Total Rewards Quarterly

FMCG Sector: On the Road to Revival


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While experts were crystal ball gazing the prospects for India’s consumer story for 2015, there was strong hope for revival in the sector that is intricately linked to the overall performance of the Indian economy. 2014 saw the sentiment plagued first by the election uncertainty and then high inflation and cautious salary hikes by India Inc. The overwhelming environment saw FMCG sector bottoming out in terms of the growth rate that had already been languishing in the 6-8% range in the 2011 to the 2014 period. The sector was expected to buck this trend of diminishing growth with a near double-digit rebound. The sector has definitely been in the news in the first quarter of the financial year not entirely for the right reasons and the jury is still out on the prospects for the rest of the year.

Muted Year-on-Year Median Salary Movement

The diminishing growth period has had a direct impact on the salary increases as well, which at an overall level
has more or less plateaued in the 10-11% range over the last 3-4 years. This trend becomes even more prominent when we compare the year-on-year movement in the median salaries across management levels that have flattened out in the 4-5% range across most levels. This isa dip of more than 50% as compared to the median movement during the 2012-13 period.

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Unless the expectations of a positive consumer sentiment on the back of strong macroeconomic indicators and a low consumer price inflation environment translates into dollars hitting the bank for the FMCG majors, the advent of ‘acche din’ for talent in this sector may end up being a long-drawn process.

Indian Vs. Foreign – Not So Much a Chasm

Comparing level-wise median salaries on a Total Cost to Company basis at India headquartered firms vis-a-vis foreign firms throws up some interesting trends. The Total Cost to Company at the middle, senior and top management levels is approximately 14-16% higher in foreign MNCs as compared to Indian organizations. The median salaries at the entry and junior management levels are seen to be marginally higher for Indian firms. This is largely owing to the fact that the foreign firms see a higher churn of talent at this level whereas the Indian firms have a fairly tenured base. Since talent availability at this level is not a major threat, foreign firms have been able to effectively plug the talent leak at controlled costs,thereby maintaining lower overall median salaries at these levels.

At approximately INR 16 lakh per annum, the cost per FTE at a foreign FMCG set up is approximately 25% higher than the cost per FTE at an Indian fir m. However, this is expected to be a cause of concern in times to come. With ever increasing pressure on business performance, the payroll costs will be a closely monitored metric as business leaders armor themselves with talent and rewards go-forward strategies to win the battle of people and profitability.

The Trend of Investment in Key Talent Continues

While bell curves may be going out of fashion in the knowledge-driven workforce of consulting and technology sectors, the times aren’t changing for the FMCG players yet. They continue their love for the traditional performance management tool. What has definitely changed though is the pattern of employee distribution on the performance curve. With top performers getting salary increases that are up to 1.7 times higher than the average performers, there is an increasing consciousness about linking performance to pay. As a result, only those who matter get differentiated pay. At an overall level, approximately 28% of the population was in the ‘Exceeded Expectations’ category in 2014, a proportion that stood at approximately 32% in 2012.

When compared to other industries, consumer products emerges amongst the most aggressive when it comes to differentiating salary increases for key talent vs. the overall population. Firms in the FMCG space are seen to have a formal process of key talent identification which is a pool of high performers, high potential and critical roles.

As reducing costs to ramp up the bottom line continues to be the business prerogative, pay differentiation more so basis sustained performance than current performance only, will be the top agenda item of rewards managers across the board.

Rewards & ‘Pay at Risk’

The other critical lever that the compensation managers are using to reinforce the performance and rewards linkage is ‘Pay at Risk’. Over the years, an increasing portion of the salary is being parked in the variable pay kitty – annual bonus and Long-Term Incentives (LTI). While the pay mix has remained more or less constant at the junior management, the significant shift towards variable pay and LTI can be observed at the senior levels. In addition to using long-term incentives as a retention hook, there is an increased focus on the element as a means of wealth creation tool for the senior and top management. LTI as a percentage of Total Cost to Company has increased from 17% in 2012 to 26% in 2014 for top management. Stock options and restricted stocks are the most prevalent vehicles of LTI for the major players in the sector.

In recent times, vigorous variable pay plans have become a pre-requisite for any reward mechanism to be successful. While majority of the firms in the sector are seen to have a cap on the maximum variable payout, this on an average goes as high as 150-180% of t arget. Rewarding talent for exceptional performance and thereby setting performance benchmarks not only inspires individuals to work hard and achieve professional goals, but also acts as a compelling tool to curb mediocre or humdrum performance. 

Variable pay was and will continue to be an important component of compensation in the FMCG sector across management levels. Though the form of variable pay is still restricted to individual performance, a few companies are now exploring other forms of cash bonus that promote higher accountability and retention such as Company Profit Sharing, Deferred Cash Plan and Team/Group Awards.

Are Benefits Making a comeback or is Cash Still the King?

Over the last few years, organizations have become increasingly conscious about the importance of benefits as one of the major retention tools. Firms have matured to the fact that while offering hefty cash pay would initially attract job seekers, but what would make them stick around is a robust and well-bundled basket of employee benefits. 80% employees feel benefits are an important retention lever. Benefits have emerged as the top retention measure for top management employees. With over 70% organizations in India and over 80% of the firms in the FMCG sector having revised their benefits budgets upwards in 2014 as compared to the previous year, the case for focus on employee benefits keeps getting stronger by each passing year. A majority of the employees today want flexibility in benefits with a menu option and are even willing to make voluntary contributions to get access to certain additional benefits. Despite the buzz about the importance of benefits, when we take a closer look at the break-up of fixed pay in the FMCG sector, cash still emerges as a major rewards tool, contributing to over 80% of the total fixed pay across levels.

Even though most organizations provide a wideplethora of benefits ranging from retirement benefits, car related benefits, housing and healthcare, yet this takes up a very small portion of the pie, with majority of the funds still being parked in cash components.

Which benefits are then the flavors of the season? Firms are looking at giving employees the power of choice and providing much more than livelihood benefits which the cash salaries are able to cover for. What employees really value are benefits that one may not be able to attach a monetary value to whether it be flexible working hours, enhanced maternity and paternity leaves, option of remote working, health and wellness  initiatives, among others. The phenomenon is beginning to catch up with the FMCG majors who no longer see this as a softer investment but a hard coded business imperative to ensure that they not only have onboard the brightest but the ones they have are healthy, productive and engaged to drive key results for the organization.

Where are We Headed?

The first quarter has been rather slow for the sector due to subdued demands from the urban as well as rural markets. While experts remain bullish on the performance in the medium to long-term, some immediate reformist measures seem essential to translate the feel-good factors into tangible market results. This is bound to bring back prudence at the forefront of rewards managers’ white boards. Having said that, there will be skills sets that will be in demand and will in turn command more premium than the others. As digital becomes the all-pervasive phenomenon, marketing professionals in general and digital marketers specifically will rule the roost. These along with the Men in Black manning the Corporate Affairs and Liaising teams will continue to see being paid for the value they bring to the table in the increasingly tightening marketplace – competition-wise and regulation-wise.

Organizations in this sector have come a long way in terms of people and rewards practices and most have a developed rewards philosophy in place. Considering the business environment, rewards differentiation, segmentation and communication will be more important than ever before. A mature sector has its own set of challenges to deal with, and the smarter players in the FMCG sector will have to brace up to overcome these as they navigate the human capital marketplace deftly and diligently.

The sector has definitely been in the news in the first quarter of the financial year not entirely for the right reasons and the jury is still out on the prospects for the rest of the year
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Gaurav Gupta
Consultant, Aon Hewitt
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Ayesha Dhall
Associate Consultant, Aon Hewitt
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