Total Rewards Quarterly

FMCG Sector: Steady, Stable and Spot-on

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The FMCG sector has historically been seen as an evergreen sector in India, with consistently strong business performance, stability and growth even during trying times. While it’s fair to say that FMCG growth over the last two years has been mildly disappointing, this is still a sector that is widely viewed as an employer of choice, with organizations frequently at the cutting edge of HR/talent practices. This is supported by the fact that the FMCG sector has had lower attrition (13.6% in 2014 and 13.3% in 2013) as compared to the average attrition for India Inc. (18.1% in 2014 and 18.5% in 2013)1.

Stability and soundness of HR strategy seems to have helped the sector retain its sheen on most fronts.
It is, therefore, not inaccurate to say that FMCG companies seem to have done something right in terms of their talent/rewards philosophy. Hence, is there something that other sectors and industries could learn from the FMCG sector on these fronts? That is what we have set out to decipher.

This article examines the 4 P’s of the rewards philosophy of leading FMCG organizations:

  • Pay Positioning

  • Pay Structure

  • Performance and Potential

  • Pay Communication

Pay Positioning – Managing Perceptions
Anchor for Benchmarking

Total Cost to Company (TCC) is crucial for budgeting and cost projections as it depicts the total cost incurred towards an employee. However, salary negotiations, matching and comparisons while hiring (or losing talent) in general happen on Total Fixed Pay (TFP) or in some cases, the “take home” salary. It is interesting, therefore, to note that most companies use TCC as the anchor to benchmark their pay positioning in the market instead of TFP. Naturally, we see that overall cost inclusive of LTI becomes an important consideration at higher levels.

This implies that organizations are not only targeting to be competitive on total cost, but also represents that organizations are better communicating their overall rewards package, thus ensuring that conversations around salary negotiations and annual increments factor all components of pay into account.

Target Positioning

In a sector that is known for its war for talent, organizations would need to be perceived as good paymasters. It therefore, is no surprise that a significant number of organizations target a positioning above median. Additionally, instead of targeting a uniform peg point, organizations differentiate target positioning basis various factors, such as:

  • Levels of Management: At senior levels of management, target positioning increases with more organizations targeting a higher percentile point at higher levels of hierarchy. This can be explained by the argument that the impact of replacing an incumbent at senior levels is higher and therefore, organizations position themselves aggressively at these levels to reduce attrition. At the entry level, most organizations are content to be at the median of the market. This is due to the abundance of talent and considerable investment made by organizations to make new hires job-ready at these levels. 13% organizations are even content to position themselves lower than the market median.

  • High Performers and Critical Talent: 40% of the organizations surveyed have differential positioning for top performers and critical talent. These organizations not only give a higher payout linked to performance/potential, but also peg these employees higher vs. market. Hence, critical employees and high potentials may get a dual benefit.

  • Functional Differentiation: 20% organizations identified specific core functions (such as sales, marketing and R&D) which are, by default, pegged differently from the rest of the organizations. These identified functions give the organizations their competitive advantage.

Most companies use TCC as the anchor to benchmark their pay positioning in the market instead of TFP

Pay Approach – Structures & Systems
Pay Range Design – Spanning Deliberations

Conventional wisdom dictates that pay ranges are typically level-based as this makes it easier to align pay ranges with internal grades and career progression. However, only 53% of the organizations surveyed have level-based pay ranges which are uniform across functions. The prevalence of a function-dependent pay range is as high as 40%. This is seen mostly in organizations which have premiums associated with certain functional clusters. It is instrumental to drive different pay philosophies for these clusters as it can become difficult to accommodate the functional premiums in a common level range; the ranges might become simply too wide for comfort.

As expected, in 70% organizations, the pay range widens at senior levels of management. This is generally on account of average time for promotion being higher at these levels. For top management (function heads and management council members), a dichotomy is observed:

  • 30% organizations have a wide range (125-150%)

  • 20% have a narrow range (52-70%)

This highlights contrasting approaches towards internal parity at senior and top management. In the latter, all members of the top management team are remunerated similarly while the former allows for drastically different salaries to be accommodated.


Pay Range Fitment – Handling Promotions, New Hires and Anomalies

Pay range fitment questions typically arise from three sources:

  • Where do internal promotes enter the pay range?

  • Where should lateral hires be placed?

  • How should “red dots” (employees whose present salary is higher than the range maximum) be handled?

While 55% of organizations promote employees to the lower third of the pay range, a significant portion (45%) promote employees to even the middle third/range mid-point. This is justifiable keeping in mind that the person promoted has shown a potential but is yet to grow into the level and hence, cannot be paid at par with an employee who is already present at that level.

However, the new salary can sometimes be hard to match given the employee is coming from a lower pay range. This statistically takes the whole pay range down. Therefore, although organizations might provide higher salary increases at a level, the range mid-point movement is much lower than the salary increase figures.

Lateral hires present a whole new set of challenges. As they are role ready, organizations typically hire laterals around the range mid-point or slightly lower. In order to hire the best, 20% organizations say that they do not have specific criteria/guidelines and are willing to use the entire pay range for hiring.

Finally, there arises the question of how to treat red dots. While the simplest answer would be to promote such employees, the challenge arises when some employees are unable to display the aptitude or behaviors required at the next level and are therefore, not ready to be promoted. While some organizations continue to give such employees the average increment, other organizations instead give such employees a one-time payout without increasing their annual pay.


Performance & Potential – Managing Expectations
High Performers – Higher Pay for the Best

While some organizations have created a buzz globally by doing away with bell curves, the FMCG sector continues to rely on the traditional methods of ranking and managing performance. Majority of the organizations enforce bell curves fairly strictly, using this as a lever to better reward the high performers both in terms of salary increase as well as performance bonus payouts:

  • Highest raters get up to 1.7x the salary increase of average performers

  • The maximum bonus payout for high performers ranges from ~130% to 300% with an average of 180% of target bonus



 
FMCG organizations are also placing increased emphasis on the modes of pay communication, such as implementation of Total Rewards Statements for annual increment communications
Pay Communication – Balancing Transparency & Prudence

Communication is one of the most useful tools in driving an organization’s rewards philosophy, driving cultural change and managing engagement from a rewards perspective. Employees demand  transparency from the organization in terms of the decisions taken regarding their pay, and organizations are happy to share details with employees in order to ensure that employees feel they are being paid fairly.
72% organizations share “General Information Broadly”, which includes sharing of details of elements such as the overall rewards philosophy and the salary increment process. Fewer organizations share more details such as market data (80% organizations share this with only their leadership team).
 
FMCG organizations are also placing increased emphasis on the modes of pay communication, such as implementation of Total Rewards Statements for annual increment communications, organization-wide roadshows and other interventions to increase awareness of benefits available to employees and changes in rewards components.
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A robust pay philosophy acknowledges and addresses the need to have targeted pay interventions for specific employee groups. The insights derived from the practices of the leading FMCG organizations throw light on some expected trends as well as a few counter-intuitive observations. While such practices are good to know, and in many cases good to adopt, it’s imperative to keep in mind the old adage – one size does not fit all. A successful pay philosophy is one that takes business goals, talent strategy and employee preferences as inputs with equal weightage. As business realities and employee preferences change, it behooves organizations to review their pay philosophies regularly. Having said this, while organizations across sectors are focusing on these aspects, a key learning from the FMCG sector is the ability to successfully execute this focused strategy.


Data Source:
1) Aon Hewitt Salary Increase Survey 2013-14 and 2014-15 (Phase 2 reports)

 
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Gurdit Singh Sachdeva
Senior Consultant,Aon Hewitt
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Puja Pradhan
Consultant, Aon Hewitt









 
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