Reference no: EM133278110

Case: Think Before you leap :The Compensation Plan of a Chennai -based Two-Wheeler Major

In 2001, a Chennai-based two- wheeler major introduced a bonus scheme for its employees. Employees covered under this bonus scheme are evaluated through a three-tier process-(1) meeting production schedules, (2) maintaining machines, and (3) reducing overtime, scrap, and shipping errors. In 2002, productivity surged and some employees even added as much as 15 per cent to their paychecks.

The two-wheeler company started facing competition from international players and also was riddled in patent issues. A court order forced them to stop production of many models requiring significant manpower restructuring and compulsory retirement for more than 20 per cent of its employees. With successive drop in sales, the company was forced to withdraw the bonus scheme and asked employees to be prepared for a financial structure, which would mean a reduction in their benefits and perks. This message had a highly demoralizing effect on the employees and many efficient designers and engineers left their jobs to join competitors. The trade unions also took up the matter as only the workers faced pay-cut whereas the senior management remuneration remained unchanged.

A portion of the employee compensation is paid as variable pay, of which bonus is a major part. Other variable incentives are based on allocated weightage on group target achievement. To rationalize the compensation cost, the company decided to switch over to individual performance track record. A formal announcement to this effect made the workers furious and led to workers' protest resulting in production loss on a regular basis. The company made it clear to the employees that their behaviour would lead to the closure of the company, which would put them in financial hardship. The workers did not respond to the company's statement and went on an indefinite strike.

A few months later, the company obtained clearance from the court and the production of all the premium high-selling brands, which was stopped earlier could be resumed as the patent issue was found to be untenable. The company feels that the whole issue was masterminded by competitors to poach valuable employees from the company.

Discussion question
Study the case and provide an alternative compensation design, which would redress the problem faced by the two-wheeler major in Chennai.

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