad-hoc methods for promotions be eliminated.

Unnecessary / over-lapping positions should be merged or

avoided. This enables better authority-responsibility.

Ideal Wage Policy – Guidelines

Performance appraisal parameters should be objective, transparent and flexible. Behavioural aspects and core performance must be given weightage in appraisal.

Performance bonus should be based on multiple factors like individual success, company profitability, employee’s loyalty etc. Recognition of achievements is primary.

Allowances, perks & reimbursements should take care of:

Job based requirements,

Location based hardships,

Position based rewards,

Emergency facilities,

Reduction of tax liability etc.

Ideal Wage Policy – Guidelines

In cases of trade unions, weak management control etc.

forced overtime are considerable, though unnecessary.

Overtime wages should be used as the last resort to

achieve bigger volume of production or for compensating

lost time due to machine breakdown, accidents etc.

Major reasons for overtime are –

Trade union dominance,

Unplanned production schedules, loss of productive time,

Poor maintenance of machinery,

Decline in labour productivity & no control over the same,

Insufficient capacities etc.

Overtime management

There are four options for wage negotiations for overtime

management –

Only normal wages (no overtime or productivity bonus),

Normal wages with overtime payment,

Normal wages with productivity bonus,

Normal wages with overtime pay and productivity bonus.

Overtime management (contd.)

Example – Mr. XYZ

• Basic wages – Rs. 30 / hour• Dearness allowance – Rs. 10 / hour• Overtime pay – Rs. 60 / hour• Productivity bonus – Rs. 10 / extra unit• Weekly bonus = Rs. 100 / week• Working 8 hours a day for 6 days a week

• As per normal productivity produce 1 unit in 2 hours.

• In a week, he worked for 56 hours and produced 30 units

• Paid holiday once a week• Calculate the cost of wages

per unit produced.

Overtime management (contd.)Option 1 – only normal wages.• Normal = 48 hrs x Rs. 30 = Rs. 1440• D.A. = 48 hrs x Rs. 10 = Rs. 480• Weekly bonus = Rs. 100• Holiday wages = Rs. 8 hrs x Rs. 40 = Rs. 320• Total normal wages = Rs. 2,340• Normal wages / unit = 2340 / 24 = Rs. 97.50

Option 2 – normal wages with overtime pay.• Normal wages (as above) = Rs. 2,340• Overtime pay = 12 hrs x Rs. 60 = Rs. 720 (normal 60 hrs for 30 units)• Total payments = Rs. 3,060• Total payments / unit = 3,060 / 30 = Rs. 102

Overtime management (contd.)Option 3 – normal wages with productivity bonus.• Normal wages (as above) = Rs. 2,340• Productivity bonus = 6 units x Rs. 10 = Rs. 60• Total payments = Rs. 2,400• Normal wages / unit = 2,400 / 30 = Rs. 80

Option 4 – normal wages + overtime pay + productivity bonus.• Normal wages (as above) = Rs. 2,340• Overtime pay = 8 hrs x Rs. 60 = Rs. 480 (56 hrs – 48 hrs)• Productivity bonus = 2 units x Rs. 10 = Rs. 20 (30 units – 28 units)• Total payments = Rs. 2,840• Normal wages / unit = 2,840 / 30 = Rs. 94.67

The productivity bonus should be attractive so that employees do not get tempted by overtime work or overtime wages.

Prod. bonus also implies earning more money in less time.

VRS is an important strategic decision of a company.

Reasons for introduction of VRS plan by companies –

To reduce excessive work-force

To reduce administrative costs

To make optimum resources of limited resources

To reduce overheads and raise profitability

To discontinue inefficient labour and retain the good ones.

Reasons for opting VRS plan by employees –

To start own business

No financial requirement, since children are earning

Physical / mental inability to work

Voluntary Retirement Scheme (VRS)

However, VRS plans prove unsuccessful due to following: Response from the employees is overestimated,

Unwanted, inefficient employees do not opt for VRS,

VRS is so attractive that even good employees leave the

organization,

Employees are not educated about effects of post-VRS

opportunities and possibilities.

Steps for ideal VRS plans: Identification of employees to discontinue and retain,

Based on years of service, salary drawn, post-retirement benefit,

Effective cost to company, increase in profitability etc.

VRS expenses should be taken as deferred revenue expenses.

Voluntary Retirement Scheme (VRS)