Focus shifts in Total Rewards space

The compensation function in today’s organization has suddenly become an exciting space. The landscape of talent expectations has changed at a great pace over the last couple of years and the external business environment is imposing additional complexity. With the economy expected to grow by over 5% in 2015, the India market will most certainly grab the attention of global companies. At a time when China’s growth is slowing and the eastern region is tied down with conflict, this growth automatically increases talent demand. As the talent market becomes more competitive, the rewards space has become adaptive. More and more companies are creating competitive differentiation in their employment value proposition through creative reward strategies. And in most cases, innovations are happening on the non-monetary side.

In most sectors this year, companies are not looking to change the basic compensation structure. There will, however, be more flexibility in terms of base salary and fixed allowance as the mixed generation workforce will be looking at different needs and, hence, different numbers in these brackets. With more than a three-generation mix of Gen X, Gen Y, and Baby Boomers, collaborative tools to engage and enhance the interest of employees will be a great focus area. Across generations, flexible work hours will rule the roost as the top incentive for retention.

Leave policies will also see a revision to match employee expectations. Long-term incentives will see a return with a lot of companies offering differed bonuses and stock option programs. With a number of the newer e-commerce firms hiring big numbers this year, ESOPs will retain their charm with the younger generation. Also, smaller incentives like reimbursement coupons, free or subsidized food options will add to the basket offered by smaller companies. Technical skill building will be another way for cash-strapped companies to offer better employability and growth aspects to prospective and current employees.

With such diversification of rewards, a lot of focus will turn to performance-based measures to dole out justified monetary benefits, which will also add to the bottom line of companies across sectors. HiPos can expect a salary hike of 15-16 per cent in 2015. A differed bonus will be a great way to engage and show confidence in high-performing employees as well. Also, with companies looking to increase their global footprint, HiPos will be offered mobility assignments that will act as great performance incentives and add to the organization’s expansion efforts.

Looking at the salary trend in India, its rate of increase is higher than the inflation rate. This means that real wages across the country are rising. With fewer candidates and increasing merit in these pockets, this year will see double-digit increases in salaries across all sectors. Leading in this trend for increased hikes in the range of 12-13 per cent will be life sciences and the consumer goods industry. These industries have seen a steady upward trend and are looking to continue on the same trajectory. While the life sciences industry has been fairly recession proof, consumer goods has seen some inflationary pressures in the last year. For both, 2015 will be a catch-up year.

Contrary to popular belief, industries with large employee bases like High Tech, shared services or the BPO industry will not be looking to give significant hikes. Rather their numbers might be the lowest this year, slightly upwards of 10 per cent. Information Technology will look to offer over an 11 per cent increase in average salary numbers.

Manufacturing sector has seen a new lease of life with the ‘Make in India’ campaign in the last year. All sub-industries under the manufacturing sector are looking to expand with an expected increase of 10 lakh jobs. With such great numbers and the positive sentiment of the global market for investing in these companies, the manufacturing sector is looking at an upward revision of close to 11 per cent in this year. Financial services sector is fairly segmented with insurance still struggling to make money. This will ensure a muted sentiment across the sector. However, asset management has a lot of scope and is likely to pay close to the industry average.

As the economic and demographic conditions of the workforce continue to change rapidly, rewards have to be very closely integrated with an organization’s overall talent management strategy. Aspirations have diverged from the erstwhile homogenous times, where cash and job security were the biggest drivers of retention in an organization. While some of the factors, such as cash, continue to play a central role in compensation strategies, several other expectations have crept in to modify how companies view total rewards. Here is a look at some of the new-age reward strategies.

A radical change in employee expectations comes from the fact that the enterprise of today demands differentiation. Some of the key differentiation factors include performance, potential, experience and business contribution. As a result, organizations have to ensure that they chalk out clear differentiation policies and also communicate them explicitly. A key challenge for talent management teams is to ensure that differentiation does not lead to disengagement. Some of the key strategies that companies adopt in order to differentiate are the following.

Need segmentation. Talent management teams create broad segments of the workforce based on age, educational and socio-cultural backgrounds as well as gender to differentiate and target needs of each segment in a unique manner. Companies gather the needs of each segment through different means, including surveys, focus groups and data analytics. Having a need-adjusted differentiated reward strategy ensures higher engagement.

Performance clusters. The key to ensuring that performance-based differentiation does not lead to general disengagement lies in clear communication. Talent teams have to design transparent communications that clearly distinguish performance clusters and the corresponding rewards associated with them. In the February 2015 People Matters ‘Total Rewards Conclave’ a number of compensation leaders from some of India’s most progressive companies remarked that transparency of communications is the most important thing while implementing a differentiated rewards strategy. Experts recommend that communications should be honest and should ideally include the basis of differentiation, such as business unit need or even the talent demand and supply situation.

Leaders agree that a good approach towards framing compensation strategies is to offer employees the option of choice. With the wide divergence in preferences prevalent in today’s organization, a menu of options ensures that companies do not invest on the wrong rewards. Options also build more engagement and loyalty among employees, and contribute to the employer brand. Some new-age ways of offering reward options are as follows:

Flexi-pay benefits. In a flexi-pay plan, an employee gets the option to divide the amount of variable pay between cash and equity. It is surprising to see that despite the typical Indian employee’s predisposition towards cash, there is an increasing trend to choose deferred options, comprising long-term benefits. Companies that offer flexi-pay benefits explicitly demarcate the cash and equity components of their employee salary structures.

Pre-determined progressions. Some progressive companies are seriously considering giving employees the option to choose achievement landmarks tied to their compensation. For example, as a means to ensure goal alignment between an employee and the business, some companies explicitly state skill and goal stages and the corresponding compensation possibilities associated with each. While this practice has been around for a while, what talent management teams are doing differently now is a formal structure of methodically documenting these goals and stages.

As a way to build long-term loyalty, a large number of companies are implementing employee stock options, whose popularity is unmistakable. Compensation consultant ESOP Direct’s compensation trends research in the Indian market reveals that stock options have become a differentiating employee branding driver in the talent market. Many compensation professionals in this country are yet to understand the subject of stock options fully, and it is high time they educated themselves about these options.

The trend for stock options has picked up so well that many unlisted companies are also offering them to employees. Such rewards are inherently future-facing and build long-term loyalty. Research indicates that an employee can truly enjoy the benefits of stock options only after spending a considerable amount of time in the company, typically after five years.

On the non-monetary side, companies have been working on a change in the last two years which will be even more evident in 2015. The major focus by them will be on work-life balance, health and wellness and recognition programs across sectors.  The span of overall wellness has expanded in recent times and has come to cover several additional components of an employee’s life. While some of these wellness initiatives are structured investments by companies and are based on solid research, several initiatives in Indian firms are grounded in the emotional fabric of the company’s culture. For example, a well-known apparel manufacturer has a special initiative for “mothers-in-law” of employees. Family days and round-the-year initiatives involving parents of employees are becoming increasingly common.

Educational sponsorships are increasingly becoming common among Indian organizations. Not only do they offer a strong employer branding opportunity for companies, they build strong and long-term bonds amongst employees. Many firms are also looking to tie up with lease and financial service companies to offer cheaper car and home loans for employees. In addition, many firms are also going beyond their typical set of responsibilities during employee relocations and helping the latter find housing and domestic help in a new city.

Enterprise contracts with health service providers have moved beyond regular annual health check-ups and insurance. Companies are looking to use health data to make more targeted talent management decisions. For example, not only do companies provide health check-up facilities, but they are also looking at health data to create specific interventions. A possible outcome of data analysis could be segmentation of the employee population into distinct clusters that require less or more frequent health check-ups.

Compensation strategies are getting increasingly inventive. It makes sense for any company irrespective of industry to discard traditional approaches and adopt new techniques to attract and engage talent. It is always a good idea for a firm to conduct an industry benchmarking (exercise?) to devise a compensation strategy that is both relevant and effective.