Article: Imitation is the sincerest flattery - but the worst strategy

Compensation & Benefits

Imitation is the sincerest flattery - but the worst strategy

The compensation war Indian corporates lost can still be won.
Imitation is the sincerest flattery - but the worst strategy

The Roman legion was the supreme battle formation of its time. It established the might of Rome’s empire over much of Europe and beyond. Yet, a little over two thousand years ago, at the battle of the Teutoburg forest1, three of these magnificent fighting machines were virtually wiped out, checking (according to some) the relentless spread of Roman imperial power for the first time. Many reasons are given by historians for this cataclysmic defeat but the one that rings truest, because of its obvious logic, is that Publius Quinctilius Varus, who led the Roman expedition, allowed his soldiers to face battle when they were in a narrow forest track, out of combat formation and under conditions that were favorable to their Germanic enemies who were masters of forest fighting.

Indian corporates, by the early '90s, had worked out functioning remuneration models. Of course, they fell gravely short on individual wealth accumulation because there were limits on how much cash could be paid out at the highest levels but perquisites and welfare measures took on some of the burdens of benefit delivery. Individual differentials in compensation were also nowhere close to the magnitudes that are commonplace today but one may argue that was not entirely inimical to creating a spirit of teamwork and intrinsic motivation. Came liberalization and the entry of a new crop of MNCs with fat and simple 'cash only' models of remuneration. Indian corporates followed in droves and, even if they couldn’t make their packages as fat, they vied in making them simple and easily comparable. The newly arrived MNC recruiters felt like US Navy aviators did at the great Marianas turkey shoot as they picked off the best talent groomed over the decades by Indian companies – especially since they were served up in neat little packages with newly minted CTC labels to help the shoppers pick the best deals. The legions of talent Indian industry (mainly manufacturing) lost in those years gave a severe check to its investment and growth plans in the following years. Though I did not come across any CEO butting his head against the walls of his office, shouting, "Give me back my legions!" (as Augustus Caesar is reported2 to have done after the catastrophe at Teutoburg), they could well have done so considering they were faced with the choice of permanently hemorrhaging their best people to overseas competitors or to lift compensation for top executives (and, with some scaling down, for other managerial levels) close to international benchmarks. 

For too long Indian corporates have allowed the vehicles of material reward at our disposal get constrained by the unnecessarily imitative stance we took a quarter century ago

I have dealt in a previous column3 with the consequences of virtually unchecked increases in senior-level compensation and the strain ever-increasing inter-level differentials put on the fabric of the organization. What this column seeks to address is whether Indian industry could have responded differently to the compensation challenge posed by newly arriving MNCs after liberalization. More importantly, are there any lessons for the compensation philosophies we adopt going forward?

From bubble-wrap to level fields

I trace the perquisite and (non-cash) benefit loaded compensation pattern followed by most Indian corporates in the second half of the last century to three causes. Historically, the stage was set by the need to attract people to remote locations where companies set up their manufacturing or mining operations. Entire townships had to be set up, providing employees with basic essentials like physical security, roads, housing, and hospitals and progressing to top grade schools for their children, a huge range of sports facilities and lavish clubs (suitably graded, of course). The Tata township at Jamshedpur set the gold standard but there were several equally facility-rich instances both in the private and public sectors. Though I was spared the cloying claustrophobia of being brought up or having to work in a company township (I will go underground till the hit teams organized by my friends, who swear there was no better experience to be had this side of Swarga, get tired and give up), those patterns influenced the type of welfare measures and employee benefits that were created in other locations with large concentrations of employee population and, in some ersatz form, even in the smaller offices. Non-cash delivery mechanisms got a huge boost when penally high taxation rates made it virtually impossible to provide incremental value to employees through their salaries. The other rule that kept us busy finding innovative ways to deliver benefits through non-monetary means was the cap on employee remuneration. Though it was only in 2015 that Ravi Mehta and Meng Zhu carried out their experiment4 on the extent to which scarcity or abundance influence how creatively people use their resources (novel ways of using bubble-wrap sheets was their measure) we could have given them plenty of case studies as we struggled to find new ways of delivering value to incentivize effort without contravening Company Law guidelines.

As we merrily marched out of our incommensurable benefit ramparts and converted them to optional cash components not only did we lose the cost advantage of delivering benefits to scale, we simultaneously lost our best people

There is no gainsaying we were severely constrained in what we could pay and reward employees with till the time of liberalization. Rapid correctives on the monetary side were in order (though they didn’t need to be quite as unchecked and iniquitous as they turned out 3). Where we made a strategic error was in our eagerness to imitate the new entrants’ ways of conveying compensation solely as cash. They had scarcely any choice in the matter but we did – and squandered it. In the process, we abandoned the advantages we had built in delivering what employees valued and which our newly arrived competitors for talent could not have replicated for years, if ever. Leveling the field doesn’t advantage all antagonists – least of all the ones who have defensive fortifications already built. As we merrily marched out of our incommensurable benefit ramparts and converted them to optional cash components not only did we lose the cost advantage of delivering benefits to scale, we simultaneously lost our best people. With the willing assistance of our friends in Finance and the guidance of the newly arriving breed of compensation consultants, we allocated every welfare cost to individual CTCs which we thought we were being extra smart in rubbing into the consciousness of each employee. The recruiter, of course, had only to give a premium on the CTC to the select best (who were naturally delighted with the sharp earning boost) without having to recreate the overhead of the entire welfare system from which we had computed artificially low and illusorily variable individual costs.

Some of us resisted the competitive disadvantage that the Procrustean CTC bed imposed somewhat longer than the fashionistas did – to the eternal vilification of our erstwhile colleagues (I expect at least a couple of furious calls as soon as this column is in circulation). To no great avail. Soon CEOs were measuring the potency of their people policies by the length of typeface occupied by the CTC figures of their top teams compared to those of the newly arrived Joneses. People who tried nuancing the bare CTC figures with non-quantifiable benefits (like post-retirement medical cover, for example) were considered wusses or wuss.

Understandably, it is no longer feasible or wise for companies to set up hospitals just for employees and their dependents. But larger corporates at least can use their enormous bargaining power and actuarial base to carve out innovative extensions to standard medical cover schemes

It was not only the poachers who were happy with the MRP-tagged merchandise they could shop. The people getting picked wore the figure like a badge of honor and sometimes even started judging their own worth by that unidimensional yardstick. Their zeal in augmenting it with each job hop could not have been more if they were laying up karmic stock to improve the starting handicap in their next rebirth.

Countering the commoditization of compensation

While the foregoing review (of how playing on their talent competitors’ turf was a huge mistake for Indian corporates) should be helpful to HR strategists, this column hopes to achieve more than that. The recap of how we dug ourselves into our present hole is a prelude to some practical suggestions for how we can get ourselves out of the quagmire of undifferentiated compensation delivery.

Michael Schrage wrote: "Executives, entrepreneurs, and investors are too ready to believe that commodity is destiny. The result is a dulling of strategic focus and a narrowing of the business mind."5 We can easily add most CHROs to the list of types that have accepted the inevitability of commoditization, at least insofar as planning their compensation offerings is concerned. While this still leaves the rest of the Employer Value Proposition (EVP) available for differentiation and branding, clearly compensation is too important a component of the EVP to be left as a fully fungible figure of CTC. 

By way of illustration (but certainly not as an exhaustive listing) let me give three constituents of the undifferentiated CTC mass which can be extracted and de-commoditized. They relate to Health, Housing, and Education.

Understandably, it is no longer feasible or wise for companies to set up hospitals just for employees and their dependents. But larger corporates at least can use their enormous bargaining power and actuarial base to carve out innovative extensions to standard medical cover schemes. One such extension (that has been referenced earlier and actually implemented in some companies) is post-retirement medical cover for the employee and spouse. There can be many other health cover extensions which can be chosen depending on the demographics of the employees the organization most wishes to retain and the potential employees it needs to attract.

The one asset most employees wish to retain with them post their working lives, and possibly bequeath to the next generation, is a house. They will go to great lengths to build long term careers in companies that contribute significantly to the house acquisition process on an ongoing, long-term basis. There are many ways to link longer tenures to the support companies provide for house acquisition and organizations can choose those best suited to their retention criticalities. 

A third investment that resonates greatly with most employees is education. While their own continuing education (and here we are not referring to directly job-related learning, which organizations underwrite in any case) is of growing importance in a world filled with uncertainty and career transitions, the education of children strikes a special sweet spot in most employees’ need maps. Several organizations have found clever ways to use the trusts they run and the CSR outlays they make to subsidize these benefits to a greater or lesser extent.

There are many ways to skin each of these three cats. The methods we were familiar with in pre-liberalization days have been augmented manifold by newer forms these services take and cost-effective ways of funding them collectively. In any case, the three examples we have dealt with were just the familiar-to-all tip of the compensation iceberg. The key forward-looking thrust of this column has been to remove the straitjacket we have worn for more than two decades that prevented us from developing creative options for compensation delivery, despite (or perhaps because of) much more money being available for spending under that head as purse strings were rapidly loosened. Once the constraint of pushing most compensation costs into individually identifiable and quantifiable buckets is removed, there is no limit to the ingenious and organizationally unique ways HR can design Comp & Ben plans that support and extend the company’s EVP. 

While the most innovative of these new options for compensation delivery will naturally be company-specific, there are some key characteristics they are likely to share. Most of these benefits will be non-computable to any degree of precision and non-commensurable. Thus, the value of the benefits will be difficult to reduce to single Rupee figures. The benefits may or may not be optional but it will obviously not be germane to debit employee compensation with the full cost for availing of them. Level-wide benefits, which leverage the scale provided by large numbers of employees, will be obvious (but not exclusive) candidates to pick from. Employees will find it more difficult to forgo compensation quanta if they are prized by their families and those which are socially conspicuous. Barriers to replication will start with finding packages that can’t be easily bought (at least by individuals or beachhead operations – eg holiday homes in exclusive resorts where there are no hotels). Using the company’s properties, partners and privileges can make such barriers practically unscalable. 

It was not only the poachers who were happy with the MRP-tagged merchandise they could shop. The people getting picked wore the figure like a badge of honor and sometimes even started judging their own worth by that unidimensional yardstick

Recruiting organizations, especially those with largish employee bases of their own and some regard for the need to run policy-driven rather than idiosyncratic and ad-hoc people practices will find it difficult to breach the barriers we have been describing. The scope they have for poaching over the barriers will be limited and expensive (which is really the point of erecting the barriers in the first place) but, of course, not impossible. This leads to a salutary restraint on the amount of talent-thievery but doesn’t impose permanent shackles on people who can better realize their potential elsewhere. On both the occasions I had for changing corporate employment in my career, the organizations I joined were flexible and ingenious enough to find such individualized perquisite substitutes and, at least in one of the cases, with an unreplicable substitute of its own.  

From potatoes to porsches

After Teutoburg, Augustus and the Romans learned their lesson and did not venture their arms on territory so unfavorable to their military capabilities. For the next few hundred years their legions suffered no comparable defeat. 

Hopefully, HR in India will also learn the dangers of blind imitation. For too long Indian corporates have allowed the vehicles of material reward at our disposal get constrained by the unnecessarily imitative stance we took a quarter century ago. Since then, the more undifferentiated compensation cash we have poured into our EVPs, the more they have resembled potatoes – fattening but indistinguishable one from the other. If we succeed in de-commoditizing our compensation offerings with the kind of innovations suggested in this column, each EVP can become as distinctive as a high-performance sports car. Not everyone can get a Porsche (and certainly not the ones who need to ask for its price) but who doesn’t want one? And that’s what a great EVP should be like. 

 

Notes:

  1. Peter S Wells, The Battle that Stopped Rome – Emperor Augustus, Arminius and the Slaughter of the Legions in the Teutoburg Forest, W. W. Norton & Company, 2005.
  2. "Quintili Vare, legiones redde!" ('Quintilius Varus, give me back my legions!'), Augustus is supposed to have shouted while butting his head against the walls of his palace. Suetonius, Lives of the Caesars, Translator: Catharine Edwards, Oxford University Press, 2009.
  3. Visty Banaji, But who will guard the guardians?, People Matters, 14th March 2018.
  4. Ravi Mehta and Meng Zhu, Creating When You Have Less: The Impact of Resource Scarcity on Product Use Creativity, Journal of Consumer Research, Volume 42, Issue 5, February 2016, Published October 2015.
  5. Michael Schrage, The Myth of Commoditization, MIT Sloan Management Review, Winter 2007.

 

Topics: Compensation & Benefits

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