Total Rewards Special: Link Corporate Strategy to Variable Pay
Variable pay is essential in an organization that wants to align remuneration with the company strategy and have reward based on performance
Earlier compensation packages in India constituted of basic salary and as many as 22 different allowances and benefit types per employee
For effective implementation of variable pay, organizations in emerging markets need to link corporate strategy to variable pay, address line managers’ skills and differentiate high performance.
In the profession of compensation and benefits in the HR space, we set great score by hard facts and financial numbers. To gauge the performance of the company, we pour over the numbers in the financial statements. To measure the effectiveness of a department, we look at the revenue or cost saving measures, profits and operating contributions. With same token, are organizations paying more to their best performing employees?
Companies both big and small could be facing new market challenges in the post-recession world. While fixed compensation continues to rise between 8% and 12% per annum, many forward-growth companies and new market entrants in emerging markets are adopting ‘cost-to-company models’ to have more efficient ‘Total Rewards Program’.
This article dives into the topic of compensation landscape in emerging markets and how fast-growing and dynamic organizations are adapting to the change.
Variable Pay – What is the return on investment?
Variable pay is essential in an organization that wants to align remuneration with the company strategy and differentiate reward based on performance. If the goals are clearly defined then individual expectations in the role is also clear. Employee engagement is higher where employees perceive a fair differentiation of reward based on performance. In many ways it also helps to adjust compensation costs in a downturn by not putting all eggs in one basket of fixed compensation.
Variable Pay – How are organizations implementing it?
Most variable pay programs change are due to better alignment of the programs with changing business strategies:
• Sharing the connection between organizational and individual performance
• Improving the performance metrics
• Reviewing the metrics more often than implementation
A number of organizations have added protection mechanisms to their short term incentive programs (i.e. hurdles, triggers, clawbacks). Much change in variable pay programs has already taken place. However the trends we see in India are different compared to other global markets.
Trends in India
Pay in Indian market has evolved over a period of time and we shall continue to witness organizations moving away from boutique of allowances and benefits. Prior to liberalization in 1991, compensation packages in India constituted of basic salary and as many as 22 different allowances and benefit types per employee. These complex pay programs were largely driven by the desire to reduce tax. Now, a typical compensation program has fewer than 10 elements with indication of further simplification. A series of tax reforms has reduced the incentive to continue complex fringe benefits practice.
Variable pay plans in India have not been successful in driving behavior within the organization that is consistent with their culture and values.
• 50% of companies are public sector and do not have a bonus scheme in place
• Many Indian companies like to pay bonus payments, not in cash but in shares, which could be having an impact on the target levels being higher
• Geographically uneven economic development of the country leads to large differences in pay between regions and cities of India
• Key differences in India compared to global markets
-Not acceptable in some cultures to tell people they are not performing - this is true to some degree in India
- In emerging markets of Brazil, Russia, India and China, organizations do not want to risk losing talent to competition by not paying out a bonus resulting in more of socialistic way to reward for performance.
Organizations in emerging markets are expected to experience a paradigm shift in the way compensation is structured - shifting the focus from fixed elements to variable ones. However, historic legacy of fixed compensation and two-tier pay levels will slow the pace of this shift. Variable pay schemes should be closely examined to check whether they are reinforcing behaviors which bring benefits to the organization and not just benefits for the individual employee.
Once growth figures in emerging markets begin to reflect a certain sense of normalcy, organizations will stop trying to keep up with growth and start concentrating on the efficiency of their business. In addition, the pressure from key stakeholder which include the shareholders, boards, remuneration committees, top management and consequently, human resources departments, are starting to play a strategic role in defining total rewards rather than only focusing on fixed pay.
To effectively implement variable pay, organizations in emerging markets need to link corporate strategy to variable pay, address line managers’ skills and differentiate high performance. There is no ‘one’ right answer but the best implemented programs are led from the top with strong vision and leadership; provide line of sight between employee performance and company success is championed by line managers; and communicated clearly.
Vijay Gandhi, Regional Director, Reward Information Services (Middle East, India and Africa) – Hay Group