And in India ( a developing mkt), it doesn't work.
In developed mkt we see have seen that salary rises for last few years has been nominal, in single digits, maybe just a few % points more than inflation. But in India the avg has been ~15% with mid-to-higher management levels witnessing 40%+ levels. More so in lateral hiring a doubling of pay is more of a norm! Thus in India atleast, we are still living a self fulfilling aspect of a short-on-talent and long-on-demand job mkt scenario.
Add to it the recent inflation and we see India witnessing the proverbial wage-price spiral! Given we are stil developing, we need to be aware that this mkt competitive pay concept is not at all working in India at the moment. A few more points to explain the current conundrum:
Firstly, compensation, is just a hygiene factor. What makes people stay in firms is content, people & lifestyle. These 3 things these days define the expectations of a successful, commited employee.
Secondly, India will continue to have the low-cost advantage for maybe next 5-10 years more before we get globally aligned and our job mkt matures.
Lastly, India is the next growth engine for the world (along with China or even Middle east) and its sectors like Retail, Financial and other professional services, IT (yes, scope still remains in applications in bio & energy domains) would continue to defy the norms of a mature job mkt. The War for Talent is on and so the exuberence will continue for some more time to come...
Sunday, September 7, 2008
Friday, September 5, 2008
Market competitve pay and its dynamics
In todays world of rising attrition and increasing employee demands, I feel that market competitive pay makes sense. That can be said atleast of some industries. I work in marketing research and in similar industries wherein employee talent rather that employee numbers make more of a difference, i feel that this system might work a lot for corporations. In our industry, talented employees are generally the drivers for firms, as clients are always demanding and performance is guaranteed only with a quality workforce. We get direct client feedback, as well as cases where particular employees are demanded for by the clients. Hence in such cases the job satisfacion is immense, be it any organization. This does not change with different organizations, as your quality of work travels by word of mouth. In such as case, companies can lose employees easily purely on the basis of the remuneration that is awarded. And with the options available, it is easier to switch between jobs and find the satisfaction levels that are desired. The present jobs are also much more stressful. I spend almost regular 15 hour days regularly, and hence if i feel that the pay package does not match that which is given in the market, I would definitely be pushed to take a call.
I also think in a way, it is the way companies strategize. Some of the players in the market use that as a basic calling card. Their competency is the fact that they govern market pay and make their pay the comparable base. So although you might go for such companies, some thought is also given to the quality of work that is provided. But these are only a few cases. In most of the cases today, a large chunk of employees work for better remunerations and also decide on career paths on the sam factor. With the huge demand for quality labor in India, it has become a different scene from about 5-10 years back when you would think thrice before thinking of a switch.
In conclusion, with today's market dynamics it is important to go by market based pay. Quite a few industries are there where employees are driven purely by pay, as other factors that add to the job such as quality, satisfaction, learning etc. are minimal. Hence here i feel that market based pay works out as an important strategy. With jobs that are more involving and are more satisfying, one can do without this philosophy, but i think in many cases it might just backfire if you stay away from market competitive pay.
I also think in a way, it is the way companies strategize. Some of the players in the market use that as a basic calling card. Their competency is the fact that they govern market pay and make their pay the comparable base. So although you might go for such companies, some thought is also given to the quality of work that is provided. But these are only a few cases. In most of the cases today, a large chunk of employees work for better remunerations and also decide on career paths on the sam factor. With the huge demand for quality labor in India, it has become a different scene from about 5-10 years back when you would think thrice before thinking of a switch.
In conclusion, with today's market dynamics it is important to go by market based pay. Quite a few industries are there where employees are driven purely by pay, as other factors that add to the job such as quality, satisfaction, learning etc. are minimal. Hence here i feel that market based pay works out as an important strategy. With jobs that are more involving and are more satisfying, one can do without this philosophy, but i think in many cases it might just backfire if you stay away from market competitive pay.
Tuesday, September 2, 2008
It depends on the market.....
A recent survey among the HBS Graduating class brought some interesting findings. Around 80% of the graduating class voted that they are happy with a salary of $100,000 if their peers are getting a salary of $80,000. But they are not happy with a salary of $120,000, if their counterparts are getting $140,000. This implies , it is not the absolute value of the salary that alone is sufficient but what matters more is how it is compared , vis a vis others. And this brings in “Market Competitive Pay".
Take the example of a homogenous set of employers; say Big-4 consulting firms or top-5 Indian IT Companies. These organisations are similar to a great extent, in terms of work environment, organisational structure, line of business and the skills they look for in an employee. Here market competitive pay becomes paramount importance if the organisation wants to retain its key employees. The other thing that works for employees here is the liquidity of their skills in the job market. An employee can demand a competitive pay package as other organisations need the skill set he possess and might pay him. This can be best described as a free market scenario for both employees and employers and Market competitive Pay is most prevalent here. If an employer cannot pay the industry bench mark levels, he won’t be able to retain its key employees. He cannot also pay significantly ahead of its peers as the line of business and the bottom lines are more or less same for them. No employee can also demand a pay package, comparably higher than his counter parts, because, the employer can find a substitute of his skill sets in a lesser price. The whole system leads to equilibrium in compensation which may be described as Market Competitive pay.
But things are not quite similar for the programmer of an out dated programming language. If there are not too many players in the market to recruit him for his skills, he cannot really demand a competitive package. Here the employer has the freedom to decide the salary. Now consider the case of a top notch neurosurgeon or country’s best criminal lawyer. There are not too many substitutes for his skills. So the employer may have to pay him significantly higher than the market to recruit & retain him as he is the critical success factor to his business and a very specific asset to the organisation with no immediate substitutes. What we can conclude here is market competitive pay does not work, in an oligopositic or monopolistic market. This can be vindicated if we take the case of IT Product companies like Google and Microsoft who thrives on innovation. They tend to pay significantly ahead of the market as they need the best of the talent pool and the bottom line of the business supports it.
To sum the above discussion, Market competitive Pay package works in a Free Job where there are immediate substitutes avaialble for both employers and employees available. But it is not seen incase of a monopolistic / oligopolistic market, where the substitutes are scarce.
( the author of this post is an employee of a leading IT Consultancy firm in India)
Take the example of a homogenous set of employers; say Big-4 consulting firms or top-5 Indian IT Companies. These organisations are similar to a great extent, in terms of work environment, organisational structure, line of business and the skills they look for in an employee. Here market competitive pay becomes paramount importance if the organisation wants to retain its key employees. The other thing that works for employees here is the liquidity of their skills in the job market. An employee can demand a competitive pay package as other organisations need the skill set he possess and might pay him. This can be best described as a free market scenario for both employees and employers and Market competitive Pay is most prevalent here. If an employer cannot pay the industry bench mark levels, he won’t be able to retain its key employees. He cannot also pay significantly ahead of its peers as the line of business and the bottom lines are more or less same for them. No employee can also demand a pay package, comparably higher than his counter parts, because, the employer can find a substitute of his skill sets in a lesser price. The whole system leads to equilibrium in compensation which may be described as Market Competitive pay.
But things are not quite similar for the programmer of an out dated programming language. If there are not too many players in the market to recruit him for his skills, he cannot really demand a competitive package. Here the employer has the freedom to decide the salary. Now consider the case of a top notch neurosurgeon or country’s best criminal lawyer. There are not too many substitutes for his skills. So the employer may have to pay him significantly higher than the market to recruit & retain him as he is the critical success factor to his business and a very specific asset to the organisation with no immediate substitutes. What we can conclude here is market competitive pay does not work, in an oligopositic or monopolistic market. This can be vindicated if we take the case of IT Product companies like Google and Microsoft who thrives on innovation. They tend to pay significantly ahead of the market as they need the best of the talent pool and the bottom line of the business supports it.
To sum the above discussion, Market competitive Pay package works in a Free Job where there are immediate substitutes avaialble for both employers and employees available. But it is not seen incase of a monopolistic / oligopolistic market, where the substitutes are scarce.
( the author of this post is an employee of a leading IT Consultancy firm in India)
Retaining talent is more than just a matter of compensation
Having worked for an Indian IT major for close to 4 yrs, I can safely say Market Competitive Pay does not always work. I was offered a very lucrative package twice, but I declined to take up the offers simply because the trade off involved in terms of work profile and growth opportunities was too large.
As an employee, the work culture of an organisation, the job profile, learning and career growth opportunities which my workplace offers matters to me as much as, if not more than, my compensation structure. Pay is not the only factor.
While the jobs I was offered were paying almost 100% more than what I was earning at that time, I still decided to stick around. Factors like support of my co-workers; a healthy and competitive but non-threatening work atmosphere was what tilted my decision in the favour of not quitting.
But sadly this was not the case with some of my other colleagues who were swayed by the size of the package being offered. An year down the line those same people were back in the job market hunting for a new job. Dissatisfaction with the work culture was the primary reason cited when I asked them the Golden Question “Why so soon”. In such a scenario more than the employee it is the organisation who is loosing out, since they try to pay competitive and lucrative pay packages but do not follow it up a conducive work culture and other perks.
(the author of this post is a Senior Project Engineer in a leading IT company in India)
As an employee, the work culture of an organisation, the job profile, learning and career growth opportunities which my workplace offers matters to me as much as, if not more than, my compensation structure. Pay is not the only factor.
While the jobs I was offered were paying almost 100% more than what I was earning at that time, I still decided to stick around. Factors like support of my co-workers; a healthy and competitive but non-threatening work atmosphere was what tilted my decision in the favour of not quitting.
But sadly this was not the case with some of my other colleagues who were swayed by the size of the package being offered. An year down the line those same people were back in the job market hunting for a new job. Dissatisfaction with the work culture was the primary reason cited when I asked them the Golden Question “Why so soon”. In such a scenario more than the employee it is the organisation who is loosing out, since they try to pay competitive and lucrative pay packages but do not follow it up a conducive work culture and other perks.
(the author of this post is a Senior Project Engineer in a leading IT company in India)
Organisational need which decides.....
Being an owner of an SSI in a small town I believe market competitive pay doesn’t work much in our case. I may pay an employee more than the market if I am in need of that employee and if I believe that the employee does has the capability & experience to handle the work. In some cases where the employee is less experienced I would pay him below the market rates and would assure him of a pay hike as per his performance. We appoint accountants, production head (operations controller) – though it is not done on a very large scale but we do face a lot of competitions from other small industries in the same locality. We do not go for surveys but we do keep in mind what the other industries in the same area are paying. So for any particular job we look at the so called “market rates”, experience of the employee and my need for that employee before deciding his final salary. Therefore in our case its my need which plays a more important role in deciding whether I should pay the employee as per the market rates or not.
(the author of this post is the owner of a Refractory firm in Jharkand)
(the author of this post is the owner of a Refractory firm in Jharkand)
Monday, September 1, 2008
Market Competitiveness of Pay is a topic that has generated a lot of interest in the last few years. A dynamic economic scenario and changing employee demographics forced Human Resource Professionals to relook at their compensation practices and utilize it for business advantage.
Compensation is definitely one of the strongest tools available to HR to attract and retain talent. For the last 4 years India Inc has witnessed an average yearly increase of 15% in compensation across sectors. The growth is expected to continue in double digits till 2011 atleast. But rising employee costs have been always a growing concern across Indian industries, especially for the service sectors which have been riding on the cost advantage. Coupled with high inflation figures that we are witnessing currently, companies are thinking hard about ways in which they can cut down on unnecessary employee costs.
Most of the service organizations have employee costs forming 50% of their opex. That is a substantial amount of money which can make an impact on the balance sheet of a company. Prudent usage of the same can help companies manage their talent pool better.
Pay for Performance
Most of the companies operate with a compensation philosophy which would define
a)The Market competitiveness of Pay – E.g. We want to be at the 50th percentile in compensation against our relevant comparator companies in the same market/sector
b)Pay for Performance: E.g We would pay at 80th percentile of the market for outstanding performers, 65th Percentile for people who exceed expectations and at the median for people who meet expectations and so on.
The above example illustrates how performance gets rewarded within a defined compensation philosophy and strict employee budgets. Most of the progressive companies adopt this approach wherein they reward superior performance within a conservative budget, thereby ensuring that their top performers are competitive with respect to Market Pay.
Guaranteed Compensation ( Cash – in hand)
Compensation practices have also underwent changes due to shift in employee demographics. Today, the average age of an employee in India Inc workforce is 25 years. S/he is mobile, tech savvy, achievement oriented, status conscious and has a progressive outlook which makes her/him comparable to his global peers. To cater to her/his need, companies are moving towards cafeteria approach to pay.
Earlier, lot of companies had benefit rich compensation structures. Company car, accommodation, club facilities, Retirement schemes etc were common practices adopted across sectors. These schemes were high on administrative efforts and expenses.
Today, majority of the companies are focusing on Cash rich compensation structure. Maximising the cash in hand seems to create a win win situation for both the employer and the employee. So companies are moving towards “Cafeteria approach to pay” wherein employees have a flexible basket and they can design their own compensation to suit their needs. Also, employers are focusing and improving on tax friendliness of compensation structure. Food Coupons, Car Leasing Schemes etc are very popular measures adopted in this regard. All these efforts are directed towards being competitive in the market with respect to guaranteed compensation.
Variable Pay
Variable Pay is another component which is increasingly gaining significance in determining market competitiveness of Pay. Most of the new progressive organizations run on 2 different schemes of Variable Pay – Bonus and Incentive Schemes. While bonuses are paid out to the top management and support staff like HR, Finance, IT, Admin etc, Incentive schemes become applicable to the Sales Force.
In sales oriented organizations, Incentives on an average can go upto 50% or even more of guaranteed compensation. This factor makes Variable Pay a very strong factor in driving performance. Companies look at market competitiveness of Variable Pay to attract and motivate a strong sales force.
Another factor which is increasingly forming a part of Variable Pay is Company performance. In such cases, Variable Pay will have 2 components – Individual Performance and Company Performance. The relative significance of company performance in the Variable Pay increases significantly towards Top management positions (Since a good year or a bad year is primarily determined by their decisions).
For eg: An entry level management graduate might have 10% weightage for company performance and 90% for individual performance whereas the CEO might have 60% for company performance and 40% for individual performance)
This practice helps companies manage their costs very well and reduces the risk of paying out a hefty bonus scheme in a lean year. It also helps the team move towards better performance for the whole organization.
Conclusion
It is definitely important to be competitive with market with respect to Pay especially in these turbulent times. But Pay is just another factor that helps to attract and retain talent. There are other factors like Culture, Learning Opportunities, Sense of Fairness, Quality of co-workers and Support of supervisors that help talent grow and reap the best out of their abilities. As an HR professional who is working in the area of compensation with a leading global consulting firm, we hear our clients resonate this belief that compensation cannot be the only factor. We might face lean years and thin budgets in the future, but if organizations develop internal capabilities for people development and provide a conducive environment to work, learn and grow that would be the real differentiating factor which keeps their people satisfied.
Compensation is definitely one of the strongest tools available to HR to attract and retain talent. For the last 4 years India Inc has witnessed an average yearly increase of 15% in compensation across sectors. The growth is expected to continue in double digits till 2011 atleast. But rising employee costs have been always a growing concern across Indian industries, especially for the service sectors which have been riding on the cost advantage. Coupled with high inflation figures that we are witnessing currently, companies are thinking hard about ways in which they can cut down on unnecessary employee costs.
Most of the service organizations have employee costs forming 50% of their opex. That is a substantial amount of money which can make an impact on the balance sheet of a company. Prudent usage of the same can help companies manage their talent pool better.
Pay for Performance
Most of the companies operate with a compensation philosophy which would define
a)The Market competitiveness of Pay – E.g. We want to be at the 50th percentile in compensation against our relevant comparator companies in the same market/sector
b)Pay for Performance: E.g We would pay at 80th percentile of the market for outstanding performers, 65th Percentile for people who exceed expectations and at the median for people who meet expectations and so on.
The above example illustrates how performance gets rewarded within a defined compensation philosophy and strict employee budgets. Most of the progressive companies adopt this approach wherein they reward superior performance within a conservative budget, thereby ensuring that their top performers are competitive with respect to Market Pay.
Guaranteed Compensation ( Cash – in hand)
Compensation practices have also underwent changes due to shift in employee demographics. Today, the average age of an employee in India Inc workforce is 25 years. S/he is mobile, tech savvy, achievement oriented, status conscious and has a progressive outlook which makes her/him comparable to his global peers. To cater to her/his need, companies are moving towards cafeteria approach to pay.
Earlier, lot of companies had benefit rich compensation structures. Company car, accommodation, club facilities, Retirement schemes etc were common practices adopted across sectors. These schemes were high on administrative efforts and expenses.
Today, majority of the companies are focusing on Cash rich compensation structure. Maximising the cash in hand seems to create a win win situation for both the employer and the employee. So companies are moving towards “Cafeteria approach to pay” wherein employees have a flexible basket and they can design their own compensation to suit their needs. Also, employers are focusing and improving on tax friendliness of compensation structure. Food Coupons, Car Leasing Schemes etc are very popular measures adopted in this regard. All these efforts are directed towards being competitive in the market with respect to guaranteed compensation.
Variable Pay
Variable Pay is another component which is increasingly gaining significance in determining market competitiveness of Pay. Most of the new progressive organizations run on 2 different schemes of Variable Pay – Bonus and Incentive Schemes. While bonuses are paid out to the top management and support staff like HR, Finance, IT, Admin etc, Incentive schemes become applicable to the Sales Force.
In sales oriented organizations, Incentives on an average can go upto 50% or even more of guaranteed compensation. This factor makes Variable Pay a very strong factor in driving performance. Companies look at market competitiveness of Variable Pay to attract and motivate a strong sales force.
Another factor which is increasingly forming a part of Variable Pay is Company performance. In such cases, Variable Pay will have 2 components – Individual Performance and Company Performance. The relative significance of company performance in the Variable Pay increases significantly towards Top management positions (Since a good year or a bad year is primarily determined by their decisions).
For eg: An entry level management graduate might have 10% weightage for company performance and 90% for individual performance whereas the CEO might have 60% for company performance and 40% for individual performance)
This practice helps companies manage their costs very well and reduces the risk of paying out a hefty bonus scheme in a lean year. It also helps the team move towards better performance for the whole organization.
Conclusion
It is definitely important to be competitive with market with respect to Pay especially in these turbulent times. But Pay is just another factor that helps to attract and retain talent. There are other factors like Culture, Learning Opportunities, Sense of Fairness, Quality of co-workers and Support of supervisors that help talent grow and reap the best out of their abilities. As an HR professional who is working in the area of compensation with a leading global consulting firm, we hear our clients resonate this belief that compensation cannot be the only factor. We might face lean years and thin budgets in the future, but if organizations develop internal capabilities for people development and provide a conducive environment to work, learn and grow that would be the real differentiating factor which keeps their people satisfied.
What does it mean to the current employees?
I was reading the last post on how market pay rates will attract and might not retain employees that something struck me. When a company keeps paying higher pay packages to justify the market rates, how about the current employees. There are companies who recruit experienced people by offering them pay packages which are much higher than the market rates depending on the changes in the so-called "Market" and many of us would have heard one story or another on these lines. Now this can be a highly de-motivating factor for the current employees who having spent long years in the organization and performing the same work and are paid lesser.I have heard of instances in which a new recruit's compensation package amounted to almost as his boss's pay. Now the current employees are not going to like this at any cost. During the time that I worked as a software engineer, I remember, how frustrated many of us were when we got to know that the new batch that has been recuruited has been offered a higher basic which would entitle them to the same salary that we were drawing at the end of an year. Though the HR department tried to convince us saying that they had to pay according to the going rate at the market, I am not sure how many of us were convinced.... So what can organizations do to retain or motivate these employees or rather how can they just explain this better so that it makes sense to both parties...
Another issue is how to compensate your employees who are situated in different geographies. When an organization expands, it is quite possible that it expands into new markets sometimes situated in various geographies. Now comes the new challenge.. There might be people working in different countries who are doing the same work, but paid very different salaries. The market rates of companies are different in different countries. Thus a marketing head's pay in US might be less than or equal to that of someone lower in rank might draw in Europe. This is usually explained by attributing it to the difference in cost of living expenses in various regions. But what about the kind of work done. The widely accepted principle that the same kind of work should derive the same compensation package is a myth!! And there is no concept of a logical market here...All that depends is where you are and how crucial your skill sets are at this point in time.
I was reading the last post on how market pay rates will attract and might not retain employees that something struck me. When a company keeps paying higher pay packages to justify the market rates, how about the current employees. There are companies who recruit experienced people by offering them pay packages which are much higher than the market rates depending on the changes in the so-called "Market" and many of us would have heard one story or another on these lines. Now this can be a highly de-motivating factor for the current employees who having spent long years in the organization and performing the same work and are paid lesser.I have heard of instances in which a new recruit's compensation package amounted to almost as his boss's pay. Now the current employees are not going to like this at any cost. During the time that I worked as a software engineer, I remember, how frustrated many of us were when we got to know that the new batch that has been recuruited has been offered a higher basic which would entitle them to the same salary that we were drawing at the end of an year. Though the HR department tried to convince us saying that they had to pay according to the going rate at the market, I am not sure how many of us were convinced.... So what can organizations do to retain or motivate these employees or rather how can they just explain this better so that it makes sense to both parties...
Another issue is how to compensate your employees who are situated in different geographies. When an organization expands, it is quite possible that it expands into new markets sometimes situated in various geographies. Now comes the new challenge.. There might be people working in different countries who are doing the same work, but paid very different salaries. The market rates of companies are different in different countries. Thus a marketing head's pay in US might be less than or equal to that of someone lower in rank might draw in Europe. This is usually explained by attributing it to the difference in cost of living expenses in various regions. But what about the kind of work done. The widely accepted principle that the same kind of work should derive the same compensation package is a myth!! And there is no concept of a logical market here...All that depends is where you are and how crucial your skill sets are at this point in time.
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