Executive Summary

The case puts into limelight a prominent organisation which has recently
ventured into a new category and has setup its first unit towards
manufacturing this product. The business has recently turned profitable,
however margins are still paper-thin. Its been 2 and a half years since the
previous settlement was reached and the management is on the brink of
reopening the wage negotiations with the union.
The question which plagues Vivek and Deepali, managers at X company,
is what is the wage payable to the workers which can be considered fair
and what is the apt framework to arrive at this wage figure.
The various range of options presented in this respect are:

Region cum industry benchmarking

A Laissez-faire model of supply-demand in labour market
Dividing the organisational profit-pool equitably
Making the fair wage para materia to the Govt. declared minimum
wage

The approach towards identifying fair wage and towards the resolution of
the issue at hand takes into account multiple factors. The labour cost as a
percentage on profits is calculated to be around 34% for X company and
in the range of 10%-11% for the competitors. It is difficult to justify
sustaining such high wages at low profitability levels. As compared to the
competitors the current wage levels can be considered reasonable.
As per Wage effort theory, the worker would reduce the effort if he thinks
that the wage hes getting is less compared to effort hes putting. But
when this gets compounded with the comparison we make with the wage
across the industry, the picture gets clear. Current wages are still the best
among the players playing in the same field. So, sense of being Underrewarded would disappear from the minds of the workers.
Hence, considering the current wage as fair wage (since it isnt a viable
option to go lower), the negotiations shall be held with the union to stall
the increase in wages as transient measure till a certain level of
profitability is attained.
The aforementioned approach might create friction which might lead to a
temporary loss in production. However, this outage has been taken into
account considering that this wont have a huge impact on the bottomline as the current market levels of consumption is less than the potential
production level with respect to the installed manufacturing capacity.
Hence, any dip in production due to disruption could easily be made up for
by other manufacturing units, albeit the higher transportation costs might
cause a small spike in the final product cost.

What is Fair Wage?

As per www.fair-wage.com, Fair wage has been defined as Wage levels
and wage-fixing mechanisms that provide a living wage floor for workers,
while complying with national wage regulations (such as the minimum
wage, payment of wages, overtime payments, provision of paid holidays
and social insurance payments), ensure proper wage adjustments and
lead to balanced wage developments in the company (with regard to
wage disparity, skills, individual and collective performance and adequate
internal communication and collective bargaining on wage issues)
Fair Wage differs from country to country, state to state and city to city
depending on the various external factors like standards of living, dignity
of labour, govt. regulations, et al. But then, we can analyse and come to a
fixed amount for Company X making full use of the information provided.
Firstly, Fair wage is not minimum wage, which is set by law. Neither is it
the living wage which is broadly the wage enough to take care of
individual and his familys needs
So where does fair wage figure in all this?
Well in most countries, the fair wage is somewhere between the minimum
wage and the living wage. So it does not necessarily has to satisfy the
familys needs and take care of other aspects of individuals needs but it
needs to be some sort of going rate wage.
Hence fair wage should be looked at more from the perspective of
1. Local Competitor Wages i.e. Market Parity
2. Companys Profitability
3. Cost of living in the region/city
4. The heart of the issue of fair wage i.e. giving decent living and
dignity to labour.

XLRI Team Saksham: Ankit Kumar|Himanshu Nainani|Neelabh Mishra|Prateek

Gupta

Concept of Fair Wage across Companies

The Fair Wage Network uses a consistent approach, which we can apply
to many countries. It includes a focus on wages, along with other critical
factors such as working hours, social benefits, equity, costs to workers and
the opportunity for progression. This approach is inclusive, drawing on
input from workers, managers and external sources (IKEA, 2014).
The Fair Wage approach was implemented in pilot stores in Japan, China
and US and led to a number of outcomes. In Japan IKEA has closed a
significant wage and benefits gap between full-time retail workers and
part-timers (mostly women). In China, where excessive working hours is
the norm, it has worked with suppliers to reduce hours without a reduction
in wages. In the USA it has raised its wage floor to $10.76 an hour. (As
reported by OXFAM, 2014).
In 2015, we will begin pilot projects with the Fair Wage Network approach
at home furnishing suppliers in selected countries. The pilots will give us
insights into supplier practices in the sectors and help us understand how
we can extend the approach across our supply chain (IKEA, 2014).
The Fair Wage Assessments have helped us improve the way we monitor
compensation and pay issues. We have integrated the Fair Wage idea into
our supplier training on Human Resources Management Systems. This has
helped to clarify where gaps existed in monitoring and measuring wage
performance and what sustainable remediation practices might look like.
The Fair Wage model complements our initiatives promoting
manufacturing excellence and responsible buying practices (Adidas,
2012).
A skilled, motivated and engaged workforce is essential to achieving our
growth ambition. Fair compensation is an important factor to achieving
this We will therefore create a framework for fair compensation, starting
with an analysis in 180 countries by 2015 (Unilever, 2013).

XLRI Team Saksham: Ankit Kumar|Himanshu Nainani|Neelabh Mishra|Prateek

Gupta

Question Analysis
Question 1: According to you what should be the fair wage payable
by the Company X and Why?
When we look at the demographics of Company X, we find out that it has
3 types of on-roll workers, they are 12 th, ITI and B.Sc. graduates. Of the
three category only ITI graduates can be considered to be semi-skilled
who are being paid Rs. 20,100 per month while other two categories fall
under unskilled workforce who are paid at Rs. 17000 per month.
Apart from in-house manufacturing, they have contractor manufacturing
facility as well in the nearby region. The contract workers are deployed for
packing, loading, unloading and other miscellaneous activities. These are
unskilled Employees who are paid 66% of the wages paid to the regular
employees.
Now, we look at the data given at the end of the case
Considering only ITI as Semi-Skilled employee,
The Employee cost of Semi-Skilled Workforce comes out to be 2492400
And Employee cost of Unskilled Workforce comes out to be 6392000
Taking Contract Employees as unskilled employees, and their wages to be
66% of the wages of unskilled employees,
The Employee cost of Contract Workforce comes out to be 5049000
Adding all the labour costs, the total Wages is 13933400
The Labour cost as percentage of Sales turnover is 3-5%. Taking the
average 4%, the Sales turnover comes out to be 348335000
Taking Margin as 13%, the profit of the firm is 40073938.1
Hence the Labour cost as part of profit is 34.77% which is really high.
While following the similar steps for the competitor, the labour cost as
part of profit comes out to be just 10-11%.
Here since the data is given for only two competitors, we have taken
Company 2s data for our analysis. Everything has been calculated for
competitors keeping Company 2 in mind.

XLRI Team Saksham: Ankit Kumar|Himanshu Nainani|Neelabh Mishra|Prateek

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From Companys Point of View:

Since, we are in the expansion phase, the profitability is really low. We
need to focus more on capturing the market share with the right price. At
present our market share is just 11%. So if we increase the labour cost
even by 20%, it increase the cost of production by 9%, which will bring
down our already bleeding margin. Hence, from the companys point of
view, the wage we are paying is already the fairest wage which we can
afford. Going beyond it would not be sustainable for our business.

From Competitors Point of View:

When we compare the competitors wage with our wage, we figure out
that We are paying 34% of the profit as workers salary, while other
players are just keeping it at 11% of the profits. Even at one to one basis,
wages which we are paying for contract workers are 66% of the normal
salary, on the other hand our competitors are just giving the minimum
wages.
Hence, there is no need to revise the current structure. It is the best in the
market and enough to attract and retain the best talent.

From Workers Point of View

As per Wage effort theory, when people do not get what they deserve,
they try to get even. In our case, the workers are being paid at 20100 and
17000 for semi and unskilled jobs. These are higher than what our
competitors have to offer. Although not getting promised increment would
not be a happy state of affairs, but still getting above market for same
skill would be enough for them to stick with the job.
The perceived value of the labour input will equal the perceived value of
the remuneration. This formula can be translated into economic notation
to say that the number of units of effective labour input (denoted e for
effort) times the perceived value of a unit of effective labor (denoted w*)
will equal the perceived value of remuneration (denoted w). In other
words,
e = w/w*
We wish to emphasize that w *, the perceived value of a unit of labour, will
be the fair wage, and not the market-clearing wage. And here the Fair
wage will be the current wage which is being paid by Company X.
Therefor value of e stand 1.
The Fair wage for the Semi-Skilled workers is 20100 and Unskilled is
17000

XLRI Team Saksham: Ankit Kumar|Himanshu Nainani|Neelabh Mishra|Prateek

Gupta

Question 2: What HR practices and systems will allow for acceptance

of what you consider Fair Wages?
The HR practise and system which are needed to be in line for the
acceptance of Fair wage achieved by us are following:
a) Recruitment
i.
Mix of Contract and Regular Employees: If the work can be
made more process oriented, and the dependency on talent
can be reduced, then we can focus more on contract workers
wherever possible and hire as few regular employees as
possible but keeping in mind that processes which are crucial
to us and require higher accountability should be still handled
by the regular wages. Such a system will help us reduce the
amount to be disbursed as wages and also the perceived
fairness of the wages would be higher since we are recruiting
the contract and regular employees for different purposes.
ii.
Localized Hiring: The hiring of skilled and unskilled employees
should be done locally. Hiring from different locations or
transferring employees from one region to another might pose
difficulty in terms of equity perceived by the employees if they
come to know of the wages being paid in the other regions.
Changing regions for such employees also makes it difficult for
the employee to stay in the other region since the wages
being paid are minimal.
b) Training and Development: The dependency on talent can be
reduced only if the processes are well defined and the employees
are well trained in those processes. Training the employees also
makes a culture of homogeneity in the organization so that all
employees feel empowered to do the tasks at hand rather than a
few knowing the task far more better which instils in them a feeling
that they are getting reduced wages.
c) Performance Management: Since the work in such an industrial
setup is highly standardized and the culture is more egalitarian,
rather than having an individual pay for performance plan, it would
be much more fruitful to have a productivity linked bonus or a gain
sharing plan which would improve the perception of the wages
being paid to the employees and encourage them to perform better
in the organization.
d) Industrial Relations: Expectation Management would be an integral
part of the determination of wages in the collective bargaining
process. If the culture is such that the employees feel that company
gives a lot of benefits and the company cares for its employees,

XLRI Team Saksham: Ankit Kumar|Himanshu Nainani|Neelabh Mishra|Prateek

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they would feel happier in the organization even at lower pay. Such
an atmosphere would also make the process easier and would allow
handling of the Trade Union much better

Appendix
The Excel Sheet contains the calculations done to achieve the labour cost as per
the profit of the firms.

Calculation.xlsx

XLRI Team Saksham: Ankit Kumar|Himanshu Nainani|Neelabh Mishra|Prateek

Gupta