Sharad Vishvanath, Practice Leader, Analytics Consulting, India & West Asia

Since joining the WTO in 1995, India has experienced extreme economic growth, emerging as one of the leading foreign investment tickets in Asia. This has had a dramatic impact on the local talent market, and today, local companies and multinationals are not only competing for the same customers, they are also competing for the same people. As a result, rewarding performance effectively is now a key differentiator for Indian companies as they look to attract, retain and motivate employees.

Over the last five years, Hewitt has conducted extensive research into performance and rewards in India. The results of our research identified three clear trends:

• A strong correlation between economic growth and salary levels;
• Companies are increasingly rewarding, recognizing and reinforcing performance; and,
• The rationalization of compensation structures.

An In-Depth Analysis
A Strong Correlation Between Economic Growth and Salary Levels

A strong correlation between economic growth and salary levels was clearly demonstrated across many sectors, with high-performing sectors consistently recording higher pay increases. Three examples from the Hewitt India Annual Salary Increase surveys demonstrate this point.

The IT and ITeS sectors have demonstrated consistent growth over the past four years, and rank among the highest paying industries in India. Since 2001, the IT industry has seen scores of benefits from the government, making it one of India’s leading sectors. The ITeS boom began in 2003 when the sector grew by over 60 percent and revenues sky-rocketed. The year 2004 saw a Compound Annual Growth Rate (CAGR) of 64 percent, and this success continued into 2005, so it comes as no surprise that this sector has been paying higher increases with every passing year.

Sudden spurts in sector performance have historically led to salary increases. For instance, 2001 was good for the telecommunications industry, with high growth fuelled by expansions following a new telecom policy. As a result the industry awarded its employees the highest salary increase of the year at 18.9 percent.

A similar situation arose in 2005 for asset management companies, when the sector grew by 37 percent from the previous year. SENSEX reached an all time high, which led to the mass participation of retail investors in new fund offers and many asset management companies (AMCs) expanding operations to first- and second-tier cities to increase customer reach. This, in turn, resulted in fierce competition for talent, and many companies used high salary increases to help attract and retain the best people.

Companies Are Increasingly Rewarding, Recognizing and Reinforcing Performance

Hewitt research clearly demonstrates a continued trend towards rewarding, recognizing and reinforcing performance in organizations.

In the Hewitt India Annual Salary Increase Survey 2005-06, some 99.5 percent of participating organizations said they had a formal Performance Management system (PMS) in place, compared to 97 percent in 2001. More than three quarters of participating studies ranked "pay for performance" as the top criteria in their reward strategy.

Our research also demonstrates that the implementation of variable pay is also on the increase. Only 85 percent of organizations had variable pay plans in 2001, compared to 89 percent in 2005. Significantly, variable pay as a percentage of total compensation has increased from an average of 11.5 percent to nearly 19 percent across all sectors.

Many organizations today actively differentiate high performers, and in the 2005-06 study high performers received double the salary increase of an average performer.

Sectors also display differentiation in their appetite for variable pay

Industry

2001 Variable Pay

2005 Variable Pay

Manufacturing	11%	16.20%
Banking	13.50%	23.30%
IT	10.90%	13.70%
ITeS	12.90%	16.40%
Telecommunications	14%	17.80%
Financial Services	19.20%	23.50%
FMCG	13.30%	16.50%

Hewitt’s research also shows that the services sectors offer variable pay more than capital intensive sectors. The success of a services company lies in its people, and therefore service-oriented organizations are more willing to include a higher variable pay component in their compensation structures.

Furthermore, most service-oriented companies are in what are termed "new economy sectors" such as IT, telecom, ITeS, AMCs and insurance. These companies don’t have the legacy issues inherent in some of the old economy sectors, which tend to have more long-term employees.

Banks, financial services and AMCs are the most aggressive organizations when it comes to variable pay as a percentage of total compensation. Many HR managers attribute this skew to the fact that it is easier to measure performance in the financial services industry versus in many other sectors.

These industries are followed by the telecom and ITeS sectors, which have been largely responsible for India’s recent high economic growth phenomenon. Unfortunately employees with the necessary skill set are limited and, therefore, companies employ aggressive incentive strategies to retain their talent.

The Fast Moving Consumer Goods (FMCG) and manufacturing sectors have traditionally been more conservative when it comes to variable pay, since organizations in these old economy sectors tend to focus on total rewards rather than on total compensation.

Compensation Structure Rationalization

Salary structures are being simplified across most industries. Historically, compensation structures comprised of 22 pay components, each to ensure that the employee paid the least amount of tax possible. In line with international structures and due to changes in the government’s direct tax policy, compensation structures have been simplified dramatically to include about six to eight items of pay. We have even seen examples in the industry of compensation structures being simplified still further to only three items of pay.

Typical structures, both past and present, are outlined below. Most organizations are either at or are moving towards "B" and "C" structures. Some, meanwhile, still follow the "A" structure, while more progressive organizations have adopted a "D" structure.

Structures vary within an industry sector depending on its maturity and employee demographics. For instance, banking and financial services, which traditionally comprised a benefits-heavy structure, are rapidly moving towards a simplified, cash-oriented model. In contrast, the FMCG and manufacturing sectors, which are simplifying their compensation structures, are still inclined towards retaining key benefits that have perceived employee value given the maturity and stability of these sectors and the relatively older employee population.

Another concept that has gained popularity is that of flexible salary structures in which an employee has the freedom to choose from a defined menu of items of pay and to optimize his or her own tax planning. This has gained increasing acceptance as it results in a win-win situation for both employer and employee—the employee gains flexibility and the organization does not have to sacrifice tax compliance.

New and emerging sectors such as retail, telecoms, aviation, IT, ITeS and AMCs that are free of legacy issues and have a younger employee population tend to adopt simplified structures at the outset. There are several key causes for this trend towards rationalization:

• A simplified tax regime has negated the tax shelter effect that most items of pay enjoyed;
• Organizations using simplified structures can effect sometimes significant administrative cost savings;
• The employee population is becoming younger and is, therefore, more oriented towards higher cash structures and flexibility;
• Much stricter corporate governance norms on tax compliance in employee payroll have pushed organizations to do away with dubious “tax” items of pay; and,
• The recently introduced Fringe Benefits Tax has significant cost implications on most benefits-heavy organizations and is pushing firms to rethink their structures.

Conclusion

India Inc has demonstrated tremendous growth in recent years, making it one of the most competitive markets in the world. However with this growth, we have also seen the emergence of a highly competitive talent market and a rise in the cost of attracting, retaining and motivating key talent as companies increasingly understand the importance of employing the best people. As companies continue to face a volatile business environment made worse with aggressive competition and scarce talent, the trend of giving out hefty salary increases will continue. With companies are constantly looking at meaningful ways of rewarding their workforce. Variable Pay Plans will continue to grow in popularity. Increasingly companies will use these plans to improve competitive positioning, enhance productivity, and adjust organization and business priorities to suit the changing business environment.