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Fear of losing employees: Guiding pay decisions?

Judhajit Das, Chief-HR, ICICI Prudential Life, K.A.

Narayan, PresidentHR, Raymond Limited, K.S. Kumar, Vice President-HR, Castrol India, Varda Pendse, Director, Cerebrus Consultants and Sanjay Gawde, Sr. General Manager-HR, John Deere India Pvt. Ltd reflect on the issues related to compensation levels in organizations and discuss if there is a return to normalcy. 

Which factors are dictating compensation decisions within organizations todaytalent / role/ qualifications / any other (please specify)? What are the trends you foresee for the future?  

JUDHAJIT DAS: Compensation decisions are linked to internal and external equity, ability to pay, individual performance and potential. Pay and pay mix has to be seen from the context of attraction and retention of talent and also, for aligning employee goals with business goals. Typically, fixed pay is set at the level which allows the organization the ability to attract people with the right set of capabilities for the jobs/roles it needs people for. Variable pay is awarded based on the organization or individuals meeting a threshold level of performance.

 [HR Guidance] The extent of pay at risk, i.e., variable pay, is another important consideration for getting the right balance between fair pay and productivity goals. Long-term pay is typically given for potential or organizational impact and may also be linked to the achievement of future business outcomes or business performance as in ESOPs. Labour demand and supply also impact pay and niche skills command a premium.

K.A. NARAYAN: Skills and competencies are key factors dictating compensation decisions in organizations today. In addition, some unique skills that employees bring to the role are probably the single most important factor deciding compensation. Secondly of course, the performance of an employee would also be a factor impacting compensation. This trend is likely to continue in the near future as well.

K.S. KUMAR: The mid to long-term strategic horizon is the key driver of compensation decisions from the employers point of view. Special skills will continue to attract a premium. Over time, it is expected that total employee value or reward proposition will dictate compensation decision. An increasing challenge is balancing individual employee aspirations and the global performance versus the local entity performance in an increasingly matrixed business environment especially for large MNC's. If staff cost is productive then it can be considered as 'good' cost, if not then there would be pressure on managing the cost. Organizations are becoming increasingly conscious of ensuring that compensation decisions are robust and gives a sense of assurance to the recipient on 'procedural' and 'distributive' aspects of fairness and consistency.

VARDA PENDSE: Compensation as a parameter of employee engagement is no longer on the priority list. The factors that are considered as key drivers for compensation are: market, affordability, criticality of role, job worth, employee profile and employee performance level. In the last decade, factors that got more focus and emphasis were market movement, profile of the individual and criticality of role. We now see a change in the trend as the focus in on affordability, performance of the individuality and criticality of the role. Finally, performance and contribution to the company would always stay critical drivers of compensation.

SANJAY GAWDE: I think we are yet to witness a stronger linkage with performance before. Most organizations use performance on the job as the first and foremost measure of compensation. In addition, they also look at level in the organization, business critical skills and individuals, and performance of the business. More and more organizations are moving away from compensation strategies based on age, tenure, education, or proximity to owners. These things may matter only at the time of joining and not later. I foresee the focus on market and performance linked compensation to continue in future. The variable compensation, which is where organizations share profits with employees, is dependent on organization, unit and/or individual performance. I see an increased interest in team based variable compensation programmes as organizations try to build sustainability and move away for risk of individual driven performances.

How important are long-term incentives in the overall compensation policies of organizations and why? 

JUDHAJIT DAS: As mentioned earlier, long-term pay has become an important aspect of the pay mix at senior levels. This aligns pay with the long-term shareholder objectives of sustainable value creation. It is also aligned to the principles of good governance in reward management. K.A. NARAYAN: Long-term incentives are indeed an employee retention tool. However, given the short-term outlook of the young talent, employed with an organization, long-term perks are increasingly losing their sheen as a retention mechanism.

K.S. KUMAR: Long-term incentives are becoming increasingly important vehicles in the total reward offer. If they are administered selectively then it becomes a key message. Of course, it also helps align individuals to business objective.

 VARDA PENDSE: Long-term rewards-incentive programmes/ ESOPS are seen as key components especially for the senior management/ key roles. Increasingly companies are opting for long- term reward programmes-LTRP's provide direct linkage to performance/ contribution and reward and also acts as a retention tool. The turbulent economic scenario has ensured companies would like the senior management to take greater accountability and ownership on performance and delivery, for a period of time rather than just a year.

SANJAY GAWDE: Long-term incentives (LTIs), usually in the form of equity-based compensation, are great tools for organizations to build ownership and pride among critical talent. However, it is highly dependent on stock market performance. Most employees, like retail investors, are happy with the ownership and upside it presents, however hate the downside (risk) associated with it. You hear a lot of complaints about 'worthless paper' when stock markets crash. This is where the 'pride in ownership' gives way to 'quick fortune' mentality. Behavioural science shows that 'people hate marginal losses more than significant gains'. This is where communication is so very critical as well as tricky. The data shows that if you stay invested in good stocks for long, you end up making a good return. Hence, good organizations continue to leverage LTIs as part of their compensation policy. LTIs are also a great source for attracting talent in start-up organizations.

These organizations may not always have deep pockets to pay for executive talent and that is where LTIs come in handy. There is value to be unlocked and that is a great attraction for right talent.

To what extent are long-term incentives being seen as tools for reinforcing productivity and contribution? How can organizations ensure success of long-term incentive programmes? 

JUDHAJIT DAS: Two important considerations for LTI to be successful are that the person who is being awarded long-term pay needs to be identified through a credible and robust process. Also, it needs to be aligned with long-term business goals. Long-terms incentives especially, deferred cash / ESOPs at senior-management level is being increasingly used by organizations to link management goals to shareholder goals of sustainable value creation.

K.A. NARAYAN: While long-term incentives may work for retaining select talent groups; they do not have any bearing on employee productivity or contribution to business growth. For instance, employee stock options as a retention tool help capital build-up< over the longer term and may help employees reconsider outside options. However, they have almost no role to play in their functioning including productivity in projects and business contribution.

K.S. KUMAR: Well aligned long-term incentive programmes can be key drivers of productivity and long-term orientation. To ensure success, organizations must be discrete in such awards and not succumb to the easy way out of offering this wide and deep across levels where it fosters an entitlement mindset. Tying in to hard business metrics with performance-based vesting will make the programme a success, rather than just another negotiation point in a recruitment discussion.

SANJAY GAWDE: LTIs are a great way to create value for employees proportionate to value created by organizations at stock markets. You can link this to employee's own contribution. It helps drive focus on what is critical for an organization to be successful at stock markets. The key to successful LTI programme is to be true to its intent, which is to create ownership and value for employees in the longer run. If the company does well, employees do well. If the company does not, it is only fair that employees do not as well. Organizations should not get carried away at protecting the downside and making it 'upside only' programmes. There are risks associated with ownership, it does hurt sometimes, and however, it comes with pride and long- term success. The challenge is in getting the right measure so that everyone is focused on long-term sustained performance.