Motif Inc the knowledge base ITES firm which serves Fortune 500 and mid market customers set up its operations at Ahmedabad since the city is considered to have a lower salary cost when compared to major Indian cities like Delhi, Bengaluru, and Hyderabad. Motif whose client list includes one of the largest online auction companies in the world and one of the top five travel companies in the United States, is ranked among the top 100 BPO companies globally (by the International association of outsourcing Professionals in April 2006).
Employers handle cost of the living differentials in several ways. One is to give the transferred person a non-recurring payment, usually in a jump sum or perhaps spread over few years. Others pay a differential for ongoing costs in addition to a one time allocation. Others simply raise the employee’s base salary Government employees in India are eligible for a city compensatory allowance (CCA), which depends on the type of city. It is an additional payment to take acre of the increased cost of living. Compensating expatriate employees is till another policy problem as The New Workforce feature illustrates.
IBM is a classic example of organizational renewal. It dominated its industry in the 1980s. But by the 1990s it was failing to exploit new technologies and losing touch with its customers. Its board hired Louis Gerstner as CEO. His first strategic aim was to transform IBM from a sluggish giant to a lean winner. His actions illustrate how employers use compensation policies to support strategic aims.
Transforming IBM into a lean winner meant doing more than downsizing: Gerstner had to transform IBM’s culture – the shared values, attitudes and behavior patterns that guided employees’ behavior. He sought to emphasize winning execution speed and decisiveness. He wisely decided to use the compensation plan to support IBM’s strategic aims.
IBM’s existing compensation pay plan did the opposite. Everyone was in a job whose relative worth for pay purposes was based on a decades of point factor system which meticulously assigned points to each job’s duties. Maintaining the point system for over 100,000 employees require a massive and cumbersome attention to point factor manual based evaluations. This approach also cultivated a preoccupation with internal equity rather than with market driven competitive rates of pay. Gerstner knew he had to change the pay plan to drive the new culture he sought to create.
To change this situation, Gerstner’s team made four main changes in what became the firm’s new strategic compensation plan:
The market rules: The Company switched from its previous single salary structure (or non sales employees) to different salary structures and merit budgets for different job families (accountants, engineers, and so on) in amore market oriented way. The new approach seen the strong cultural signal that a market driven company must watch the market closely and act accordingly
Fewer jobs, evaluated differently in Broad bands: second, IBM scrapped its point factor job evaluation system and its 24 traditional salary grades. The new system has no points to all. The old system contained 10 different compensable factors for assessing a job’s worth: the new one slots jobs into 10 bands based on just three factors (skills, leadership requirements and scope/ impact).
In the US, the number of separate job entitles dropped form over 5,000 to fewer than 1,200 and 24 salary grades dropped to 10 broad bands. This communicated a new organizational model: IBM was to be a flatter organization that could deliver goods and services to market faster.
Managers manage: The previous compensation plans based raises on a complex formula that linked performance appraisal scores to salary increases measured in tenths of a percent. The new system is streamlined. Managers get a budget and some coaching the essence of which is: Either differentiate the pay you give to stars versus acceptable performers or the stars won’t be around too long. The new approach lets mangers rank employees on a variety of factors (such as critical skills and results). The managers decide which factors are used and what weights they’re given.
Big stakes for stakeholders: As IBM was floundering in the early 1990s, very non executive employee’s cash compensation (outside the sales division) consisted of base salary (plus overtime, shift premiums and some other adjustments). Pay for performance was a foreign concept. Within a year or two after Gerstner arrived most IB employees around the world had 10% or more of their total cash compensation tied to performance. In the new system here are only these performance appraisal ratings. A top rated employee receives two and half times the award of an employee with the lowest ranking.
The changes at IBM illustrates the nuts and bolts of strategic compensation which means using the compensation plan to support the company’s strategic aims , IBM’s new pay plan refocused its employees’ attention on the values of winning execution and speed.