Workspan Article on Compensation Challenges and Solutions in India

1. 1 | 2012
®
The Magazine of WorldatWork©
Today’s Compensation
Challenges in India
Staying true to compensation principles and avoiding favoritism
will make it easier to communicate.
With more than 1 billion customers who, fact, the highest turnover occurs in the first
until several decades ago, were locked three months of tenure as new employees
behind trade barriers, India is one of the assess if they can shop around for a better
most attractive markets for the world’s offer somewhere else.
multinationals. Every company with a Companies have attempted numerous
strategy to be an international player must techniques to slow down turnover, such
have India in its sights, which means it also as requiring a three-month notice period
must have compensation in its sights. This is to resign, using employee share ownership
especially important considering the unique plans (ESOPs), providing frequent
compensation challenges facing India in six promotions and coming up with noncompete
areas: turnover, supply and demand, social arrangements among companies in the same
expectations, retirement, compensation sector. Regarding compensation specifically,
structure and compensation data. increases of 15 percent to 20 percent have
This article provides an outline of those been prevalent in recent years, making
challenges, as well as some solutions. employee cost one of the largest items in
the profit-and-loss statement for service
Turnover companies. For some roles, such as business
The large gap between demand and supply heads and specialized skill sets like
of qualified talent is causing turnover up to actuaries, salaries in India are higher than
70 percent annually in some frontline roles. In those in the United States.
By Rajiv Burman, CCP, SPHR, GPHR, CHRP, Max New York Life
© 2012 WorldatWork. All Rights Reserved. For information about reprints/re-use, email copyright@worldatwork.org | www.worldatwork.org | 877-951-9191

2. nontechnical jobs and, at the very
The reason sought-after least, a change in title, all of which
can be problematic. With promotions,
talent is far fewer in supply for example, employees can grow
accustomed to them and expect
than demand is that there them as an annual rite of passage
regardless of business results. And
are two Indias: one in the
when companies set compensation for
new hires and the candidate shares
the number of promotions he/she has
better-run educational received, the candidate might receive
higher compensation and level than
institutions in cities and what is deserved.
the rest in a relatively Retirement and Benefits
Two factors have led private sector
ungoverned environment of companies to focus on increasing
cash compensation as a means for
smaller towns and villages.
their employees to purchase benefits
and provide for the retirement years:
ONE | An absence of a robust retirement
system through public or private
pension plans for the private sector. In
its place the government has two cash
accumulation programs that provide
for some limited payouts: a) Provident
Fund (a pay deduction and equal
employer contribution of 12 percent
Supply and Demand the better-educated talent available of basic salary, which is usually
The reason sought-after talent is through well-run institutions, leading 30 percent of fixed compensation); and
far fewer in supply than demand is to supply shortage. b) Gratuity (lump sum paid on exit
that there are two Indias: one in the after at least five years of service or
better-run educational institutions Social Expectations 15 days of basic salary times the years
in cities and the rest in a relatively Social status and families play a very of service). Due to accumulation limits
ungoverned environment of smaller large role in India. It is common and the low retirement age of 55 to
towns and villages. The graduates for employees to want a promotion 60 in India, these payouts are usually
from the better-run institutions whether or not it causes a change inadequate to fund retirement needs.
are world-class and have gone on in their role — as long as they get a
to compete at the highest levels bigger title and more money. After TWO |An absence of publicly
globally and are at top roles all, the ability to marry someone of funded medical coverage and a
in multinational companies. a higher social status is dependent low prevalence of employer-funded
But in a number of smaller towns, on the title and money in a country comprehensive medical insurance.
cities and villages, the quality of where arranged marriages are the
education is poor due to problems norm. Even after marriage, the need Compensation Structure
in teaching and testing and lack of to impress neighbors, in-laws and the New multinational companies
resources for providing the necessary spouse remains high. and their HR professionals at the
tools. As a result, the “qualified” The past decade of tremendous headquarters find the compensation
candidates passing out of many growth in various sectors like IT, structure in India complex, as it
smaller cities, towns and villages telecom, banking and insurance has features multiple elements driven by
are not up to the expected level. For enabled some companies to respond the income tax code. For example,
example, it is not unusual to meet to the need to impress through base pay is typically broken up into
students educated in small towns various business practices. Those basic salary (typically 30 percent
who have difficulty conversing in practices include annual promotions, of base pay), house rent allowance
English. Hence companies chase tenure-based promotions even in (HRA) and other allowances. Many
50 | workspan january 2012

3. companies will provide a number competitive rewards, offers passionate about them. A well-
of other elements as part of the challenging jobs, has a positive developed system for job rotation,
fixed pay that have favorable relationship-based culture and investment in long-term career
tax treatment, such as medical encourages managers to focus on planning, enriched roles through
allowance, leave travel allowance, their employee development — projects and global assignments can
and reimbursements for a car, and then invest in branding it help retain talented employees.
driver and fuel. The compensation that way. Candidates vie with ❙ Improve work-life balance through
structure varies significantly among others to work for globally well- flex time, work-at-home schedules
companies. Given all of the above, known companies like Proctor & and avoiding 12-hour workdays.
when setting compensation it is Gamble, American Express The Indian public sector pays
important to seek a comparison Co. and Citibank. Some Indian well below the private sector but
on total remuneration, total cash companies like the Tata Group have mitigates the gap by providing
and fixed pay. Just using basic similarly succeeded in this area. one of the most life-friendly
salary will lead to understatement ❙ Use compensation elements work environments, which has
of overall compensation. intelligently to deliver various contributed to lower turnover levels.
objectives. For example: fixed ❙ Create a security net through
Compensation Data pay to create security; variable a retirement and benefits
Accessing complete information on pay for rewarding short-term program. Developing a defined
compensation for senior roles is performance; deferred bonus for contribution program and providing
challenging, since companies are retention; and stock options for comprehensive medical insurance
wary of disclosing information as it long-term value/wealth creation. benefits will provide a high value
is seen as a competitive advantage. ❙ Implement a robust compensation to employees and their families
It is not unusual for a number structure based on a job evaluation and enable greater retention.
of compensation elements to go system and an internally equitable
unreported at senior levels. Elements pay-for-performance program, with Conclusion
like stock options, perquisites, a clearly articulated compensation India offers huge business growth
benefits and deferred cash plans philosophy, principles and rules. opportunities and presents a number
are ones where most of the Staying true to these compensation of challenges to attracting and
information is incomplete. principles and avoiding favoritism retaining employees. Human resources
A second factor is that not all makes it easier to communicate. For professionals can help deal with these
Indian companies have a professional example, explaining to employees challenges using some of the solutions
compensation structure and a why they are not being promoted described in the article depending on
job-sizing process. Hence, a number until the job level/grade has what fits their business strategy. This
of matches could be based on titles changed is a tough message in will help reduce pressure on employee
and a brief role outline. Given the India, but easier if the policy is compensation, and create higher
proliferation of inflated titles, there consistent across the company. retention. Losing talented employees
is a significant risk in data validity. ❙ Work with multiple reputed sources and experiencing high turnover can be
It is therefore important for HR of data. Depending on job roles, costly and devastate a business. This
professionals to work with reputed use data obtained through the emerging market offers an opportunity
compensation consultants who can hiring process, sector associations for human resources to demonstrate its
employ a consistent methodology (in India there is no legal barrier to value in creating business success.
to compare roles, review data and sharing compensation data among
identify information gaps. companies) and public sources Rajiv Burman, CCP, SPHR, GPHR, CHRP, is the
like annual reports. Also, blend chief people officer at Max New York Life. He can
Solutions data for difficult-to-match roles. be reached at burman7@yahoo.ca.
Some solutions that you can use to ❙ Design a total compensation
deal with these challenges are: framework for assessing
❙ Use a complete employee value competitiveness. Use all the resources plus
proposition (EVP) rather than elements of fixed pay, short-term For more information, books and
pay alone. The employee value incentives and bonuses, benefits, education related to this topic, log
proposition impacts four core areas: long-term incentives and stock on to www.worldatwork.org and
use any or all of these keywords:
the company; work; rewards; and options to assess the market rather
❙❙ Multinational + compensation
manager. Ensure the company is than addressing it piecemeal.
❙❙ Compensation structure
an attractive place to work — one ❙ Ensure that roles are exciting and
❙❙ Employee turnover.
that is well-managed, provides challenging, and employees are
52 | workspan january 2012