By Punita Malhotra

The volatile arena of compensation management in India has undergone a radical transformation over the past decade, and certain market forces have contributed significantly in this transformation. Over the past few years, compensation had become one of the major factors to attract talent and indeed, retain talent too. But now, is the balance being restored to the tipping scales? Are we witnessing a return to the employer driven market again?

...Continued from last issue

Judhajit Das, Chief-HR, ICICI Prudential Life, K.A. Narayan, President–HR, Raymond Limited, K.S. Kumar, Vice President-HR, Castrol India, Varda Pendse, Director, Cerebrus Consultants and Sanjay Gawde, Sr. General Manager-HR, John Deere India Pvt. Ltd reflect on the issues related to compensation levels in organizations and discuss if there is a “return to normalcy”..

Which factors are dictating compensation decisions within organizations today…talent / role/ qualifications / any other (please specify)? What are the trends you foresee for the future?

Judhajit Das: Compensation decisions are linked to internal and external equity, ability to pay, individual performance and potential. Pay and pay mix has to be seen from the context of attraction and retention of talent and also, for aligning employee goals with business goals. Typically, fixed pay is set at the level which allows the organization the ability to attract people with the right set of capabilities for the jobs/roles it needs people for.

Variable pay is awarded based on the organization or individuals meeting a threshold level of performance. The extent of pay at risk, i.e., variable pay, is another important consideration for getting the right balance between fair pay and productivity goals. Long-term pay is typically given for potential or organizational impact and may also be linked to the achievement of future business outcomes or business performance as in ESOPs. Labour demand and supply also impact pay and niche skills command a premium.

K.A. Narayan: Skills and competenciesare key factors dictating compensation decisions in organizations today. In addition, some unique skills that employees bring to the role are probably the single most important factor deciding compensation. Secondly of course, the performance of an employee would also be a factor impacting compensation. This trend is likely to continue in the near future as well.

K.S. Kumar: The mid to long-term strategic horizon is the key driver of compensation decisions from the employers point of view. Special skills will continue to attract a premium. Over time, it is expected that total employee value or reward proposition will dictate compensation decision. An increasing challenge is balancing individual employee aspirations and the global performance versus the local entity performance in an increasingly matrixed business environment especially for large MNC's. If staff cost is productive then it can be considered as 'good' cost, if not then there would be pressure on managing the cost. Organizations are becoming increasingly conscious of ensuring that compensation decisions are robust and gives a sense of assurance to the recipient on 'procedural' and 'distributive' aspects of fairness and consistency.

Varda Pendse: Compensation as a parameter of employee engagement is no longer on the priority list. The factors that are considered as key drivers for compensation are: market, affordability, criticality of role, job worth, employee profile and employee performance level. In the last decade, factors that got more focus and emphasis were market movement, profile of the individual and criticality of role. We now see a change in the trend as the focus in on affordability, performance of the individuality and criticality of the role. Finally, performance and contribution to the company would always stay critical drivers of compensation.

Sanjay Gawde: I think we are yet to witness a stronger linkage with performance before. Most organizations use performance on the job as the first and foremost measure of compensation. In addition, they also look at level in the organization, business critical skills and individuals, and performance of the business. More and more organizations are moving away from compensation strategies based on age, tenure, education, or proximity to owners. These things may matter only at the time of joining and not later. I foresee the focus on market and performance linked compensation to continue in future. The variable compensation, which is where organizations share profits with employees, is dependent on organization, unit and/or individual performance. I see an increased interest in team based variable compensation programmes as organizations try to build sustainability and move away for risk of individual driven performances. How important are long-term incentives in the overall compensation policies of organizations and why?

Judhajit Das: As mentioned earlier, long-term pay has become an important aspect of the pay mix at senior levels. This aligns pay with the long-term shareholder objectives of sustainable value creation. It is also aligned to the principles of good governance in reward management.

K.A. Narayan: Long-term incentives are indeed an employee retention tool. However, given the short-term outlook of the young talent, employed with an organization, long-term perks are increasingly losing their sheen as a retention mechanism.

K.S. Kumar: Long-term incentives are becoming increasingly important vehicles in the total reward offer. If they are administered selectively then it becomes a key message. Of course, it also helps align individuals to
business objective.

Varda Pendse: Long-term rewards-incentive programmes/ ESOPS are seen as key components especially for the senior management/ key roles. Increasingly companies are opting for long- term reward programmes-LTRP's provide direct linkage to performance/ contribution and reward and also acts as a retention tool. The turbulent economic scenario has ensured companies would like the senior management to take greater accountability and ownership on performance and delivery, for a period of time rather than just a year.

Sanjay Gawde: Long-term incentives (LTIs), usually in the form of equity-based compensation, are great tools for organizations to build ownership and pride among critical talent. However, it is highly dependent on stock market performance. Most employees, like retail investors, are happy with the ownership and upside it presents, however hate the downside (risk) associated with it. You hear a lot of complaints about 'worthless paper' when stock markets crash. This is where the 'pride in ownership' gives way to 'quick fortune' mentality. Behavioural science shows that 'people hate marginal losses more than significant gains'. This is where communication is so very critical as well as tricky. The data shows that if you stay invested in good stocks for long, you end up making a good return. Hence, good organizations continue to leverage LTIs as part of their compensation policy. LTIs are also a great source for attracting talent in start-up organizations. These organizations may not always have deep pockets to pay for executive talent and that is where LTIs come in handy. There is value to be unlocked and that is a great attraction for right talent. To what extent are long-term incentives being seen as tools for reinforcing productivity and contribution? How can organizations ensure success of
long-term incentive programmes?

Judhajit Das: Two important considerations for LTI to be  successful are that the person who is being awarded long-term pay needs to be identified through a credible and robust process. Also, it needs to be aligned with long-term business goals. Long-terms incentives especially, deferred cash / ESOPs at senior-management level is being increasingly used by organizations to link management goals to shareholder goals of sustainable value creation.

K.A. Narayan: While long-term incentives may work for retaining select talent groups; they do not have any bearing on employee productivity or contribution to business growth. For instance, employee stock options as a retention tool help capital build-up over the longer term and may help employees reconsider outside options. However, they have almost no role to play in their functioning including productivity in projects and business contribution.

K.S. Kumar: Well aligned long-term incentive programmes can be key drivers of productivity and long-term orientation. To ensure success, organizations must be discrete in such awards and not succumb to the easy way out of offering this wide and deep across levels where it fosters an entitlement mindset. Tying in to hard business metrics with performance-based vesting will make the programme a success, rather than just another negotiation point in a recruitment discussion.

Sanjay Gawde: LTIs are a great way to create value for employees proportionate to value created by organizations at stock markets. You can link this to employee's own contribution. It helps drive focus on what is critical for an organization to be successful at stock markets. The key to successful LTI programme is to be true to its intent, which is to create ownership and value for employees in the longer run. If the company does well, employees do well. If the company does not, it is only fair that employees do not as well. Organizations should not get carried away at protecting the downside and making it "upside only" programmes. There are risks associated with ownership, it does hurt sometimes, and however, it comes with pride and long- term success. The challenge is in getting the right measure so that everyone is focused on long-term sustained performance. Do you think that corporate India continues to be an employee driven market or is it becoming an employer-driven market?

Judhajit Das: Neither is completely true. It is a function of labour market economics but responsible organizations try to smoothen the gradient of pay increase so that they are seen as a stable employer and not as
mercenaries.

K.A. Narayan: At a macro level, considering external economic uncertainties, corporate India may appear employer-driven. However, for top talent, it is still an employee driven scenario though it refers to a minority. Again, the standing and positioning may differ across industrial sectors. For instance, industries dependent on global markets tend to be predominantly employer driven.

K.S. Kumar: In my opinion it is still an employee driven market. This is primarily because finding the right talent for the right role is still a challenge.

Varda Pendse: Corporate India is still an employee driven market and employers are still extremely sensitive to the needs of employees. In spite of the tough times several corporates have endured, companies are still cautious in doing massive job cuts. Job cuts have been done by few companies and still limited to non-performers. Some of the companies (BFSI segment) that have done salary cuts have done so with sensitivity and care. Salary cuts are limited to senior and middle-management level. At the junior level there are no salary cuts. Employers are sensitive to ' life's challenges' faced by the junior level employees and avoid increasing their stress level.

Sanjay Gawde: In India, we have a paradox of plenty. We have a large population; however, not everyone is employable. Hence it will continue to be an employee driven market, purely due to supply-demand economics of skilled employees. A lot of people intensive service sectors like IT, ITES, retail, healthcare, financial services have seen tremendous investment by organizations in order to create skilled manpower. There, at entry levels, you can clearly see that it is an employer-driven market. However, as they gain skills, you see increasing attrition level and it becomes an employee-driven market. Sectors where the entry barriers are higher, needs some specialist/ technical education, it is employee driven and will continue to be for some years to come. Thus a lot depends on your business model and position you take on your workforce strategy. Not everything is lost for employers though. There is a clear appreciation of winwin relationship between employee and employer across for a sustainable future. In your opinion, are sectoral/industry differences still guiding compensation decisions and in what way? How can organizations grapple with this issue?

Judhajit Das: Compensation levels vary across sectors and industries. Organizations need to decide where it wants to attract people from and to which sectors they will lose people to, for deciding pay levels. Having said this, the most important consideration is affordability which varies across industries and companies, based on growth and profitability projections/business model, etc.

K.A. Narayan: Yes, sectoral/industry differences still guide compensation decisions in organizations. Compensation levels of like talent in the service and FMCG sectors may not be comparable to those in engineering or technology sectors. This is an inherent difference and reflective of the business operations in that sector. It would help organizations to design customized talent management approaches that focus beyond a compensation-based talent strategy to create long-term alignment with employee aspirations. From an employee perspective, in the long-term it would be beneficial if they decided movement based on factors other than
just compensation.

K.S. Kumar: Yes, sectoral/industry differences are guiding compensation decisions. The reasons for different sectors/industries adopting a unique compensation positioning could be productivity of staff cost, talent gap, staff cost as a percentage of revenue, etc. It is also observed that the structure of a variable plan is more rewarding or aggressive across different industries.

Varda Pendse: Sectoral performance differential is definitely impacting the compensation being paid. BFSI segment which has been negatively impacted in the last two years has seen low increases as compared to the manufacturing segment. Similarly, recession in the US and Europe have impacted the IT sector immensely. Some sectors, such as manufacturing, media and entertainment, education would see some increases in salary levels in the near future.

Sanjay Gawde: I think there are clear differences across different sectors or industries when it comes to compensation, be it in terms of quantum or elements of compensation. These are strongly linked to peculiarities of the industry and business models followed by different players. A lot of this information is really at a tactical level and is easily available through consultants or industry forums. Apart from that, I believe a good compensation philosophy, driving meritocracy and pay for performance is transferable across sectors. Organizations should focus on business priorities and create a pay system around it. It is useful to have a more holistic approach to your compensation by including financial as well as non-financial elements. A total rewards framework is very useful to communicate 'value' to all existing as well as future employees. Organizations should be
willing to spend the energy and effort to stay in this for long term. It cannot be a flavour of the year. How conscious are organizations and HR leaders becoming when it comes to the question of rising employee costs and what changes are being seen as a result of this?

Judhajit Das: Organizations facing cost pressures have to look at employee costs and this is particularly true for service industries where employee costs could be in the range of 30-50% of the total costs. This is less significant in manufacturing industries where employee costs are in the range of 5-8%. However, companies are always under pressure to become more efficient and therefore, employee costs have to be seen in terms of value creation. Companies will be focusing on exploring ways and means to bring down wage costs through manpower redeployment, reskilling, adoption of technology and outsourcing to variabilise the cost structure. This trend is likely to intensify over the next few years.

K.A. Narayan: Organizations and their HR fraternities are conscious of the fact that employee cost is a large spend item across all industries and geographies. With this cost on the rise, corporates are moving towards a performance-based compensation structure. This would help the employer and the employee equally; when organizations create compensation systems based on employee value add (EVA).

K.S. Kumar: Organizations and HR leaders are well aware of the rising employee costs and the consequences to long-term business viability. Board room discussions are often focussed on employee costs as a percentage of the total costs and revenue and trend lines. While the drive to get "smarter" with these costs is a common desire, there is a mixed approach to change with many companies hampered in their desire to bring business productivity benchmarked reward levels by the need to fill positions today! The key changes are performance based vesting of long-term incentives as well as claw backs in the year's bonuses / incentives based on
factors like credit quality and customer delight scores.

VARDA PENDSE: Board, CEO and HR leaders are focusing on compensation and employee productivity. Criticality of compensation is not lost to the key stakeholders but there is focus to link up compensation with productivity as well as talent management and development. HR strategies are focusing on developing a talent pipeline through several initiatives rather than just talent acquisition. One of the key examples is promoting a person when he/she may not be 100 % competent for the job and actively providing support through coaching and mentoring programmes. Succession planning initiatives have supported companies to deal with unforeseen exits.

Sanjay Gawde: Most organizations and HR leaders are keeping an eye on rising employee costs. This has to be balanced with increase in revenue and profitability. Hence measures like revenue per employee, employee cost as % of operating cost, engagement scores, attrition rates, productivity, etc., are increasingly monitored and benchmarked across comparable organizations. HR leaders are encouraging introspection to drive a sustainable system of pay rather than basing it on external market forces. Organizations are clearly looking at employee cost as a significant financial lever for growth and giving it a serious thought as any other investment decision. A lot of emphasis is being put on governance of pay process and analytics supported by external as well as internal parameters. The leaders are increasingly involved in advocating and demonstrating meritocracy through pay for performance approaches.

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Judhajit Das Chief, Human Resources, ICICI Prudential Life has worked across sectors spanning across manufacturing, telecom, retail and entertainment. He started with the RPG Group in 1995 and moved to GE Capital in 1999. He joined his present company a year later and was named the head of HR function in 2005. Das an economics graduate from Jadavpur University, completed his PG in Human Resources from XLRI, Jamshedpur.

K.A. Narayan has done his post-graduation in Commerce, Law and Personnel Management. He is an alumnus of Harvard Business School. He has over 27 years of experience in HR. He is presently President- Human Resources for Raymond Group. He has worked with Wockhardt, Lupin Laboratories, Garware Group and the Mafatlal Group.

K.S. Kumar An alumni of XLRI Jamshedpur, KS Kumar has over 22 years of experience in HR He started his career with Hindustan Unilever in 1989 where he worked in group companies such as Lipton and Brooke Bond. Currently Vice-President HR at Castrol India, he has worked in companies such as Burns Philp, Citigroup, NBFC and Fullerton India Credit.

Varda Pendse is a Director with Cerebrus Consultants. She leads assignments across several areas including organization transformation, compensation management, per formance management and capability and competency development. She is a facilitator, counsellor and coach. Varda, an Economics graduate from St. Xavier’s College also holds a MMS degree from Narsee Moniee Institute of Management Studies.

Sanjay Gawde is Senior General Manager with John Deere India Pvt. Ltd. In his current role, he is responsible for leading HR & IR function at John Deere’s tractor plant, Pune. He has over 11 years of experience, spread over engineering, ITES and consulting sectors. He has managed employee relations, talent management and rewards in his career. He is a passionate reward professional.

Republished with permission. Copyright 2011 www.humancapitalonline.com. All rights reserved.