CASE STUDY- BELMONT INDUSTRIES INC.

Presented By
INTRODUCTION

Belmont Industries Inc was acquired by European Industrial Holding Group in 1995.

Belmont was a firm operating in field of Electrical equipment. Belmont manufactured and sold
electrical equipments for Industrial and Consumer use.

The management of European Industrial Holding Group wanted Belmont to be a separate,

publicly listed, independent company.

Mr Pierre Dupuys had been appointed as the new President and Chief Executive in December
1995.He had been given the authority to make every required change to improve the Company’s
profitability.

The group MD has requested Mr Dupuys to review his key personnel and make
recommendations for compensation of top 20 key executive including himself.

DETAILS:

A. Belmont has two product lines

(i) Industrial & Specialized motor

(ii) Consumer- small “brown” household appliance.

B. Belmont has business spread in the US as well as Overseas locations.

C. The Organization follows a Functional structure. Functions are Manufacturing, Sales,

Purchase, Engineering, Finance, Personnel, Legal.

D. The Organization was facing the problem of rising revenue but decreasing profit.

E. The salary structure of employees at the time of acquisition was haphazard in nature.

F. Salary was the only significant compensation that the Top level employees were having.
TASK IN HAND

Mr Dupuys has been given the charge to restructure the compensation structure of top 20
executives including himself. He had a kitty of USD 2.4 Million which he had to distribute
amongst the 20 employees.

However, he has been given free hand to do whatever changes required making the company
profitable.

RECOMMENDATIONS

We feel that before doing Salary Restructuring Mr Dupuys needs to

(i) restructure the Organization

(ii) introduce some departments that will help the business enhancement
(iii) realign manpower such that all the departments have optimum manpower
(iv)Introduce an employee performance evaluation system.
(v) Brand the products

He should then introduce Compensation restructuring in three steps:

(i) Define a basis of differentiating one employee’s salary from another.

(ii)introduce components that will save tax for them ,thus increasing the take home pay
(iii) Introduce pay for performance.

Restructuring of the Organization:

Prior to acquisition, the organization had a functional structure. Every function was headed by a
Vice President. He/she used to control all the activities related to the function irrespective of the
product line.

Although they were responsible for the cost incurred by the function, they did not have control
on the overall profitability of the Organization.

We recommend

(a) Introduction of Strategic Business Unit (henceforth called SBU) structure in the
Organization.

Two SBUs will correspond to two product lines-

(i) Industrial Motors

(ii) Consumer Appliances
 Purchase, manufacturing, Sales, International assembly of the respective product lines will
be aligned in respective SBU.

(b) The support functions Finance, Personnel, legal which cater to both the product lines
should be considered as Horizontal Business Unit (henceforth called HBU).

Note: It appears from the case that there is a need of international assembly of products. We are
assuming that both Industrial and consumer products are assembled by this division.

These two SBUs will work as profit Centre. In charge of each SBU will be responsible for
increasing profitability of the SBU.

Thus the profitability of the Organization will be the resultant of the profitability of the two
SBUs and the cost saving measures of the HBUs.

Introduction of new departments:

We recommend introduction of the

(i) a Quality Control Department to monitor the productivity of the BU s
(ii) a Business Development Department which can take care of International Sales and also
try to create a “Brand” for the products .

Reallocation of the manpower within the Organization:

Department wise manpower breakup prior to acquisition was

% of
subordin total
Departme ate to other manpo
nt CEO VP VP s Total wer
Finance 1 3 84 88 3.3%
Personnel 1 1 0.0%
Manufacturi
ng 1 4 2330 2335 87.2%
Purchase 1 2 12 15 0.6%
Sales 1 3 230 234 8.7%
Engineering 1 1 0.0%
Legal 1 3 4 0.1%
CEO 1 1 0.0%
1 7 12 2659 2679
There should be more manpower in Personnel and Engineering Department as they are both
quite important ones in such organizations.

With the introduction of SBU concept in the organization, there will be a need of 2 SBU Heads
who can be in VP level instead of 3 VPs in manufacturing, Purchase, Sales. This may cause
redundancy of one senior level position.

However, as we are recommending introduction of 1 new Department, Mr. Dupuys may consider
absorption of the available manpower for the position if he/she has desirable skill set.

Post restructuring, the organization will look as follows:

Chief Executive Officer

VP-Consumer
VP- Industrial Appliance BU
Product BU

Manufact Man Manufactur

Pur Man uring – Purc ing-
ufact Sales
cha ufact Internatio Sales hase Internation
uring
se uring nal al assembly
assembly

Accounts

VP-Finance Control

Treasury

In charge Business Development

VP-Personnel

VP-Legal

VP-Quality Control

VP-Engineering
Compensation Restructuring

It has been mentioned that the Compensation structure had 3 components –

(a)Salary
(b) Perquisites
(c )Bonus which is dependent on the profit earned.

As Bonus was only profit driven, employees might have not been able to relate their
performance with Organization’s growth. So they considered Salary as their only important
compensation factor.

It has been mentioned that the current salary kitty is USD 2.4 Million p.a. to be distributed
amongst 20 employees including him.

So Mr. Dupuys should perform salary restructuring in three steps:

(i) Define a basis of differentiating one employee’s salary from another.

(ii)introduce components that will save tax for them ,thus increasing the take home pay
(iii) Introduce pay for performance.

The following steps should be followed by Mr. Dupes to distribute the kitty amongst the 20
employees:

(i) Job evaluation for each position - By doing Job evaluation, he will be able to measure
relative job values within the organization. A factor comparison method is the most
commonly used methods of internal job evaluation. It values specific aspects of the job
and compensable factors and assigns a weight and level to that job.

(ii) He should then gather the current compensation package of each position. It could have
been ideal to gather market data for the benchmark positions. However, as the
management Group is averse to using outside agencies, Mr. Dupuys needs to consider the
current salaries and that of the equivalent positions at group level.

By using Regression analysis Salary can be decided for each position.

Care needs to be taken that the recommended Base Salary should not be lesser than the
compensation drawn earlier.

Once the Base Salary is defined, Mr. Dupuys should check the perquisites available.
Perquisites should not be very high as the same are not related to the performance of the
employee.
We recommend introduction of Benefits scheme like Health insurance, Life & Disability
Insurance, contribution to pension Plans etc. as these are good motivators for the employees.

We recommend introducing “Merit pay” concept in the compensation structure instead of

Company Bonus Scheme.

As Company Bonus Scheme was dependent only on Company’s profit, there was little
incentive for the employees to improve individual performance.

The purpose of Merit Pay is to reward employees for individual contributions and to
encourage the best performance. In theory, if all employees operate at peak efficiency
relative to their capabilities, the organization will thrive.

We recommend that the Incentive Schemes should be on the basis of Individual

Performance and Company performance.

We recommend the following % of the mix of Organization’s performance and

Individual performance

Level % of Individual % of Company

performance performance
CEO 10% 90%
BU & Function Heads 20% 80%
Immediate reportees to the 30% 70%
BU & Function Heads
others 40% 60%

Individual performance will have components of KRA ( Key Responsibility Area

achievement )as well as competencies required for the role.

KRA depend on the type of role the employee is performing.

(i) CEO represents the Organization as the leader . So his Incentive plan should not be only
related to operating results but also the image that he can create in International Market
for the organization as a whole. As Belmont is going to be a public limited organization,
one of his evaluation factors can also be how the organization has performed in Equity
market during the year.
(ii) The SBU Heads are responsible for the performance of the SBU. The performance
measurements should be based on EBITA achievement of the SBU.
(iii) Purchase Heads are responsible for purchase of quality Raw material and Finished goods
at competitive price. So their Incentive Plan should be based on EBITA achievement of
SBU, SLA(Service Level Agreement) achievement for timely supply of inputs to the
manufacturing departments .
 (iv) The Manufacturing heads are responsible for the production of desired quality of the
manufactured goods at optimum cost and at optimum productivity level . So their
Incentive Plan should be based on the productivity target achievement and EBITA
achievement of the SBU.
(v) Sales employees are responsible for achieving Sales Target for the definite product line.
So their incentive Plan should be based on their own Sales target achievement.
(vi) Support Departments also should be evaluated for the SLAs assigned to them, their score
in employee satisfaction survey.

Competencies for the various categories can include the following:

(a) Leadership quality

(b) Capability to work as a team member to achieve broader organization goal.
(c) Communication Skill
Etc.

We recommend that the CEO and SBU Heads should not be paid the entire Incentive amount
year on year. Organization should introduce a Long Term Incentive Plan for them.

As part of Long Term Incentive Plan, we recommend introduction of ESOP (Employee Stock
Ownership Plan) for CEO and SBU & Function Heads.

ESOP is a very powerful tool to motivate the employee, conserve resources, as well as retain
talent in the Organization.

Once the design of Incentive Plans gets crystalized, there is a need to introduce a good
Performance Appraisal System such that the employees can get evaluated properly for their
performance. In the Performance appraisal system, the employee should not only be evaluated
for the KRA achievement but also for their competencies.

By following all these steps we expect Belmont to achieve desired profitability and also have
motivated employees who will serve the organization for a long time.