In today’s world, retention and attraction of top talent have become progressively very difficult and therefore competitive compensation amongst other things has become a crucial factor
An engineering and construction major dished out handsome pay hikes to its top leadership, including its chairman, despite the company’s profit declining by at least 12 per cent. While the hike was unanimously approved by the shareholders, it was criticised by shareholder activists for its timing. It has also led to heartburn among other employees. This has come into focus as the economy is taking a turn for the worse. Is it right to dole out hikes when the company is not performing well?
We are looking at two events together which may not be right. The two events are: The company’s profit has declined by 12 per cent and handsome pay hike to its leaders approved by the shareholders.
The decline in profits may be due to multiple reasons for which a root cause analysis is necessary and the real reasons have to be unearthed. One has to also look at the trends in the financial performance over last four to five years and the projections for the next few years. Based on just one data point, we can’t come to any conclusion on the financial health of any corporation and therefore the linking of two events mentioned above may not be appropriate.
Now, let us look at the handsome pay hike given to the chairman and the top leaders, which is unanimously approved by the shareholders. I am sure this pay hike would have been recommended by the Compensation Committee and approved by the Board of Directors before it came for shareholders’ approval. I am sure the Compensation Committee would have considered all the relevant facts like market-linked competitive compensation, appropriateness of the quantum of increase, the history of the compensation hikes, the corporation’s ability to retain and attract top talent in an economy wherein it is tough to get top leaders, capacity to pay, etc. I am also sure that the majority of the shareholders would have considered all the facts before they approved this increase in pay unanimously.
In absence of complete data, to come to conclusion that pay hike was not warranted/appropriate/reasonable is not right. To come to any conclusion, one needs hard facts. It is not uncommon for the activists and the employees to show emotional outbursts when such events happen. However, one can’t make hard business decisions based on emotional aspects only.
In the knowledge economy, wherein the primary source of wealth creation is people, one can’t run away from the fact that competitive compensation is a must, irrespective of any other factors. In today’s world, retention and attraction of top talent have become progressively very difficult and therefore competitive compensation amongst other things has become a crucial factor. Moreover, other employees and the activists have to understand that for top leaders and the top technocrats, the labour market is global and therefore the compensation structures for these people will have to be benchmarked to the global market.
Most of the activists and junior level employees do not necessarily understand this phenomenon completely, they react emotionally basis some singular events without taking a holistic view.
(Vivek Paranjpe will solve a live and current business case scenario every month)