Article (January-2022)


Fixed Vs Variable Conundrum

Editorial Team

Designation : -   Editorial

Organization : -  Business Manager HR Magazine


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What Tejinder Kalsi being the HR head of this logistic company - Highway Cargo Movers Pvt. Ltd. was afraid of sometime back, has started coming true before him. Last three months data reflected that attrition has reached to 22% against average 3-4%. It was an alarming situation as he has been asked to identify the reasons, take corrective measures and also plan to recruit the persons to fill the vacancies as priority.

It was not difficult for Tejinder to identify the reasons. Actually he knew it already and even sounded the MD also beforehand but he was sidelined.

Highway Cargo Movers in the business of logistics has impressive market share and enjoys good brand having offices and warehouses in all prominent cities to serve end to end clients requirements. Co. has fairly structured compensation policy having components of fixed pay and variable pay apart from incentives. It was designed in such a transparent and simple way that employees at large were satisfied and felt secured. Variable part was from 5% to 20% depending upon the level from top management to lower level employee. In other words while lower level employee's variable pay was 5%, top management level employee's was put in bracket of 20%.This variable part was payable in annually based on company performance and business results. Middle and lower level employees were in secured job zone and were giving their best. Company was also registering profits year by year.

Apart from the pay component of fixed and variable, there were incentive schemes at individual and group/team level depending upon the nature of work of departments. The objective behind designing incentive scheme was to keep employees motivated and well rewarded to increase in turn the customers' satisfaction level. Group incentive was applicable in those departments where it was difficult to ascertain individual contribution and result was largely depended on team work. However, percentage of incentive was lower at higher level and higher at lower level. The incentives were paid quarterly.

During Covid when all other companies were reducing their employee head counts to control costs factor and business took a deep dive and overall demands were at lower side, the company decided not to reduce the headcounts during the crisis and support employees and their families, as it did not want to lose good people and moreover, it was not appropriate time to terminate even those employees who were not performing up to expectations. Company used reserves to meet out expenses because they were sure that the market will soon be up. Due to Covid, company profits have gone down. In such scenario, Company board thought of taking some effective cost cutting measures.

Tejinder communicated in a well thought and worded mail to all employees reinforcing company values and commitment towards its people that there were no reasons to be scared of as company has decided not to reduce any person during this hard time and employees should continuously put in their hard work and all efforts to bounce back and bring the company back on profits path.

Tejinder was also asked by the board to control costs by not recruiting new people but instead by redefining the job profiles and distribute excess work, if any amongst existing employees by taking a route of job enlargement.

Further to control costs, Management decided to restructure the compensation package with the objective to increase the variable pay component and reduce the fixed pay in a reasonable proportion. Tejinder expressed its reservation on this proposal as it may lower down the employees' morale and diffuse/dilute the motivation level, company achieved in terms of employer brand value and work culture by not reducing the employees during covid period. Tejinder was of the view that it may also lead to high level of attrition as after covid situation, market started opening up and activities were heading towards normalcy. Tejinder view was taken more towards softer side and of remaining in comfort zone. Tejinder suggested that incentive scheme may be redesigned and its load can be reduced by keeping certain level of senior employees out of the scheme as they were already well paid. He also suggested that even if restructuring of compensation was to be done, it should be done only in respect of senior employees. Third suggestion, he put forward that this year annual increment either be deferred or if given, should be at very minimal level. These all measures can very well take care of cost reduction without much impact on employees particularly at lower and middle levels' take home salary. But his suggestions were turned down. Few days later, message was communicated by CEO to all employees through mail directly announcing the increase in variable and reduction in fixed component of salary.

Company management was of the view that this restructuring will not have much impact on employees' positive sentiment because anyhow company will perform better and will recover the lost ground  soon, but it boom ranged. Across all offices and ware houses middle managers and lower level employees started raising concern and dissatisfaction. A sense of insecurity prevailed as their take home pay was reduced. Tejinder was on fire fighting mode to contain the dissatisfaction and was counselling the employees personally over phone and at personal level where possible along with his entire HR team. He sent personal messages to employees explaining the reason behind the move and reminded them of company management gesture during covid time.

When Tejinder was busy in diffusing this crisis; department heads increased the targets at their level without even taking Tejinder in to confidence. This action poured more fuel in the fire. Employees felt that by increasing targets, management do not want to pay the incentives also as in their opinion, the targets were not realistic and impossible to achieve in the present business environment. Tejinder, when came to know, commented to CEO that increasing the targets were not well thought of about its timing. The pressure was mounting from all corners on the HR to roll back the compensation structure on increased variable component.

The feedback also reached to CEO about the displeasure of employees in rank and file about the increased variable component in revised pay structure but on the advice of other department heads that the acceptance of the revised pay structure will come slowly and management should not roll back its decision, CEO ignored the feedback.

Within three months, resignations started flowing in across all levels. Maximum were of middle and managerial levels. Attrition rate increased. Tejinder sent the attrition report with exit interviews feed back to CEO through mail.

CEO called Tejinder to meet him next day with proposals to control the damage and further possible corrective measures.

Tejinder was thinking as if the organisation has come back to square one?

Questions for discussion :

1. Critically examine the company approach in restructuring the compensation policy?

2. What should be the ideal compensation policy having fixed and variable component?

3. Where do you find Tejinder in this case? Why he could not influence business leaders to stay away from restructuring the compensation policy? What could have been done to create employees acceptance?

4. If you were in his place, what would have been your approach to handle the whole issue?