Compensation has always been an extremely sensitive topic for rewards and HR professionals. Salary increase management used to constitute a lion’s share in a rewards professional’s work-life. Market intelligence and sentiments used to drive budgets and oscillating economic performance in India was closely connected to the salary increases offered. Market sentiments decided budgets - almost irrespective of a firm’s affordability, business outlook and talent availability.
However, in the past 5 years, we have observed a sea change in how rewards and HR professionals are looking at annual salary increases. This is not just limited to decisions on annual salary increase budgets but also on how performance is differentiated, the kind of attrition that is causing alarm and whether headcount size is defining the budgets.
The decadal review showcases that the first five years fluctuated significantly with peaks and troughs. However, starting 2012, it’s almost a plateauing line. Today India Inc. has adopted a far more mature outlook in managing salaries. While smartly managing wage bill is the key objective of organizations, what really dictates the salary increase number is the availability of employable talent. The study shows that there is limited correlation between inflation and GDP. This reflects a pragmatic approach adopted by corporate India towards pay increases. Companies across industries continue to take a cautious stand and are not moving towards aggressive pay increases. What really is driving salary increase is ‘Pay for Performance’. This is true for both differentiated fixed pay increases and high payouts in the form of bonus.
What are the Various Industries Offering?
The 20th Aon Salary Increase Survey reveals that sectors like life sciences, media and consumer products are projecting a higher increase than the market average. These industries have also consistently led the salary increase numbers since 2012. What stands out are the ‘early stage companies/startups.’ In spite of being in the pre-profit stage for over three years, most of these companies continue to have an extremely aggressive stand on pay. At 15.6% salary increase projected for 2016, they feature as number one.
Increasing Focus on Talent and Merit
Over the last few years, while employee expectations have gone up, Aon Hewitt’s research shows that companies are managing these higher expectations carefully and are not getting swayed by them. The focus on performance differentiation is far higher with a larger proportion of defined budgets being allocated to higher performers. Across the board, top performers are expected to get 1.8 times the salary increase awarded to average performers. This differentiation is even higher in most service industries such as Banking and other Financial Services (BFSI) and ITeS as well as other industries like Fast Moving Consumer Goods/Fast Moving Consumer Durables (FMCG/ FMCD). The differentiation is consistently getting steeper year-on-year. In 2014, this number was at 1.6 times the salary increase awarded to average performers.
Investing in key talent has emerged as a major trend. Key talent means ‘high potential’ and ‘hot skills’ apart from ‘high performers’. The payout gap between an average performer and key skills is growing year-on-year. At 63%, this is the highest differentiation India Inc. has observed. Additionally, in the last five years, the percentage of employees with top performance rating has dropped by close to 30%, implying that organizations are not hesitating to differentiate sharply on the basis of performance and are allocating the share of the total increase budget accordingly. India places 8.2% of its overall population at top rated. This number has significantly dropped in the last five years.
Mega Employers - The Bigger - The Smaller
The study also threw some interesting insights on salary increase and organization size. While India Inc. is largely projecting 10.3% for 2016 – organizations that employ more than 15,000 people (mega employers) are budgeting lower salary increase numbers as compared to the India Inc. average. Companies with more than 15,000 FTEs project a salary increase of 9.8%, companies with more than 35,000 FTEs project a salary increase of 9.3%, companies with more than 50,000 FTEs project a salary increase of 8.7%. In addition, on analyzing the top 100 brands – the annual budget is 9.5%. It is apparent that firms are judiciously using the brand power to manage compensation cost. For large organizations – condensing the budgets by even small values has a direct impact on the overall profitability.
Attrition Rate at its Lowest for Five Years
The attrition rate in India is dropping. At 16.3%, it is the lowest that corporate India has observed since the 2008 financial crisis. While attrition was controlled at a broader level, key talent attrition increased from 5.9% in 2014 to 7.3% in 2015. Increasingly, organizations are developing separate retention plans and policies for their top talent. While rewards continue as a retention tool to ring fence top talent, programs on leadership opportunities and coaching, overseas assignments, fast track programs for high potentials are fast gaining popularity.
The Battle at Campuses
We can safely call India as the startup capital of the world. Initiatives like ‘Make in India’, ‘Startup India’ and ‘Digital India’ are expected to provide a great kick-start for companies to setup/expand business in India. For companies to compete and succeed in this environment, they need to ensure a right talent pipeline for current and sustainable future growth. Campuses are expected to play a critical role in bridging the gap between talent demand and supply.
While India Inc. at large, is adopting a cautious stand on salary increases, the sentiment on the campus is far more positive. Results show that both campus compensation pay increases and number of campus hires have moved northwards. About 38% of the companies are expected to increase campus compensation pay and 88% of the organizations are expected to either increase the number of hires in 2016 or keep them constant. Being aggressive on campus compensation as well as number of hires, IT/ITeS and services are leading the campus story.
We further investigated to see if there is any correlation between GDP, inflation and salaries (% increase year-on-year) offered at campuses. As described earlier, India Inc. shows limited correlation between salary increase, GDP and inflation. However, on studying campus data (four year trend), we observed that there is a linkage between improved GDP and campus hiring trends (numbers and salary offered). The correlation between inflation and salary at campuses could not be established. It is interesting to see that average salary increase numbers over the last four years is approximately 10.3% whereas the MBA average increase is approximately 8.4% and B.Tech average increase is 5.2%. This shows the campus salary is increasing at a lesser rate as compared to overall salary increase numbers. We continue to hear a positive story from organizations on how they are evaluating campuses as a key talent pool. However, the offers on campuses are not moving at a rapid pace. There are a few reasons for this – pay parity across batches is a non-negotiable for firms. Keeping this in mind, firms often refrain from hiring batches at a level which is potentially paid higher than the batch above. In addition, we have also seen a shift where firms are choosing to hire from Tier 2 and Tier 3 schools. For these schools the brand often allows firms to offer less aggressive pay.
Compensation and Pay Mix
The entry of early stage companies/startups has disrupted the payout at campuses. Not only are these firms armed with heavy compensation offers – on fixed, variable and LTI, they bring in the ‘Total Rewards’ strategy angle as well. Things like work culture, autonomy, flexibility and work-life balance are propagated a lot during the campus talks. In light of these developments, traditional campus visiting organizations are re-looking at the compensation offered at campuses and also the pay mix. Our study shows that over the years, companies have adopted smarter ways to design pay packages for campus hires. Firms are offering minimal year-on-year fixed pay increases. Instead, the focus is to substantially increase the one-time payouts such as joining bonus. In addition, increase in variable pay component to link performance and pay aggressively is widely observed. Firms are trying to portray right from the beginning – high performance will be rewarded.
For Tier 1 MBA campuses in 2016, compensation is projected at `17 lacs which is 8.8% higher than the 2015 actual number of `15.62 lacs, whereas B.Tech 2016 Tier 1 compensation is projected at `9.5 lacs which is 4.3% higher than the 2015 actual number of `9.11 lacs.
The right mix of campus hires is an important criterion to consider before formulating an effective campus strategy. Current business outlook, future growth plans, reasons for hiring from campus and not laterally are some of the parameters firms refer to before going to campuses. Cost also plays an important role. Hiring from wrong tier of colleges often result in wrong expectation setting and eventual attrition. The survey results reflect that organizations today prefer to hire from Tier 2 and Tier 3 a lot more than Tier 1 campuses. Over the years, firms have been able to identify campuses which have the right set of talent where the association can be mutually beneficial. The firms meet the aspirations of the candidates and the candidates are able to add value as expected by the firm. Results show that this trend of moving to Tier 2 and Tier 3 is true for both MBA and B.Tech.
The whole discussion on pay increases is becoming far more nuanced than it used to be. With increased pressure on margins and limited budgets, organizations are accelerating the ‘Pay for Performance’ agenda in India Inc. at large. Even in campuses – the pay for performance story is widely spoken about and accepted. Organizations are heavily investing in ‘communicating’ with their employees. The objective is to build a sense of fairness and transparency and also ensure that people know what’s on the table, should they ‘Over Perform’. India is on the edge of some exiting times ahead - rewards and HR professionals are taking the route of unconventional method of rewards management. We are not temperamental anymore. Instead we are poised and are taking decisions which suit the requirement of the business best. We are truly becoming business partners. This is perhaps the emergence of the New Normal.
Senior Consultant, Aon Hewitt
Consultant, Aon Hewitt