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.

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