Total Rewards Quarterly

Aon Hewitt's 9th Annual Rewards Conference

Q. While the overall belief in the fundamentals of long-term performance remains strong, however, keeping in mind low inflation, stabilizing fiscal deficit, reform regulations leading to executive role; what is your perspective on the year ahead for Indian businesses?

A. I am optimistic about the year ahead for Indian businesses. Firstly, our fundamentals are strong. Compared to all other economies in the world we are still the strongest and have the potential to show highest growth. I think we have had two successive bad monsoons and despite that if we can show 7.4% GDP growth rate, then hopefully this year should be better.

Q. Retention or performance; what in your opinion should be the focus of any pay program for senior talent?

A. I think it should be a combination of both and a good pay program needs a balance of both, since neither one can function effectively in isolation.

Q3. How effective has incentive compensation been in your organization in driving the right behaviors?

A. At the senior levels, we have a compensation scheme which is linked to long-term ESOPs. This has shown long-term effects in terms of driving the right behaviors, with people making the right decisions. We also have a short-term incentive program which rewards performance for the year which is on specific key results areas. Both these programs have been fairly effective.

Q. Retention or performance; what in your opinion should be the focus of any pay program for senior talent?

A. There are four key things that should be kept in consideration. Firstly, it should be long-term in nature, secondly, it should be aligned to shareholder returns and further, it should be simple to understand i.e. every individual should be able to compute and understand what all he/she will earn under different circumstances and lastly, it should be easy to cascade.

Q. How effective has incentive compensation been in your organization in driving the right behaviors?

A. I think the program has worked very well in our organization. Essentially we tried to align performance for three to four years. Today, I think performance is extremely aligned. The shareholder returns and senior management compensation has been extremely well linked within the organization.

Q. How have government standards and pay changed in India in the last few years particularly with the new Companies Act?

A. I think the voice of the shareholder on the table has gone up, which is a positive sign. Shareholders are now challenging MNCs and Indian companies where the promoter salaries were earlier not based on any ground or mathematics. Thanks to these governance guidelines, the accountability has increased and thus, the need to align shareholder returns to compensation is going up.

Q. Keeping in mind low inflation, stabilizing fiscal deficit, reform regulations leading to executive role; what is your perspective on the year ahead for Indian businesses?

A. If we take a step back and look into the last three years, in 2013 India was in a bad shape. Everything that could go wrong in a macro environment had gone wrong i.e. growth had fallen significantly, inflation was in double digits, fiscal deficit and current account deficit were all flashing red lights. Between 2013 and now, we have shown huge improvements in each of these parameters. Having said that, it is also important to know that the big driver of this improvement is the oil gift. The oil prices fell by more than 100 dollars per barrel, and we leveraged those benefits. Going ahead for the next few quarters, the oil bounty won’t be that strong, largely because oil prices have stabilized and are also on their way up. In some sense, India will lose its main driver of growth and things may become slightly tricky. We have to be cautious to ensure our domestic policies are disciplined so that if external factors do not remain favorable, our growth doesn’t get impacted significantly. Our growth would plateau, but at a higher level. The GDP growth rate last year was 7.4%, staying at that level is not a bad thing at all given the global environment, but it would not be fair to expect rocketing growth. Also, the growth will be flat because there are two factors – one pulling the economy up and one pulling it down. The one pulling it up would be the fact that we might finally see some rural India revival, especially if the rains are good. On the other hand, we have a huge amount of banking sector stress at this point. The reforms are creating some stress in the short run. However, I am also optimistic about a medium term growth potential in India. 3 out of 4 reforms that we anticipated have already happened. The UID bill got passed, the Bankruptcy code got passed, the RBI MPC bill got passed. While they may not have immediate impact, over a 3 to 5 year horizon, they will show results.

Q. There is a lot of noise around 'Make in India' and significant investment in India because of this campaign. In your opinion, how effective do you think will this campaign be?

A. We have to put India in the world horizon. The thing with manufacturing goods is that they get traded very rapidly. We have made huge strides in transportation with bringing the costs down. However, most of our mobile phones, electronics, consumer durables, etc. are imported. If there are many countries around the world which have a manufacturing capacity already installed and producing goods efficiently, they will be able to sell goods to us at a rate that is faster than what we can produce those goods at. Those products will appeal to consumers because they will be quicker and cheaper. So if 'Make in India' stays and our efficiency and productivity becomes as good as the global standards, then it will be great. A lot of our problems will get solved in terms of catering to the large India population and also creating jobs. But if 'Make in India' does not increase productivity levels to global norms, then we will have to come to terms that we may not be able to create as many jobs as anticipated.

Q. While the overall belief in the fundamentals of long-term performance remains strong, however, keeping in mind low inflation, stabilizing fiscal deficit, reform regulations leading to executive role; what is your perspective on the year ahead for Indian businesses?

A. So I will be honest, in my current organization, incentives is still work-in-progress. Culturally we have always believed in a simpler and a consistent fixed program. So, variable pay and incentive pay is something we are still talking about. At this stage how it will pan out, we can’t say but personally speaking in any company which wants to enforce a change, wants to reinforce a new culture and new behavior, incentives is a very important component of the ethos that you want to create. Directionally, it would be a good path to tread, but historically we have not been an incentive-driven company.

Q. How have government standards and pay changed in India in the last few years particularly with the new Companies Act?

A. So you know officially every company would believe that they have improved their government standards, transparency has improved and the law mandates it. So technically, it’s a checkbox. But to me the larger issues are, are organizations searching their souls enough and is it as transparent as we would like it to be? But the law has definitely helped to place a premium on the need for better governance and better transparency. So I think that the slope is looking good.

Q. Aon in fact Hewitt completes 20 years this year. What is your advice, suggestions or what are your expectations in the next 3-5 years term?

A. I think bigger organizations are getting younger, younger organizations are getting to be adolescent and a lot of startups are trying to survive infancy. And I think there is demand on organizational design, talent solutions, rewards practices and engagement: norms are going to be very complex and different. So, my advice to Hewitt is continue to be agile. Don’t start thinking you are 20-years-old, think you are still 5-years-old. I think agility in organizations including consulting firms could get hit because you have spent some years. Continue to learn through your clients because every client will have his/her own solution and I think continue to be more innovative as you share best practices and you help us think differently. Also, learn because a lot of action is happening in a variety of organizations and the more you and your team can learn from other corporations because I think it will only improve and intensify your consulting practice and therefore, one day we will talk when you are 40-years-old.

Q. While the overall belief in the fundamentals of long-term performance remains strong, however, keeping in mind low inflation, stabilizing fiscal deficit, reform regulations leading to executive role; what is your perspective on year ahead for Indian businesses?

A. Last year’s growth or positivity is largely been led by the fall in commodity prices. The positive impacts of the growth in infrastructure have not yet been leveraged in generating employment and consumer demands from the interior parts of the country. In the future, when the demand comes up from the interiors and that gives rise to industry and its capability to grow - that’s the time we will see where the real growth is. This is notional growth. This has been led by winds coming in from outside. This is not led by us.

Q. Retention or performance; what in your opinion should be the focus of any pay program for senior talent?

A. It’s got to be a mix, but I would put more weightage on to performance because if you just try to retain somebody on his/her laurels and not on his delivery/pedigree – I don’t think that pays in the long run.

Q. How effective has incentive compensation been in your organization in driving the right behaviors?

A. In our case specifically since we are in a very high growth phase of the industry so therefore, our annual growth rates are in the region of 30-35% of the top line and similarly of the EBITDA, etc. so therefore, pay for performance has been our mantra. The compensation growth of the high performers,their bonuses and the long-term kickins has been good. So, we are in one of those happy phases and as I give the analogy between the proprietor and type-writer, we have very few type-writers and very less room for type-writers at this stage in the organization.

Q. How have government standards and pay changed in India in the last few years particularly with the new Companies Act?

A. It’s something that’s completely new found for us. Their reforms kicked in 1991, the current industrial revolution happened in the last 10 years. We are still grappling with how to pay and how to structure the compensation.

Q. While the overall belief in the fundamentals of long-term performance remains strong, however, keeping in mind low inflation, stabilizing fiscal deficit, reform regulations leading to executive role; what is your perspective on the year ahead for Indian businesses?

A. I think the foundation has been laid for long-term growth and sometimes people get impatient for an immediate impact, so if you're asking for magical things to happen in 2016 second half and 2017 – I would say there is caution, you will not see magical turnaround but I think you will see what we call as tailwinds, we have seen it in our sector that you start seeing the green shoots of real economic growth. But, people who are expecting magic will be disappointed, people who are expecting long-term growth will be confident that there is more to come in the years.

Q. Retention or performance; what in your opinion should be the focus of any pay program for senior talent?

A. I think there has to be a balance of both and it also depends on the stage where the company is in. In early stage companies, retention is considered a major factor because it’s very difficult to evaluate true performance or incentive links to performance. There has to be a balance and a continuum. So as the company grows the continuum keeps shifting. I think in the early days you want to retain more people for growth but as the company matures you start putting more and more indicators on them so the continuum keeps changing as the company evolves.

Q. How effective has incentive compensation been in your organization in driving the right behaviors?

A. When individual goals are aligned as to what you want to achieve at a corporate level it makes the job slightly easier for both the shareholders and the CEO. So if an employee sees an incentive to perform, at the back of his/her mind every month he/she is seeking objective targets to be achieved. So, when you put performance linked incentive plan, then employees start to do their business plan every month to see whether they are going to achieve it or not. Any performance linked incentive helps the CEO or shareholders to achieve the yearly targets in the longer run.

Q. How have government standards and pay changed in India in the last few years particularly with the new Companies Act?

A. See the new Companies Act, the way it is – it is bringing new disclosures, its bringing data accountability to the board. And as there is greater accountability to the board there are more disclosures. I think some of the facts that are hidden for executive compensation are now being exposed. You will now see boards being far more active because I think there is a bigger responsibility on them.

Q. While the overall belief in the fundamentals of long-term performance remains strong, however, keeping in mind low inflation, stabilizing fiscal deficit, reform regulations leading to executive role; what is your perspective on the year ahead for Indian businesses?

A. We have seen a lot of data and the micro data seems to be suggesting that things are moving in the right direction. However, one of the good factors for which I would keep a lookout for is the capex. My own sense is when I am looking at data is that we are far remote from the capex cycle which we have seen in 2004-05-06 which actually drove India to a fairly high growth rate. So, while all the data is looking good, my sense is to look at sustainability and if we want to move to higher trajectory that would only happen if the capex cycle returns and till that returns we are going to face large headwinds from the domestic market itself.

Q. Retention or performance; what in your opinion should be the focus of any pay program for senior talent?

A. It depends on the lifecycle of the company. I say that we are a startup since we are 5-years-old and for us, retaining people who have been with us from the beginning and been able to understand the company and its ethos and what we are trying to do is important. For the larger companies who have been around for 10-15 years and have stabilized, it has to be more in terms of the compensation they have to give to people and that will take place in pretense. Of course, you will say that there is right balance for us, retention is more important for us than the performance.

Q. How have government standards and pay changed in India in the last few years particularly with the new Companies Act?

A. We have seen a lot of changes but I still think that it needs to be internalized while you could argue that the Companies Act and the regulators are trying to change behaviors with much more disclosures. At the moment, we find that they tend to be a little bit broad brush saying that you know we have done the board evaluation and feedback has been given or it is satisfactory. The other thing which is one of the areas of focus is – how is the compensation and the bonus determined for the CEO and the senior staff. Again, what you find is that there is no granularity in disclosures, there were discussions and targets and they met the targets to achieve profits but you have not seen anything that is meaningful.

Q. Aon in fact Hewitt completes 20 years this year. What is your advice, suggestions or what are your expectations in the next 3-5 years term?

A. There are two things which I would try to look at – ownership and context. The people who are coming and dealing with us should have ownership over the project. Each of the businesses is different. It’s always good if there is someone coming to advice you, who spend some time trying to understand the business. You people have a great edge in that and you have been sitting in on a lot of data so that you are serving the right course at each of the tables and I am sure you will be here for a long time.

Q. While the overall belief in the fundamentals of long-term performance remains strong, however, keeping in mind low inflation, stabilizing fiscal deficit, reform regulations leading to executive role; what is your perspective on the year ahead for Indian businesses?

A. I think there are a lot of things that are progressive in India. The global headwinds are still uncertain and we need to be cognizant of that. Having said that, I think that many Indian corporates have businesses that are more domestically oriented and therefore, have the actually ability to have a fairly robust year in the short-term and in the medium term. So, broadly speaking, there is good news because we continue to be an island of prosperity. There will be sectorial differences those industries and sectors that are either more globally oriented or more specifically oriented will get more time to get out of it and those that are more domestically oriented or government oriented will get more quicker improvements.

Q. Retention or performance; what in your opinion should be the focus of any pay program for senior talent?

A. think the response depends on the level of organization but since this is specifically focused on senior talent focus of rewards must be on performance because the underlying presumption is that the talent acquisition process in terms of bringing onboard senior talent has been done in a manner where you don’t have to worry about the fear of retaining senior talent and use a single instrument like performance/incentives/rewards is a way to keep them. So, I would say for the senior management, it should be performance.

Q. How effective has incentive compensation been in your organization in driving the right behaviors?

A. It is a blunt instrument and at the end of the day anybody who has looked at the totality of challenges in the human capital fund across the range of different levels in the organization will attest that compensation is one instrument and its level of importance changes with different levels of seniority in the organization. At very low levels of the company, as per my company there is a very long tail of frontline staff which is relatively very inexperienced and less skilled and compensation is an important instrument for them. But as one goes up in the organization, it changes and its relative importance would reduce.

Q. How have government standards and pay changed in India in the last few years particularly with the new Companies Act?

A. I think there is a dramatic shift that is already underway and both with respect to statutory obligations, increasing demands on board members and committee members and the board itself, that we will see inversely greater transparency and debate around conversations and compensations at the level of over side both at the nominations committee and the remunerations committee level but also at the board level and its irreversible and in some cases it is a good thing.


 

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