Case Study: How a compensation model ensured zero attrition in this company

26 July 2022

The Central Pay Commission has set a minimum wage for blue-collar workers in India at Rs 18,000 per month. This implies companies are now liable to pay their blue-collar workers equal to or more than Rs 18,000 on monthly basis. However, this is just not the case. A report published by SalaryBox reveals that more than 65 per cent of blue-collar workers spread across 850 districts in India get less than Rs 15,000 and less than 15 per cent earn an average salary of Rs 25,000 per month.

For a fact, India has always been known for its cheap labour. Interestingly, for a long time, for foreign businesses, one thing that India was best known for, was its cheap labour with local businesses flexing their blue-collar workforce available at low wages. For instance, when QUAD-a strategic security forum comprising four nations: US, Japan, Australia and India-came into existence, a lot of economists and international relations experts came up with theories on how this would be of advantage to India’s manufacturing sector. Where other countries were believed to bring technological and infrastructural support, India got acclaimed for its cheap labour market.

The "cheap labour" syndrome has effectively been ingrained in our minds to an extent that the whole pay inequality and low wage culture among the blue-collar workers have been normalised. Result? As already mentioned, maximum workers still don't get the minimum wage prescribed by the government. In fact, the pay gap among workers also exists within the same companies operating in different countries and very few have a realisation of this.

For instance, manufacturing firm Elgi Equipments has two major manufacturing factories in India and in Italy. While those blue-collar workers working in the Italy factories would receive Rs 30 lakh per year, Indian workers would receive only Rs 10-11 lakh yearly. The technology for that factory was all going from the Indian unit and there the company was still profitable. This is when the company realised the major pay inequality existing within the organisation and decided to create an equitable company where blue-collar workers are paid equally to their peers in different countries.

A white paper published by the World Economic Forum (WEF) says that by 2030, India can contribute more than $500 billion in annual economic impact. However, as WEF points out, "India needs to look beyond cost arbitrage to create greater value and strengthen its position in the global order".

Jairam Varadaraj, Managing Director, Elgi Equipments, believes Indian companies have earned a name worldwide for products manufactured at their Indian plants. “It is time for them to now adopt a compensation model for their blue-collar workers here that is commensurate with global standards," he says.

"We envisage closing the pay gap between our blue-collar workers in India and those in other countries such as our Rotair factory in Italy. By bringing in pay parity as per global standards, we aim to remove the stereotype associated with Indian products being made by cheap Indian workers," Varadaraj says. For the compensation model to be sustainable, Elgi is balancing workers’ aspirations with its affordability.

But bringing out a brave compensation model and eliminating pay inequality in one big leap is not possible. Hence, the company is doing it in stages and moving towards that. To make it objective and transparent, Varadaraj explains that the entire compensation system for blue-collar employees is driven by co-created baskets that reflect the standards of living.

The Compensation Model

The Elgi Blue-Collar Compensation Model is a framework to calculate wages scientifically by taking into account workers’ needs and aspirations. Elgi’s HR team partners with the factory worker representatives to decide on a ‘cost of living basket’ of goods. The cost of the basket is then reviewed against an ‘affordability value’, which is a pre-defined share of the company’s revenue.

Now, this exercise is repeated every five years. As Varadaraj explains, this detailed basket consists of 360-odd items.

Varadaraj says, "The Elgi Blue-Collar Compensation Model is part of our transparent and progressive compensation practices. Our workers conduct market surveys to pick prices and their families are invited to provide feedback."

The team comprising both HR representatives and blue-collar worker representatives identify different categories of items, for example, food, education, financial security and personal grooming. Currently, there are 12 categories. They then define the guiding principle for each category, for example, items under 'health' must further be classified as 'physical, mental and social wellbeing'.

The team then sorts them into ‘need to have’, ‘nice to have’, ‘durable’, ‘non-durable’ and ‘recurring’ items. It ensures the items are relevant for different stages of an employee’s lifecycle and obtains feedback from the employees, their families, and dieticians and conducts a market survey to gather prices for the proposed basket. The cost of the basket is then refined after mapping the cost to the company’s affordability value.

The impact

According to Varadaraj, the company has almost zero attrition among its blue-collar employees. While unions have become a vogue, especially in manufacturing firms, Elgi Equipments has zero unions.

Varadaraj explains the union represents a bridge between the company and the employees, but if you have your own internal bridge then you don’t need an external bridge. From that point of view, he says, "We don't have a union not because they are bad but because we have a very strong connection between the company and the employees, and therefore, there is flexibility, agility and understanding."

When it comes to the compensation model, the company has also made some key enhancements this year like items under 'need to have' got increased by over 88 per cent and food items increased by 70 per cent on a year-on-year basis. The company increased basic as well as Dearness Allowance from 36 per cent (average) to 50 per cent on the monthly gross wage. For the workers, the company has also started providing subsidies for laptops and fees for college education of the employees' children.

The company's compensation model is unlike the conventional route of using the government-prescribed cost of living index and hard bargaining with trade unions to arrive at a long-term wage settlement. That approach often leads to conflicts between the management and the workforce.

With the scientific methodology of using aspirations and affordability as the base, Elgi has been able to remove arbitrariness in wage calculations. "We have empowered the employees to decide what is best for them, thus boosting their morale, performance and retention. Practices such as this have gone a long way in promoting a healthy work environment. Not a single work hour was lost due to unrest and almost zero attrition in our blue-collar workforce," Varadaraj says.

The company employs over 1,300 people in India, out of which 350 are blue-collar workers.