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Monetary compensation is not enough! Sanguine economic indicators and enhanced business activities have left employees looking for more than mere compensation

The last 18 months have provided some relief to the Compensation and Benefit Managers! Well, low or no increment management decisions must have been a relief with no employee queries and grievances to handle. Employees were concerned about maintaining and ensuring job security more than compensation. Business manager’s expectation ensured that the HR Managers had to shift gear completely from attraction and retention to measuring efficiencies and productivities.

However, since the last few months, life is once again on the upward spiral albeit with many twists and turns – some know and some unknown. Various aspects related to managing and retaining employees seem to have undergone a complete change in the last 18 months. And now the HR managers need to once again shift gear and deal with different and conflicting aspects. The balancing act between the aspects will be the key challenge!

Measuring Economic Parameters and Impact on Employee Sentiments: After a phase of deceleration in growth during the second half of 2008-09, the Indian economy exhibited signs of recovery during the first half of 2009-10. The first quarter of 2009-10 saw GDP growth of around 6.1%, which accelerated to 7.9% in the second quarter of 2009-10. The growth was driven by a strong revival in industrial output and better performance of the services sector. The Indian stock markets too had been severely hit by the global crisis. However, stock market trends are now signalling revival of confidence amongst the Indian and foreign investors who are now beginning to believe that the Bulls are here to stay!

The agriculture sector, however, witnessed a deceleration in growth during the second quarter of 2009-10 partly reflecting the impact of a deficient south-west monsoon. As prices of food grains spiraled, the inflation exhibited a dangerous upward trend. The government hiked the petrol prices as well, which will have a cascading effect on price hikes and therefore inflation.

Economic growth figures are all positive as compared to 2008–09. But when we compare to 2007–08, perhaps the growth just does not seem to have happened. Financial results of 2009–10 reveal that while most companies showed a positive growth in the bottom line, the top line had just not grown as compared to earlier years.

The positive economic indicators are reflected in the headlines, which discuss the fresh investment, expansion plans and fund inflows all geared towards the growth of the economy. However, as one of the PE analyst shared - the mood is of cautious optimism. Global economy is still on the path of recovery and the future of the Indian economy will be impacted by global economy, local demand and the monsoons.

Enhanced activities and positive economic indicators inspite of inflation has had a positive impact on the employee sentiments and there is a sense of buoyancy especially amongst the younger employees. Job markets have opened up and recruitment agencies are back on calls. Uploading a resume on the internet implies atleast 3 calls within a week. Fear of job loss now seems a distant past. Aspirations in terms of salary increases are high.

But HR managers have to deal with Business Heads and CEOs for their approvals. Business Heads and CEOs are cautious about the fixed cost increases that they are willing to commit. This inspite of the positive outlook and growth plans, CEOs want the HR teams to look beyond compensation for attracting and retaining talent.

Simplification of Structure

Compensation in India has been traditionally driven by talent availability, income tax rules and inflation. For the first time both inflation and income tax seem not to have a critical role to play in determining the compensation levels. Income tax had over the years reduced the tax breaks available to various salary components resulting in simpler compensation structures. Direct Tax code bill introduction has further simplified the structure. Companies are moving away from the Flexible Plan/ Reimbursement-driven structure. Many companies have already encashed benefits such as housing, car and loans and the trend would continue. Younger employee profiles and income tax rules would perhaps make the Compensation and Benefit Manager’s life a bit easier!

Spiraling Benefit Cost

HR function had to review its compensation and budget and cut back on the peripherals and non essential items. One of the biggest benefit cost has been the Employee Medical Insurance cost. Over the years, medical insurance cost have increased multifold and are expected to increase further. Though companies seem not to have reduced the medical insurances coverage amount, there is a definite trend to re-define the ‘family’ to whom the benefit is applicable. Typically, company medical insurance plans are extended to parents, spouse and children but are now increasingly being restricted to self, dependent spouse and children because of the cost aspect. Another trend visible is allowing the employee to choose from the basket of benefits available. This ensures for the company a control over employee benefit cost and for the employee the ability to choose the benefits as per his requirements.

Recent amendments in the Gratuity Act, increasing the maximum gratuity payable from Rs. 350,000 to Rs.1, 000,000 have increased the company’s funding liability.

Senior and Mid level Compensation

Cost consciousness and need to reward performers is viewed more critically than ever before. ‘Rewards linked to performance’ is more relevant than ever before. Ratio of Fixed Earnings linked to Variable Pay is increasing especially for business roles and middle and senior roles. Variable pay is no longer tied to annual performance but for performance over a period of time. Long term incentive plans now play a role in retaining talent as well as rewarding employees on long term contribution.

Junior Level increases

Simplification of Income Tax and lowering of Tax slabs have impacted the employees earning less than Rs.500,000 very positively. The tax burden has reduced and resulted in higher take home salary. Entry level salaries for both engineering and management campuses have not shown any increase since April 2008. Even though companies did visit campuses this year and most campuses have had a good placement for the 2010 batch, it is still marginally short of full placement. Companies have not increased their entry level salaries at the campuses. Lowering of tax slabs and no increase at the campus salaries would impact the increases provided at the junior level.

The biggest change in the recent years has perhaps been in the way compensation is viewed by management. It is a ‘cost / expense’ and there is a need to regularly review the productivity and performance. Performance Management needs to detail expectations, measure performance and provide linkage to reward.

From Compensation to Total Rewards

There is growing realization that monthly salary package and the annual performance bonuses cannot be the only retention tool available with HR Managers. Concept of Total Reward is gaining importance. Opportunity to learn, groom and build one’s career, as well as providing the employees a work–life balance, providing an opportunity to meet personal aspirations, et al are seen as critical as compensation. Many companies are implementing sabbatical leave policy, flexi work hour and work from home policies to meet the employee needs and aspirations. Career planning/ succession planning are other initiatives that go a long way in retaining employees!

The biggest HR challenge would be in terms of educating the employee to accept the changing paradigm!