Traditionally retailing in India can be traced to the emergence of the neighborhood kirana stores catering to the convenience of the consumers. However, the concept of retail and the idea of shopping has undergone a dramatic change in terms of the platform and consumer buying behavior.
The Indian retail industry has emerged as one of the most dynamic and fast-paced industries due to the entry of several new players. It accounts for over 10% of the country’s Gross Domestic Product (GDP) and around 8% of the employment. Increasing participation from foreign and private players has also given a boost to the Indian retail industry. However, the sector has been impeded by multitudes of challenges in the last few years. The biggest challenge has been the emergence of the e-tailing business that has forced traditional retailers to rethink their business strategies to remain relevant and competitive. One of the cost elements that retailers have traditionally turned to in difficult situations has been employee costs – these constitute anywhere between 3.5% - 8.0% of revenue and their ability to effectively optimize on these costs has often made a real difference to performance.
HR teams of retail companies have been made to forgo the traditional hat of recruiter or trainer. While these continue to be critical roles – HR has emerged as the true business partner. HR today, is working hand-in hand to ensure the bottom line numbers are met, the productivity norms are adhered to and the right talent mix is driving the business. In various efforts brought in by HR – the central objective is to 'build for tomorrow’.
The Headcount Distribution across Core and Support Functions
In retail – the margins are thin, attrition is high and competition is growing at a rapid rate. As a result, firms need to ensure that they are able to achieve the right teeth to tail ratio. It is a fine balance where retail companies want to ensure they have as many incumbents as possible generating revenue, but at the same time – the non-revenue teams are not under unreasonable pressure.
Optimization of employee costs is also fraught with risks. In an industry where organizations see almost the entire frontline staff turnover in 12-15 months, it is important to ensure that there is a certain degree of motivation and performance orientation. On an average, retail organizations follow a 93:7 teeth to tail ratio. This signifies that for every 13 revenue generating team member (core), there is 1 non-revenue generating team member (support). This stiff ratio is a reflection on how firms are looking at manning their pyramid. Many firms today have chosen to outsource some of the non-core roles to ensure efficiency of cost. However, when we compare wage bill distribution amongst the core & support roles – the ratio looks different. Market trends show that the wage bill ratio for core to support is 80:20. This indicates that while support teams are smaller, the average spend is higher as compared to the core functions.
The organization pyramid in the overall retail industry takes the shape of a perfect pyramid. With a sizeable population manned at the lowest level (largely the retail operations team), the pyramid is a reflection of how the industry is managing not only the distribution of headcount but also the wage bill. Almost three quarters of the overall population is manned by the bottom two levels. Keeping in mind the industry dynamics and the sensitivities of talent required by the retail industry – this is an extremely effective way of managing people cost.
Retail operations have a lion’s share in the core team. This is the on-ground staff – responsible for sales. This team typically constitutes +12 graduates who are on the shop floor assisting sales (this demography changes basis company philosophy and also products sold). While retail operations have the highest headcount, the compensation budget spent on them is relatively smaller. This is a result of low payout as many team members in the retail operations team are on minimum (plus) wages.
Buying & merchandizing and supply chain are the other two large teams. With increased scrutiny on revenue management and profitability of business – loss prevention teams have gathered strength over the years.
The support headcount constitutes 7% of the overall headcount and 20% of the overall wage bill. On an average, support roles are paid relatively higher than core roles. However, within the support universe it is finance that enjoys the highest premium, which is driven by the gap in demand and supply.
Compensation Philosophy and Pay at Risk
Most organizations within the retail fraternity are still working on a concrete pay philosophy. The industry is in the early stages towards building a consistent approach on how wage management and talent differentiation can be done. The anchor of pay for defining pay philosophy dramatically changes from firm-to-firm. Organizations choose multiple anchors for deciding compensation based on roles and levels. However, a fairly large segment of the industry is using Total Fixed Pay as the key anchor.
In line with the services industry, retail has worked on making variable pay an integral part of the total payouts. While the retail industry has embarked upon the journey on having ‘pay at risk’ built in the offering – ensuring that it drives the objective of pay for performance, the percentage payouts are not at par with market averages. At the junior management levels, the pay mix is fairly similar to the market. However, as the management level progresses, the dependence of variable pay does not grow substantially. The difference is particularly at the top management level. Across industries, firms place almost 25-30% of the top management salary in variable pay. For the retail industry, this is at around 22%. In addition, many firms in the services space provide long-term incentives in the form of stock options or RSUs. This phenomenon is still getting discussed/evaluated across firms in the retail space.
Typically, the revenue generating functions (direct or indirect) have higher dependence on variable pay as compared to support functions. The trend is similar for retail. Across levels of management – core functions (teeth) have higher dependence on variable pay. Particularly, at the top and senior management levels, the difference is visible. On costed benefits at large, the distribution is similar for both core and support. This is because benefits are largely linked to levels and not functions.
Improvements in the market sentiments have led to the expectation of growth of retail in India. It is a massive manpower-oriented industry that recruits a large pool of employees. However, there is huge scarcity of skilled retail professionals. The industry is projecting a salary increase of 10.7% for 2016. This was 9.5% in 2014. The salary increase projections can be directly correlated to expected growth in the industry. In addition to this, lack of trained retail professionals is also causing a significant dent in the overall compensation budget.
Over the years India Inc. has adopted a fairly stringent pay for performance norm. Retail in India is also embracing the pay for performance concept with open arms. The differentiation that a top talent receives over an average performer is 1.8 times. This is one of the highest across India Inc. Given the current pressure on cost, companies are maximizing their investments in people by identifying and focusing on fostering engagement of their key employees.
For an industry which is fairly troubled by attrition, firms today have started looking at talent management of store employees seriously. It is expected to bring in double benefit; it will help firms to manage attrition and also at the same time identify individuals who are high performers and differentiate both on role and pay. Some forward-looking firms have also started using formal assessment test as a promotion tool. It is an established fact that role promotion means more than just higher revenue/sales numbers. It includes many softer aspects like people management, team management, solutioning, etc. Firms are adopting these tests to ensure, individuals with the right tangible and intangible skills are promoted.
The Need for Change
On an average, stores promote 9% of its employees. If we break this across levels, the promotion numbers look as follows:
Unlike stores, majority of the promotions in corporates happen annually during the salary revision period. On an average, about 8.5% employees across levels of management get promoted at the corporate level.
India remains an appealing and long-term destination for several reasons. The demographic dividend of having the youngest population in the world with growing middle class disposable income is expected to pay off. However, with changing times, retail is also looking at managing its show differently. Not so long ago the e-commerce revolution hit the conventional retail format. Competitive pricing, different payout methods and just the novelty of using this channel has created a dent in the store based retail unit. To add to this, the cost-based pressure of less than encouraging business results, high level of attrition, lack of trained retail professionals and high cost of training has only made business difficult.
To cope with all these changes retail needed to adapt, and adapt quickly. In a very short span of time, retail firms have shown a lot of agility in how they are looking at managing business in India. While business management can be discussed at length, what is interesting to note is that now HR is looked at as an instrument for driving change and is gaining incremental value.
Rewards management took the center stage, where HR looked outside-the-box on how the operational cost can be curtailed without impacting the engagement of its top performers. Companies have increasingly transitioned their HR strategies to be more performance oriented and have structured programs that drive better differentiation between the performers and laggards. It is initiatives such as these which will hold retail companies in good stead, as the headwinds continue to get stronger, and character and conviction in how they manage the people challenges will define future success.
Senior Consultant, Aon Hewitt
Consultant, Aon Hewitt