New Delhi: Senior executives in India will take home smaller performance bonuses for 2008-09 as the economic downturn crimps business and cuts corporate profits, says a survey on remuneration conducted by US-based human resource consulting firm Mercer Llc. for the first time in Asia.
The report reveals telltale signs of the slowdown on short-term incentives offered to executive employees. Around 38% of the companies surveyed expect lower short-term incentive payouts, or variable and performance bonuses, for 2008-09.
The Mercer survey is based on the response of human resource heads at 48 companies across 22 sectors in India, of which 31% are multinational and 69% Indian.
The Indian economy is forecast by the government to grow 7.1% in the year ending 31 March, the slowest pace in six years, as firms stall expansion plans, consumers reduce spending and the US, Europe and Japan battle recession.
For the next year, 2009-10, most firms do not expect any change either in variable pay targets or upside potential for exceeding performance targets. But 54% of the firms anticipate a stronger linkage between executive compensation and company performance.
“A majority of companies are looking at changed measures to decide on performance bonus for 2009-10,” says Padmaja Alaganandan, who leads Mercer’s human capital business and executive remuneration practice in India.
“The shift is from growth-related performance measures or linking performance with revenues or inorganic growth achieved through acquisition etc. to profitability or returns-related measures—that is linking performance to return on capital employed or net profit.”
“Companies are going to be cautious with bonus payouts this year and performance benchmark and evaluation parameters will only increase,” says P. Dwarakanath, director, group human capital, Max India Ltd, which has interests in health care and financial services. “This is because the need to focus on driving higher level of performance and efficiencies is felt by organizations more than ever.”
The report says 59% employers see no change in long-term incentive payouts. These comprise incentives offered as equity or cash, and sometimes both. Equity plans can include stock options, restricted stock —a stock that is not fully transferable until conditions such as performance targets have been met—and shares given to executives only if company-wide performance targets are achieved.
A plunge in stock prices, increasing public scrutiny and tighter regulations have made it tougher for firms in Asia to design compensation packages —particularly long-term incentives that constitute a significant component of the remuneration paid to senior executives.
While 57% of firms granting stock options expect no change in existing plans, 39% of the respondents expect options to be repriced in view of the economic downturn, which can diminish the attraction of such incentives and lower their effectiveness in helping firms retain people.
To retain their top talent, Internet search company Google Inc. and coffee-house chain Starbucks Corp. announced programmes last month to reprice stock options that are “underwater”—a phenomenon in which the stock price falls below the option price.
Human resource consultants say they expect to see a similar move by some companies in India as stock prices decline. “However, this may raise questions on corporate governance regarding responsible executive compensation,” says Alaganandan.
The argument is that such preferential treatment could be unethical given that a company’s financial results are the responsibility of its management and senior executives shouldn’t be shielded from the consequences of poor performance. “At the core level lies a great conflict between egalitarian principles and executive compensation. The two can’t coexist especially in a performance-driven culture,” says Ganesh Shermon, partner and country head, human capital advisory services, KPMG India.
“Though repricing does not align with larger shareholders’ interest, there is no choice for organizations but to pay to retain,” says Shermon.
Right people in bad times
In fact, retaining top talent will be the biggest challenge for 85% of the companies in India during the downturn, the Mercer report says.
“On the face of it, the finding seems contradictory given that hiring has slowed down and attrition rates are declining,” says Alaganandan. “But in bad times, the need to have the right people is far greater than (in) good times.”
Around 69% firms don’t anticipate any increment on base salaries in the next 12 months. Base or fixed pay comprises basic salary and guaranteed allowances such as conveyance and special allowance.
Human resource managers say most raises are likely to be in the variable component of remuneration, with sectors such as personal care products and telecom firms that have been hit less hard by the downturn than industries such as information technology, retail and real estate, offering slightly better raises.
“The raises for senior executives are going to be very little this year and like many companies we will be looking at greater differentiation of executive talent with a reward system based on performance,” says Rajeev Dubey, president, human resources, after-market and corporate services and member of the group management board, Mahindra and Mahindra Ltd. “We have always been very aggressive with performance pay system.”
Also, fixed pay is valued more by senior executives with 58% firms considering it to be the most effective pay element to align executive remuneration with organization strategy. In contrast, in other Asian countries, including China, Japan, Singapore and South Korea, incentives are considered the most effective pay element.
“To some extent, the trend reflects the cultural mindset and immaturity of Indian market in terms of performance-linked benefits,” says Max India’s Dwarakanath. “Executives in India see fixed pay as a safety net because a higher fixed pay means increase in benefits such as superannuation, pension and gratuity.”