If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too.
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And – which is more – you'll be a Man, my son!
If (no pun intended) you were to pick up the first few and last few lines of Rudyard Kipling’s much acclaimed poem, and use a literary lens to evaluate India Inc.’s rewards strategy rather just the typical economic barometer, you could make the case for India’s coming of age story for 2017.
Viewed against the backdrop of a highly difficult year (as VUCA* as it can get) as wave after wave of ‘unprecedented’ events around the globe shook us – the results of the US elections, Brexit and closer home the demons of demonetization and the underperformance of many sectors – it was certainly a time of upheaval and duress.
Let’s rewind a little. 2009 in many ways was the year that brought the acronym VUCA* up on the center stage. The global financial meltdown coupled with the ‘Satyam’ debacle brought India Inc. to a standstill. We saw a rather radical and impulsive reaction especially on the people front with salary increases falling to an all-time low of 6.6%, almost half from the 2008 actual spend on salary budgets. There was widespread headcount freeze – reduction in some cases and people expenses were viewed with a brutal magnifying glass. And all of this, despite being fairly insulated from the domino effect of global events.
Stretching the argument – in many ways, 2009 and 2016 are not very different years. The sense of ambiguity and uncertainty did cloud the mind of leaders across the board. Optimism around business performance though growing has remained wrapped in cautiousness. So most pundits and practitioners predicted a fairly gloomy picture when the time came to predict and project how salaries would shape up for 2017. However, this time around, against all odds, a different story has emerged.
Aon recently concluded its 21st Annual Salary Increase Survey that covered over a whopping 1,000 companies with an equal split of manufacturing and services, making it one of the largest and most comprehensive studies on performance and rewards trends ever carried out in India. The survey did project a drop in pay increases to an average of 9.5% across industries from 10.2% last year. Not only is the drop at best marginal, it also downplays the impact of demonetization which has been felt in certain sectors. It reflects the maturity that India Inc. has displayed in dealing with the ambiguity amidst global and Indian economic and political events. The trend, this year reflects a gradual slowing of rampant pay increases and a higher emphasis on productivity and performance – quite literally a ‘graying’ of salary budgets for India.
Some More Gray Than the Others
Increasingly, we are recognizing that the India average of 9.5% is actually a very broad number. The truth is that industries are behaving quite differently based on where their growth patterns are and how the ‘glocal’ events have impacted them. It will come as no surprise that consumer internet companies are still at the top of the leader board; however, what is interesting to note is that they are almost 3% lower than their projections for 20161. The reality is that consumer internet companies are under tremendous pressure and the startup bubble has been pricked to say the least. The funding is drying up and many of them are under deep scrutiny from the current investors. So while their hunt for talent continues, the rate at which they were paying has slowly started showcasing the realities of business results and the pressure to perform. Similarly, if we look at industries like life sciences, which have consistently been in the leader board there is a gradual settling down after an almost 6-year high pay growth trajectory.
Towards the bottom of the heap, let’s look at Financial Institutions (FIs). In the last 5-6 years, FIs have been in the lower quartiles of the leader board. However, that by no means is an indicator of poor performance of the sector as a whole which has seen local banks, NBFCs and general insurance usually keep the FI ship steady. FIs have always had a heavier salary base as compared to most other industries. Also, given the global impact of this industry, there are increased pressures on cost control. Hence, the year-on-year increases are conservative, especially this year given the adverse impact of demonetization on sunrise sectors like NBFC and MFI and the growing NPA drag on the banks.
Another couple of sectors that are under the scrutiny are IT and ITeS, given the after effects of the US elections and the associated tough decisions on work permits. While the projected numbers seem to have withstood the looming vagaries as the impact is yet to be felt, we do foresee the actual numbers getting impacted once the actual business realities in the election result aftermath come to the fore.
Salary increase in India today represents business fundamentals that will not swing wildly each year but will stay on course over a longer term. Questions organizations are asking before deciding the budget are: What is the economic and business performance? What is the talent demand-supply gap? Are we making investment hires for future? What is the affordability of the firm? Answers to these questions play a pivotal role in deciding the budget number. Decisions are no more knee jerk, intuitive or based on market sentiment. They are based on facts and business realities. India Inc. is displaying the signs of a stable economy which is coming of age and holding its ground.
No Country for Average Performer
So what happens when business performance is average, sentiments are poor and budgets are meagre? People expenses get impacted. While organizations in the past took a view where people cost got affected across all employee segments, in the last three years India Inc. has started taking more calculated decisions. Two key changes have happened. The number of people getting rated as ‘high performers’ took a dip and the multiplier of salary increase have got steeper. With tighter budgets, it became imperative for firms to ensure that their ‘top talent’ is identified and remunerated accordingly. The survey revealed that the segment of population that features as ‘high performers/top raters’ has fallen to 7.5%, the lowest number recorded in the 21 years of the Salary Increase Survey in India. Consequently, the multiplier that India Inc. is offering these employees is also very high. At 1.8 times, India is one of the highest differentiators across Asia.
While ‘top raters’ is one segment, the other key trend is the investment in key talent. Firms are carving out high potential and hot skills along with high performers as their key talent segment. This segment forms a very small part of the universe and are remunerated 1.6 times more than employees who fall in the ‘average rater’ category. Firms are balancing priorities through disproportionate investment in key talent. And, this is not limited to compensation but also structured career development plans, learning and development, international and functional mobility and leadership access.
Employees Are Coming of Age As Well
There was a time when attrition used to be one of the greatest challenges for HR to manage in an emerging economy like India. However, attrition in India today stands controlled at 16.4%. The number has been stable for the last 2 years and is one of the lowest amongst emerging economies around the world.
So what is changing? There are two clear themes. Firstly, for the first time in almost a decade and half, India Inc. does not have a specific industry that is pulling talent from industries or what we term as the ‘pull’ force. In the early 2000s, it was insurance, the latter half saw the emergence of telecom and finally in the last five years we saw startup organizations pursuing talent actively and aggressively. All these industries were relatively new to India and had limited relevant and ready talent available. As a result, there was widespread talent movement, which in many ways resulted in heavy attrition across industries.
The second theme is the ‘push’ force. Over the years, firms are investing far more in engaging their employees and ensuring that ‘regrettable’ attrition is controlled as much as possible. Outside of ‘compensation’ organizations are investing far more in L&D, recognition programs, differentiated benefits and enabling work environment to control attrition. In addition, employees are also clearly getting smarter about rampant job changes which in the past have been a thoughtless, cash-driven decision. Given the state of the global economy and the uncertain times, employees have also taken a more mature outlook at building careers and not indulging in myopic money games.
And finally, firms are far more cautious about creating every new job. The concept of double hatting is almost an acceptable norm across industries. With relatively lesser jobs being created the attrition levels automatically have gone down
While overall attrition is controlled, a matter of concern is ‘key talent’ attrition. From 2015-16, key talent attrition has close to doubled. At 12.3%, organizations are losing a rather significant part of their key talent every year. It should come as no surprise that industries like entertainment media and engineering services which are facing a lot of external pressures are losing their top talent far more than others. On the other hand, industries like life sciences and consumer products, which have established people practices and are also stable in terms of business are able to retain their ‘top talent’ better.
Fleeting Fad or Enduring Equilibrium?
A fundamental question that is being asked is that if the economic conditions improve and we see softening of the global headwinds as well as a resurgence of the Indian story, will salary increases claw back by the next year? Possibly, but in all likelihood not to the higher echelons that we have experienced in the last few years. A range of 9.5-10% is fairly likely and could be achieved as fundamentals remain strong and conditions stabilize, but the graying of the salary budgets and the maturity with which Indian companies manage their compensation decisions will ensure we don’t see the 10.5% and above era. We believe this to be the new norm that will emerge given the rising wage costs, P&L pressures and pay-for-performance equations that confront and challenge most business leaders.
While India could afford these steep increases in the past few years and remain ahead of the APAC pack, over the last 2-3 years it has become amply clear that India cannot operate in isolation. As we become a ‘glocal’ economy, we are highly exposed and sensitive to the realities and challenges the open world has to offer. A few variables changed in the last couple of years. CPI was controlled and the growth story did not turn out to be as promising. The wage base was not so low anymore (aided by almost 15 years of double-digit increase). In addition, the demographic dividend that India has to offer (skilled workforce at a competitive price) has become a challenge and is starting to dent the overall story.
Both in terms of the internal dynamics that have propelled the compensation numbers upwards in the last few years as well as the external undercurrents that now unequivocally cast shadows on the rising wage costs, the flattening of the salary increases is an eventuality that had to happen sooner or later. Maturity not only means prudence and pragmatism that India Inc. has clearly demonstrated; it also means enduring uncertainty and opacity in a sustained fashion. And we hope we continue to see more of that even if the complexity of global and local conditions doesn’t get mitigated in the coming year.
1. 20th Annual Salary Increase Survey
Associate Partner, McLagan, An Aon Company
Aon Hewitt Consulting
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