For employers, struggling with wage and job inflation and rising attrition, the employee stock option program went quite a way to arrest attrition
The reward management topography has seen interesting changes in the last ten years in line with changing external and internal forces
At ICICI Prudential Life, the rewards philosophy is built around the key principles of meritocracy, internal equity and affordability. The principle of meritocracy is based on differential rewards based on performance, internal equity is based on equal pay for equal work and affordability is based on business imperatives, organization performance and growth. The external factors of economic performance, labour market dynamics and industry performance provides the contextual backdrop against which rewards actions are decided. Over the last nine years, management of rewards has adapted and evolved with the evolution of the life insurance industry in India. The purpose of this article is to take a helicopter view of the evolution and attempt to look forward to the changes in reward management that we may see in the coming years.
Dawn of Private Insurance Industry
For the insurance industry and specifically ICICI Prudential, the last nine years could broadly be divided into three periods.
From 2000 to 2006, were the “early years.” The insurance industry was liberalized in 2000 and during these years, 14 private companies set operations in the Indian soil. Insurance penetration increased from about 2% of GDP in 2002 to 2.6% in 2005, and much of this growth was in the private sector, with the private sector market share moving from about 1.9% in 2002 to 25.3% in 2005.
Growth was relatively orderly; competitive activity was stable and a large gap existed between the first and the second private player. The focus on products moved from traditional policies to ULIP policies. Distribution channels expanded from the traditional agency model of selling insurance to alternate channels of distribution like bancassurance and direct marketing.
During this time, ICICI Prudential grew from about 800 people in 2002 to 7,700 people in 2006. The hiring philosophy was to “hire for attitude & train for skill.” Emphasis was placed on cultural compatibility -- around demonstration of passion, speed, agility and entrepreneurship and less on domain competence. Talent was acquired from varied sectors like FMCG, financial services, consumer durable, telecom and other service businesses. For certain specialized roles in the Actuarial, Underwriting & Claims functions, the insurance sector was tapped for domain competence. The employee value proposition was to work in a fast growing sector, in a start up environment with opportunity for experimentation and learning and fast career growth. The rewards proposition at managerial levels was designed around guaranteed pay and performance bonus to ensure attraction of talent.
Compensation at frontline sales was structured so that high performers could have high variable earnings based on achievement of individual performance targets. Performance management of frontline sales employees was based on defined targets, the achievement of which translated to career growth and significant fixed and variable earning opportunity. The employee value proposition was transparency in the performance management system with clear targets to be achieved and rewards thereof. Employees also had the choice to opt and continue as a high-performing sales professional with very high variable earnings or taking on a team management role at higher guaranteed pay but significant drop in variable pay. It is interesting that whilst several employees chose to opt to remain high end sales professionals with much higher quantum of earnings, many more opted to choose the team manager role with a much lower total pay proposition. Clearly, the career proposition was far more interesting to frontline sales professionals rather than the total earning potential.
Expand thy wings
The next phase, of “expansion” between 2006 and 2008, saw relentless expansion by most private players. The number of players increased to 18 in 2008, while insurance penetration jumped to about 4.4% and insurance premium per capita more than doubled. The market share of the private sector rose to 50.5%, driven by branch expansion in semi-urban and rural areas, and a greater balance between the agency and alternate distribution channels. During this time, ICICI Prudential’s employee strength grew four times and the branch network expanded tenfold. Capacity building was the pre-dominant imperative across the organization and particularly in support functions. During this stage, most of the insurance companies acquired talent from within the industry in their pursuit of ‘speed to market’ and the honeymoon period for employees had begun. Whilst talent acquisition was the key imperative in the first phase, talent acquisition and retention both became imperative as competition overdid each other in enticing talent with hefty increases in compensation and perquisites.
Ring fencing of key employees became an overnight imperative and the vehicle used was employee stock options that served to align employee interest with shareholder value creation. For employers struggling with wage inflation, job inflation and rising attrition, the employee stock option program went quite a way to arrest attrition as it raised exit barriers. With the insurance industry growing at upwards of 30%, employees had the satisfaction of a significant upside in their earning potential. However, one key shift was from management of performance to management of performance and potential. This was executed through a talent management system that helped identify and reward talent based not only on their current performance but also their future potential. The performance management for frontline sales evolved with strong systems to manage non-performance through a variety of interventions. Performance management for other functions was also strengthened by adopting the Balanced Scorecard approach at the organization and functional levels and a stringent periodic review process.
Past, Present, Future
Since 2008, the life insurance industry has seen a relative slowdown in growth in the context of the global slowdown. Whilst the long term growth prospects remain unimpaired, the immediate short term challenge for the industry is pursuing growth and efficiency running alongside. Competition has matured and competitive actions have become more differentiated and complex. The market has a mix of both new entrants and mature players each with different priorities. While few have scaled operations, few others have expanded and ramped activities; a slew of others have focused on driving efficiencies. The global financial crisis and resultant market volatility also saw a flight of investment to products that offered guaranteed returns.
For ICICI Prudential Life, the focus has always been on driving sustainable, profitable growth. Towards this, the rewards strategy was redesigned by placing the first level of sales management on a quarterly sales incentive program. Career growth has been re-defined in terms of building skill depth and job rotation instead of pure vertical growth as was the norm earlier.
Meritocracy as a concept was reinforced through greater differentiation of high potential employees and the introduction of rewards for consistent performance across years. Simultaneously, several steps were taken to build greater transparency and explain the reward philosophy to employees through communication sessions. The performance management for frontline sales was made more flexible to allow both the “sprinters” and the “marathoners” to perform and grow. The time window for assessing performance has been increased giving greater room for learning & performing. The focus has shifted from pure output measures to focus on driving inputs as well.
The general consensus is that the long term India growth story will continue till beyond 2020 but the near term outlook still remains volatile. Reward management in the near term will have to continue to focus on management of efficiencies, productivity and ring fencing of key talent and skills. There will be pressure on creating flexible organization structures and making the cost structure as much variable as possible. A harder look needs to be taken at each role for its impact on value creation and organizations will be forced to revisit each job or role and take stock of its job worth. This will necessitate realignment of structures and jobs with consequent impact on guaranteed pay assumptions. Budgets will need to get managed through a sharper emphasis on meritocracy using differentiation as a lever. Management of high potential talent and building bench will become of greater relevance as companies continue to compete for talent at senior management levels. The attractiveness of stock options as tools for employee retention will need to be evaluated in the context of market volatility.
There may also be a revisiting of employee benefits as benefits can offer a competitive advantage for some companies with soaring healthcare and retirement costs. Some others may trim benefit costs, which have increased significantly in recent years and offer only basic benefits to employees. This space is likely to evolve significantly in the next few years. Flexibility in performance management will increase, but so will simplicity and transparency. Organizations are likely to focus much more on ensuring alignment across levels and between functions.
In conclusion, the reward management topography has seen interesting changes in the last ten years in line with changing external and internal forces. The next phase of evolution will demand sharper focus on aligning rewards with desired goals and behaviors and making executive management accountable for performance. The challenge for Indian companies will be to focus on creation of employability opportunities for India’s abundant talent pool and thereby addressing the demand-supply mismatch in talent. Also, organizations will have to evolve strategies to hold the price line through flexible structures and variable pays. As wage increases without accompanying productivity, improvement will be a significant risk for business profitability.