Compensation Strategy at a Manufacturing Company

Company Background
Manufacturing Co was founded in 1899 in Smalltown, Ohio, as a widget-maker for buggies. The founder saw an opportunity in automobiles, and transitioned the business to make parts for Henry Ford, and the company has since become a specialist in steering wheel parts. As the business has evolved, the company opened up factories in Michigan, Ontario and later on in Juarez. Today, the company has closed its Canadian and Mexican plants in order to concentrate production functions in China, which have a cost advantage. The headquarters remains in Ohio and Manufacturing Co is still family run. The CEO, Guy Bossington IV, wants to maintain a family atmosphere at the company, where everybody knows everybody's names. The jobs in Ohio are primarily in marketing, sales, finance and other administrative functions. There is one plant that makes specialized products, and an R&D team. In Ningbo, the company has a factory that produces most of its goods, along with a small team of sales people and administrators. Most of these are from Taiwan and Hong Kong, but there is also a small team of expats from the US and Japan who work out of Ningbo as well, including the Asia Division Director, a Chinese-American from the Cleveland suburbs.
Compensation Strategy – Base Compensation & Allowances
There are several different elements of the base strategy. The first is the base compensation. For most of the company's Ohio and Ningbo workers, the base compensation is going to be set at market-competitive rates. Workers in these areas have some options, but the market is not so competitive that Manufacturing Co needs to overpay to attract workers. The overall compensation strategy is designed so that base pay at market rates is sufficient, and competitive advantage in attracting talent will be derived in other ways. The one exception is for the expats in Ningbo, as these will require base pay plus additional compensation to cover certain expat-related costs such as international schools, trips home, private drivers for staff who cannot obtain a Chinese driver's license, and access to Western-quality health care.
The IT jobs family in the United States will be paid at market rates for IT workers. There are two benefits to this. First, the IT jobs that the company requires are not cutting edge; decent talent will be just fine for the company to succeed in its industry. Second, the cost of living in Smalltown, OH is relatively low, so IT workers can live a significantly better quality of life in Smalltown than they would making the same base pay in any large city. This is a salaried role, with benefits.
The manufacturing jobs in Ningbo will also utilize competitive pay. The work is designed to be routine, and the factory uses a lot of robot labor. The objective with these jobs is to allow people to afford life in Ningbo, which has a lower cost of living than nearby Shanghai, but is also a city that attracts a lot of laborers. The company will not seek to differentiate itself on base pay, as a matter of policy. Laborers in the manufacturing sector are paid hourly, and receive standardized benefits for the region. Managers in Ningbo will receive allowances, which is common, and gives the foreign-born managers an opportunity to choose how to spend this money (health care, international schools, travel, etc.)
Compensation Strategy – Incentives
IT workers in Ohio will not be eligible for short-term incentives. As salaried workers in the US, their outputs are often project-based, and can vary depending on task. Short-term incentives will be used in China for manufacturing workers, to incentivize them to stay on the job. It is not uncommon for manufacturing workers in China to work on one-year contracts and change jobs frequently, but Manufacturing Co realizes that having long-term workers who stay with the company delivers better productivity and fewer errors. Thus, we incentivize workers to get good at their jobs, and when they are they will make more money than if they change jobs.
Long-term incentives will also be utilized. IT workers in the US will be incentivized through the company's bonus plan, which will deliver bonuses based on individual, team and company bonus. For IT workers, this could be several thousand dollars per year. The family-owned company will not be able to give equity as a form of bonus. Managers in China are also eligible for bonuses for performance, but also for staying, as it can be tricky to find qualified expatriate talent and the company want to minimize expat turnover. Manufacturing workers will not be eligible for long-term incentives.
The target is that the company should have total compensation that is slightly above the market. For the IT workers, a lot of the attraction of the company will be the family-owned spirit and the excellent workplace culture, but the bonuses help to offset the fact that there is no equity – as equity is a pathway to wealth generation, a cash substitute has to be of higher equivalent value initially, which is why a three-level bonus system is used so that high-performing individuals can earn layers of bonuses amounting to several thousand dollars per year.
The higher up in management the company someone gets, the greater their bonuses can be, as a percentage of base pay. In IT roles, the CTO can receive upwards of 50% of salary in bonuses for the delivery of successful new projects. Lower-level leadership in the IT job family can receive up to 15% of salary in bonuses and at entry level it will be closer to 10%. All IT workers are relatively high salary employees, and the bonuses can put them in the top half of IT workers nationwide, which balanced against the local cost of living means that they are very well compensated if they hit all their bonuses.
The manufacturing workers are incentivized to become good at their jobs. The company also provides benefits such as education and medical facilities, along with pathways into management, something that is unusual for labor in China. Thus, long-term incentives exist, but more in the form of benefits than pay, for the manufacturing job class in Ningbo.
Overall
Each compensation element plays a key role. Base pay is competitive to get the company in the game, but the bonuses are where the IT job family will earn superior compensation. These are structured to account for the fact that there are no equity opportunities in this family-owned company. The manufacturing job group in China receives competitive base pay, and incentives are focused on the short-term where pay is concerned, to incentivize performance and to encourage greater longevity among talented laborers. Long-run incentives are more in the form of investments in top performers, which differentiates the company in China.
HR in Ohio oversees all programs, but the administration of compensation in China is done locally, but local managers. There is oversight provided by the expat manager from Ohio. In particular, controls are exerted on incentive pay in China in conjunction with accounting, as the incentives cannot make the goods unprofitable to manufacture. IT work is where the company gains the greatest competitive advantage, especially on the R&D side, so bonuses are largest for that group –delivery of great innovation there has the biggest impact on the business' profitability.
KPIs would be turnover rate and tenure for all roles, internal promotions, and for manufacturing jobs output-related measures, for IT things like patents, uptime and new product launches.
The key success factors for the plan are the ability to remain competitive in attracting scarce IT talent, and the ability of the company to exert adequate oversight over the China facility, especially where the incentive program is concerned, as that will impact on the profitability of goods produced in China if costs go too high or there are fiscal leaks in the program and people are being paid out without performance.