Total Rewards Quarterly

The Paradigm of Pay and Performance

‘Show me the money’

There is a much revered and spoken line from the 1996 Hollywood film, Jerry Maguire mouthed by Tom Cruise, which perhaps is repeated, asserted, shouted, pleaded and perhaps screamed by employees all over India Inc. as salary increment time approaches. Now, in equal measure, and certainly not in the form of a whisper, or a weak response, but more of a counter question posed by the employer is:

‘Show me the performance’

And that in a nutshell, sums up the newly scripted and ready to roll latest version of India Inc. as released by Aon’s latest Salary Increase Survey.
The last decade has been good for employees, jobs have been relatively easier to come by and companies have focused on rewarding talent wholesomely (and handsomely) than looking purely at the salary cost line. Moreover, high salary increases were driven by comparatively lower pay levels in India vis-à-vis the global economies. An analysis of the 250 listed BSE organizations in India highlights the long run trend of wage cost growth outstripping other business metrics.
In light of the overall slowdown in business growth, it is imperative that companies pay heed to how their financial stakeholders view this decade long divergence between pay and profitability. With increasing pressure on compensation budgets, companies are realizing the need for a much stronger positive correlation between employee performance and salary decisions.
Aon recently concluded its 22nd Annual Salary Increase Survey that covered over 1,000 companies for the second year in a row, making it one of the largest and most comprehensive studies on performance and rewards trends in India. As per the survey findings, companies in India gave an average pay increase of 9.3% during 2017, marking a departure from the double-digit increments given by organizations since the inception of this study. The projections for 2018 are also expected to be similar at 9.4% highlighting the increasing prudence and maturity being displayed by companies while finalizing pay budgets. And most importantly, over the last 5 years, pay for top performers has increased by 34% more than the average performer which clearly reflects that it pays to perform in India.

Bollywood meets Hollywood

In the past, salary increases usually tracked1.6 times the GDP growth rate but 2017 witnessed a change in this trend. Indian corporates are taking a more mature view around their rewards strategy. India has started mirroring global standards where salary increases trend 1.2 to 1.4 times to the GDP growth rate.

Decoding the Decade

The last decade of India’s salary increase budgets can be clustered into 3 distinct phases. The first ran from 2007 to 2011 which was the unabashed age of high double digit growth. The second one ranged from 2012 to 2016, where the numbers were more muted and hovered around the low double digit mark. And the third era that started in 2017 where numbers were for the first time (barring the forgettable year of 2009) in single digits, and most likely will continue so going forward. Time for gloom? Not really. There is a method to the madness that plays out and it is worth appreciating the reasons behind the trend.

With the robust economic growth in the 2000s and the relative low base of Indian salaries, it wasn’t surprising to see salary increment numbers as high as 15.1% in 2007 and even 13.3% in 2008. And in spite of the sizable blip in 2009 when numbers dipped to 6.6% due to the financial crisis, by 2011 India Inc. was riding along at 12.6%. But the downward trend had naturally begun. With rising costs, subsiding momentum and profitability pains, India Inc. had settled down into an early double digit increment budget by 2012 of 10.7%, that slowly yet surely came down to 10.2% by 2016. This was in spite of a stable government coming to power by 2014 and a reasonable amount of resurgence that was promised and was beginning to take shape in the economy with a slew of reforms and policy measures. When numbers fell below the 10% mark in the next year and 2017 saw a 9.3% salary increment number, demonetization was declared the villain. However, a deeper analysis of the

numbers clearly indicated a ‘gradual and expected’ graying of the salary budgets even after isolating the demonetization impact, and a natural maturity with which Indian companies were beginning to manage their compensation decisions. This was expected to be the new norm that would emerge given the rising wage costs, P&L pressures and pay for performance equations that were confronting and challenging most business leaders. And which then clearly explain the salary projections remaining at 9.4% for 2018 as per Aon’s latest Salary Increase Survey despite the significant improvement in macroeconomic forecasts.

Sizing Up the Sectors

A mere look at the India average salary hike may not be the right representation; the picture gets far clearer when we look at how different industries and sub industries are performing. If we look at the manufacturing

sector, there has been no significant shift and most industries in this bracket are at the same level or marginally lower compared to the previous years. An exception however, is the life sciences industry, which has traditionally offered one of the highest salary increases, and has witnessed a fall by 2.5% in the last two years because of regulatory and quality challenges faced by Indian pharma companies.

Significant changes have also been observed in sectors like chemical, cement and energy that are cyclical in nature and dependent on the oil prices and government initiatives like agricultural subsidies and infrastructural development. If we look at the services sector, the story of segmentation has emerged in the country. Financial Institutions (FIs), one of the largest employing sectors in India, has projected the lowest salary increase of 8.5%, though it has increased from last year. Interestingly, sub sectors within FI like NBFCs and AMCs have projected an improved performance and are expected to give salary increase of 9.2% which has improved the overall FI number. The hi-tech sector, which is also one of the largest employing sectors in India, has shown salary increase numbers to be marginally up at 9.5% as compared to 9.3% last year. The cost arbitraged businesses i.e. the third-party IT service providers continue to be under pressures and are projecting an average salary increase of 6.2% as compared to IT consulting/captive and IT product organization, which are projecting an average salary increase of 9.1% and 10.4% respectively. Another interesting story in the services sector is that of consumer internet/e Commerce companies that are projecting an average salary increase of 10.4%, a drop of 40 basis points from the last year and a much sharper drop than the previous years.

Merit Merits Money

Over the years, with increasing pressure on compensation budgets, there is an emerging focus on ring fencing the top performers and key talent. While organizations in the past took a more aggregated view on people cost, in the last three years, India Inc. has started to take more business linked decisions. This is reflected through higher salary increases and differentiation between average and top performers. As per the survey, a top performer is getting an average salary increase of 15.4% as compared to 8.3% for an average performer (1.9 times).

The bell curve continues to become flatter year on year; however, there is a constant march towards ensuring higher differentiation. The percentage of employees awarded the highest rating comes further down to 7.4% while the population at the bottom two ratings has increased to 14.2%. At 1.9 times, India Inc. is one of the highest differentiators across Asia.

Five years ago, no single industry had more than 3% of its population in the bottom rating. Now industries go as high as 6% for the same. From a pay increase of 1% to 2% to the lowest rating, companies have moved to 0% increment to the lowest rated employees.

While ‘top performers’ is one segment of the population, the other rising trend is the investment in ‘key talent’. Key talent includes high performers, high

potentials and employees with business critical skills. This segment forms a very small part of the universe and are remunerated 1.8 times more than employees who fall in the ‘Meets Expectation’ category.

With critical skills shortage highlighted as a key concern, companies are becoming more cautious while recognizing and remunerating their key talent. This is the population which is always in demand and more likely to find external opportunities, hence, it is in the organization’s interest to retain them through better career development & learning opportunities. The percentage of people recognized as key talent is reducing whereas the salary increases for them is increasing year-on-year.

Abating Attrition

The attrition rate in India is witnessing a continuous downward trend as the overall attrition has come down from 18.5% in 2013 to 15.9% in 2017. Over the years, the hiring dynamics in the country has witnessed a shift as demand for specific talent or skill sets has become more pronounced. As companies look at hiring only where skill gaps exist, the job market is becoming tighter and we see incremental hiring and voluntary attrition going down. With relatively lesser jobs being created, the attrition levels have also gone down.

Incremental hiring is witnessing a significant slowdown. The focus is shifting from mass hiring to hiring of employees with specific business critical skills. Over the past five years, incremental hiring has gone down by around 40%. A report released by NASSCOM predicts that the industry will generate USD 350 billion revenue by 2025, but due to automation, the total number of jobs generated will be 50% less than predicted. The services industry, which accounts for majority of the hiring, has seen a sharper fall as compared to manufacturing.

Overall attrition numbers have gone down by 16.4% since 2014. Interestingly, while voluntary attrition has fallen steadily over the years, involuntary attrition has gone up, especially at the junior management level. A deep dive into the reasons for increase in involuntary attrition highlights cost rationalization as well as rising automation in certain kinds of jobs especially in the IT and manufacturing sector.

Design Thinking: Need of the Hour?

So while the numbers (and their steady decline) are beginning to make sense, should we expect the salary increment story to not look rosy anymore? Perhaps it’s more a matter of perspective than anything else, and it’s just about taking off the rose tinted glasses and encountering reality in its totality. The focus on performance rightfully is getting sharper year-on-year. Over the past few years, the pay for top performers has increased manifold as compared to the average performer which clearly shows that it “Pays to Perform” in India. We expect this differentiation to get even sharper as we enter the next phase of growth, as the salary numbers will continue to reflect the cost consciousness and prudence of companies in the next decade. We are already seeing the best-in class employers focus more on non-monetary rewards and other HR practices to attract and retain people, and we believe that more and more companies will use these levers effectively to engage their employees.

Given the broad economic context prevailing in the country and a strong focus on financial prudence, organizations have to adapt. They have to respond to the velocity of changes, manage expectations from stakeholders and constantly deliver in order to stay competitive. Each of these forces requires new thinking and action from HR to create an organization that will master the art of uncertainty and thrive in the future. Over the last couple of decades, the talent paradigm has gained considerable momentum and enough has been said and done on hiring and retaining key talent. However, HR now has to realize that the war is not only about the talent but how to use this talent in the best possible manner to achieve a competitive advantage.

A new battle has begun and the environment in which organizations operate is more ambiguous than ever. The war for talent won’t be won by the bigger army; it will be won by the most agile. HR leaders therefore need to ensure that they put together the right ecosystem that allows the truly top performers to thrive and contribute towards organizational success. It’s time for HR to be battle-ready, and it’s time to re-look, re-consider and re-design the way HR is thinking its strategy around human capital…


Akhil Gandhi
Consultant,
Aon

Yagesh Singhania
Consultant,
Aon

Roopank Chaudhary
Associate Partner,
McLagan
An Aon Company

For more information, please write to us at total.rewards@aonhewitt.com
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