Article: Rewards Special: Strategic Compensation

#Trends

Rewards Special: Strategic Compensation

Deepak Dhawan, CEO & Founder, Talentonic

India is slightly underdeveloped in terms of the perception of compensation. We look forward to a trend where compensation becomes a little more strategic, which is not happening much in the Indian context as compared to the global scenario. The manner in which compensation is being used globally is different, whereas in India, you still see compensation taking a second place and considered more as a consequence of a business plan. A lot of organizations are now concentrating on wealth creation and how to retain good talent for the longer term.

Companies are looking for different ways in which long term compensation can be structured. Globally, the attention on short term compensation is going down. Focus has shifted to long term and even equity plans with payouts at retirement. The focus globally has shifted to sustainability rather than cash, which is not really happening in India. Because of the pressure of hiring and talent acquisition and the shortage of talent, one of the problems companies are facing, is the pressure to improve short term compensation as compared to long term.

One of our clients, which is a very successful boutique company, found that their employees were resisting annual bonuses and wanted the annual amount merged with their monthly salary. In fact, they were hugely discounting the long term incentive pay. The younger generation is negotiating hard and companies are faced with the leadership pressure of demonstrating the long term value of their business model vis-a-vis cash in hand. We have seen the same challenge in an old economy giant with senior folks as well. The real challenge is that of leadership communication and compensation design. The employees may not be rejecting the compensation plan. They may be disbelieving the vision of the future of the company, which is being sold to them.

Other than in very operational jobs (operations and sales), variable pay is still an annual feature, with some bias creeping in for longer-term, business plan focused variable compensation in the form of a cash or equity plan.

The problem is that in India, we do not take compensation strategically. It has to support the leadership planning and communication and not the other way around. If the leadership is about team work, then that is the culture that is being built and compensation design should support it. If youngsters are resisting long term compensation, then somewhere there is a trust deficit. There is some kind of miscommunication and the story is not so well told. If the employees buy into it, they take a longer term stake into it. The point is that leadership comes first and compensation follows. The culture of the organization cannot be changed by introducing a different compensation plan. There has to be a balance. One cannot overdepend upon compensation but should maintain a balance between the vision, leadership communication and compensation design.

When the employee cost percentage is high (between 20-40 percent), the compensation plan gets automatically sucked to a strategic level, whereas if the costs are anywhere between 8-15 percent, then the discussion remains operational with cost management being the major contributor to the debate. Other costs are higher, like technology, supply chain, logistics and that is what occupies strategic high ground.

The area where a lot more can be done is to activate the compensation committees of the boards of the listed companies. Currently, the regulatory environment as well as the corporate policy environment are very lack luster and under play the impact, which a compensation committee can have in driving great people management practices. We do not need to blindly ape the west, but in a country, which faces a talent shortage, has weak succession planning processes and where wage inflation is one of the highest in the world, what role should we expect the board of directors to play from a good governance standpoint? Why should we not utilize the wisdom of the independent directors?

The companies, which have a good charter for the Compensation Committee, are a case in point. Cognizant, Wipro, Infosys, Genpact, EXL, all have two things in common. They are US facing and have a very high employee cost!

In the service providers’ space, there are consultants like Hewitt, Mercer and Towers Watson as the three big giants. They are full-fledged human capital management consulting outfits with a very strong organization structure and design/effectiveness capability, reasonably broad-based. Consolidation is a trend that can be foreseen here. There are boutique firms like ours, which want to stay away from the “one shop meets all” approach. In compensation design, we want to stay away from data. We plug in the space where we help organizations look at compensation more strategically. People pay us for implementing our consulting and for the fact that we do not leave them with a binder, and that we have the technical capabilities as well. Many of our clients are long term. When it comes to technology in the HR space, we are in a good position. Whether it is HR analytics, performance management, compensation management system or an understanding of the HRIS system and how to deal with that, our intent is to bring product service integration. We are investing in products but there is a service part as well. We consult in HR strategy. If one only has technology, then one becomes a technology provider and would not have the domain knowledge to advice organizations on their compensation strategies, their performance management systems or their organization design.

When we talk about players in the rewards space, Towers Watson, Hewitt and Mercer are there along with boutique firms like Talentonic. Clients either go to companies like ours or the three big ones, depending on the quality of the relationship. If the need is to buy data or benchmark compensation for some specific markets, these three companies should be preferred. But if an organization is looking at compensation design as a strategic challenge or to integrate compensation with business plans, Talentonic would be the right choice.

One of the problems that have come up is that some of the consulting businesses are tending to become over leveraged. Somewhere, sales are over taking content and methodology. It is a trend to watch out for as it is not good for the service provider community. The focus on capability, content, methodology and being able to bring senior level experience and capability in a project must remain, irrespective of the size of the client.

 

 

Topics: #Trends, #HRIndustry, #TotalRewards, Compensation & Benefits, Strategic HR

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