Article: Fair pay, Fair play

#HRInsights

Fair pay, Fair play

The coming times may see employees and employers agree more on what constitutes fair pay
Fair pay, Fair play
 

Top executives in Indian companies can earn as much as 78 times more than the salary of an entry-level professional

 

While organizations pay a premium for niche skills, it appears that across the Indian industry, organizations will be more willing to poach, rather than develop internally

 

Swadhin Kapoor walked into his swanky 3rd floor office in Mumbai’s Bandra Kurla Complex, the corporate heartland of India’s busiest city. The walk to the coffee machine was about 5 minutes long, and Swadhin looked forward to this part of his day. It gave him the time to reflect, plan, and ponder; the time to create a course of action before the inevitability of daily stress kicked in. Today, however, Swadhin was reflecting his professional life over the years. From a non-descript software developer 11 years ago, to becoming the Chief Operating Officer of a multi-national company in Mumbai was no mean feat, and one can only describe his ascent through the professional ladder as nothing less than meteoric. While he recounted the good times, something struck him as odd. Lately, he has been thinking about his wonderful past a little too often. Why was he doing that? Was there a trigger? Was there actually something sinister and disturbing, that Swadhin was trying to counter through happy thoughts?

As Swadhin kept pondering, he looked at all possible reasons for his present state of mind. While he did have some rough times with a client the week before, and some health issues, he knew what was really upsetting him. It seemed that yet another year had passed without any sign of a healthy raise. Not because his work was not appreciated, not because he had any issues with the organization, and most certainly not because he had run into any rough weather with his boss. The only reason why his salary remained mostly stagnant over the last two years was because of his organization’s blanket compensation policy. It had a provision to differentiate between high and average performers by only one percentage point, and disappointingly ranged between 9 per cent and 10 per cent. Swadhin realizes that despite his credible profile on paper, he has progressively gone poorer in the last two years because his salary has not kept pace with general inflation. While livelihood costs (housing and essentials) grew by over 20 per cent, his salary increased at a measly average of 9.5 per cent. “Why was the organization penalizing him for working hard?” Swadhin wondered. After all, he was solely responsible for bringing in and executing business worth over crores and he could not find sufficient reason as to why he should not be receiving a share of the spoils of his own plunder. Would he not be better off switching jobs to get the raise that he deserves? But then, did he really have a more compelling reason to leave other than money?

Surprisingly, Swadhin’s predicament is not unique. Hay Group’s Top Executive Compensation Report 2013-14 states that the median salary increases for top executives in India will be around 10 per cent this year. While a 10 per cent pay raise is still better compared to the 9 per cent median pay raise in 2012-13, it is no secret that executive compensation through performances appraisals have continued to be disappointing. While senior executives like Swadhin are disappointed at their salary increase, there is another side to the story.

The executive El-Dorado

Compensation benchmarks across the Indian industry shows a slightly disturbing disparity between salaries of top executives as compared to others in the organization. CEOs earn 2.9 times more salaries than business core roles, and 2.8 times more than business enabler roles. Besides that, there is a trend among Indian companies to hire CEOs externally at far higher salaries than promote any of their internal leaders.

On the face of it, there seems to be a massive divide between the “haves” and the “have-nots” in the Indian industry, but a closer look at local and global compensation trends reveal more interesting observations. Indian executives are clearly not among the highest paid. In terms of pay, senior executives in developed economies still earn much more than Indian executives.

On July 16, 2013, executives in Coal India Limited released a circular threatening strike. Their primary demand was the payment of performance bonus, which was not paid to them in five years. Executives at the public sector undertaking were also demanding higher payouts from the $10.6 billion cash pile that the company was sitting on. It is argued that senior executives in Indian PSUs get only a fraction of the compensation compared to their private sector counterparts. A study conducted in May 2013, by Institutional investors Advisory Services (IiAS) argued that executive compensation in the Indian private sector is remarkably high compared to the India public sector and compared to the rest of the globe. AON Hewitt’s research states that the Indian CEO’s median salary that year was $3.5 million (Rs 185 million), versus $7 million in the US, about $6 million in Europe and $3.5 million in Australia. In the Asia-Pacific, top executives in China were making twice the money compared to their Indian counterparts. However, when one compares CEO compensation in the Indian private sector in terms of per dollar of revenue earned, private sector Indian CEOs earn far more than even their US counterparts. One is compelled to wonder, “Has the executive leadership in the private sector built its own El-Dorado at the top?”

Cost rationalization or systematic conspiracy?

Benchmarking research in the Indian compensation landscape point towards the fact that top executives in Indian companies can earn as much as 78 times more than the salary of an entry-level professional. In the IT industry, for example, there is a wide wage gap between fresher salaries and mid-management salaries. Mid-level managers may earn as much as five to six times more compared to the salary given to freshers. Entry level salaries across the breadth of the Indian industry haven’t moved much in the past decade. While the trend of skilled professionals leaving the security of large organizations to join higher paying job assignments in start-ups is picking up, most wouldn’t deny that entry-level salaries in India are among the least competitive in the world.

A popular conspiracy theory has done the rounds across the years. The theory states that in early 2005, the CEOs of two of Silicon Valley’s biggest employers of software and hardware professionals signed a secret pact to not poach engineers from each other’s firms, besides sharing wage scale information, and artificially pushing low worker wages in the industry. While this was not only illegal, it effectively deflated the economic value of skilled engineers in Silicon Valley, who would have otherwise been eligible to receive far higher compensation if the market was not monopolistic. While this may not be true about the Indian industry, it is no secret that salary levels are base-lined against the salary structures set forth by a handful of large employers in most Indian industries. Many suspect that such a system encourages monopolistic practices in the industry.

Excessive reliance on external skills—short-term myopia?

The staffing firm, Randstad, conducted a survey in January 2014 among Indian corporations and the results conclude that 86 per cent of employees in India across the expanse of the industry expect better salaries in 2014 compared to previous two years. A number of surveys also indicate that employees expect the economy to get better and salaries to trend northward. As the professional world tends to grow more specialized and niche, Ben Casnocha, a Silicon Valley author and entrepreneur, argues the concept of per project employment contracts in the future as compared to permanent employment. Individual skills will become marketable commodities, and more and more professionals will start specializing in niche areas. The shift seems to have begun already and professionals with niche skills will command the maximum payouts compared to traditional professionals in the coming months.

Some of the key functional areas where professionals will receive the maximum salary payouts in the coming months will be in the areas of project and client management, relationship development, social media, business intelligence and analytics, and product management. Strangely, while organizations pay a premium for niche skills, it appears that across the Indian industry, organizations will be more willing to poach, rather than develop internally. According to a recent Kelly Services report, some industries, such as IT, FMCG, and Pharma will be willing to pay switching premiums for skilled talent to the tune of 30 per cent. Financial services and engineering will also be willing to pay handsome switching premiums averaging around 25 per cent. Many reports across the last few weeks by several research firms predict the average growth in salary structures to range between 10 per cent (for general skills) and 12 per cent (for niche skills). While lateral hiring seems to receive a firm push, the lack of salary-growth incentives internally may mean higher attrition numbers across the coming months. While the war for hiring external talent may intensify, one of the key risks that most business establishments may face is the risk of unaffordable talent in the long-run.

The mist is lifting

With all the speculation around fair compensation, lack of transparency, and monopolistic practices still looming large in the Indian industry, it will be unfair to admit that the air is not clearing up. The topic of compensation is still at a nascent stage among Indian corporations. Things, however, have changes largely from the times when the function was devoid of specialists, to the evolution of compensation becoming an integral and specialised part of HR departments in organizations. These changes are propelling positive changes in the industry. On February 11, 2014, Ashok Leyland announced that its MD will take a pay cut in 2013-14, owing a drop in sales. The company will seek shareholders’ approval through a postal ballot to pay minimum remuneration. Trends like these clearly indicate the commitment of corporations to secure the confidence of stakeholders by making compensation structures fair and transparent.

The head of compensation in one of the biggest FMCG conglomerates in India comments, “In the coming times, it can be expected that compensation will become more and more transparent, especially executive compensation. Several changes in the internal and external business environment is propelling more transparency into executive compensation, as opposed to the rudimentary ‘cash+bonus’ structure that executives enjoyed earlier.” The air’s clearly lifting, it seems.

Topics: #HRInsights, #Updates, #TotalRewards, Compensation & Benefits, Strategic HR

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