New Delhi: Finally, the annual performance review is set to acquire some teeth this year. Managers are bracing for a cultural shift in the Indian workplace where, traditionally, they have had issues with linking pay and performance.
Especially in sectors such as technology and outsourcing—affected by the economic slowdown but not the worst-hit—many employers are considering increasing the variable component of compensation. Portions of the salary itself and not just the bonus may be linked directly to stringent performance reviews.
Tight budgets: Performance-linked pay may rise to as much as 40-50% from the previous norm of close to 20% in the days to come. Hemant Mishra / Mint
Human resources consultancy e2e People Practices Pvt. Ltd is working with large information technology (IT) and back office services clients to create more tangible, measurable objectives for certain job roles and restructure the performance-based portion of those salaries. Performance-linked pay may increase to as much as 40% or 50% from the previous norm of close to 20%, says Yeshasvini Ramaswamy, who runs the consultancy.
Roles that are directly linked to performance milestones and clear-cut job objectives had some variable components to their salaries, but the economic downturn and pressure to cut costs yet avoid layoffs are forcing human resources departments to think a little more creatively.
“Organizations are moving into very specific key result areas,” says Ramaswamy. “Pressures are tight, budgets are tight. It is getting more driven down into direct revenue and senior positions.”
In the sectors worst hit by the slowdown—banking, finance and real estate—salaries, along with hiring, are more or less frozen. But in sectors such as consulting, information technology and back-office services, says Sandeep Chaudhary, who leads the performance and rewards practice at Hewitt Associates LLC, salary changes are driven more by the drop in attrition rate.
The rate—a measure of the number of individuals leaving their jobs—is down by almost 50% since 2007 by some estimates. “There are less job opportunities in the market place, which means they (companies) can be far more prudent in terms of salary increases,” says Chaudhary. “It is not fuelled by buoyant market conditions, so it is only made by performance.”
Senior managers, Chaudhary says, are looking at little or no direct salary increases, but should expect the performance-based portion of their pay to grow 5-20%. Middle management at offshore financial and back office services providers will see last year’s 12-15% raises drop to 7-8%.
Reviews will become much more important.
“What we are hearing companies say this year, is that they will be more strict about enforcing norms of differentiation, with variable payout, and merit increases linked to the performance rating,” says Gangapriya Chakraverti, a business head at Mercer LLC in India who specializes in compensation.
Managers, she says, are being asked to follow a so-called bell curve in their grading scale this year, and award positive reviews to only half of their employees.
Companies are also considering introducing or increasing variable pay at junior levels, though the amount varies by industry and position. Entry-level roles in IT and retail will start seeing 5-10% variable portions of a salary, and sales positions in insurance and at back office service providers can carry targets that can account for 20% of a salary.
Since variable pay is often folded into a larger salary package, it is sometimes difficult to tell if the percentage has increased, say business school placement officials. Madhu Vij, who heads placements at the Faculty of Management Studies in New Delhi, says while the bulk of offers are yet to come in, companies have stopped offering signing bonuses. She expects the base salary for some offers to be less than they had been in the past.
In addition to tweaking the variable portion of salaries, companies are considering other ways to keep promises while cutting, or at least stretching out, their costs. They are experimenting with techniques such as staggering payouts or making them quarterly, says Ramaswamy.
Companies on the April-March calendar, which most Indian firms follow, will only implement salary changes and hold reviews in April.
While multinational firms and companies in other geographies have long linked salaries to performance, India’s more relaxed work culture has traditionally made the association more difficult. “Risk pay, the concept, is not very widely deployed in India,” says E. Balaji, chief executive officer of Ma Foi Management Consultants Ltd. And “culturally managers have an issue telling employees you haven’t performed well”, says Chakraverti.
Consultants cite one upside to the shift. Says Ramaswamy: “Management is spending a lot of time with HR, which, say, two years ago, they were not.”