Flipkart converts part of variable pay to ESOPs for executives3 min read . Updated: 26 Sep 2016, 04:23 PM IST
New variable pay scheme part of broader strategy to strengthen long-term incentives for employees, says Nitin Seth, Flipkart's chief people officer and strategy head
Flipkart has modified its variable pay structure for middle and senior managers to cut costs and tie their pay to the online marketplace’s performance and valuation, said two people familiar with the matter.
Flipkart has cut the cash component of variable pay by up to 40%, depending on the seniority of executives, and replaced it with stocks, the two people said on condition of anonymity.
Flipkart’s chief people officer and strategy head Nitin Seth confirmed that the company had moved to a new variable payout structure and said the new payout scheme is part of a broader strategy to “strengthen long-term incentives for employees".
“After I came in, I did a review of our compensation philosophy with Binny (Bansal, chief executive). The experimentation that we’ve done is, overall we further want to strengthen the long-term incentives and the long-term alignment of our employees into Flipkart because the task of building Flipkart is not a one-year sprint. It’s a multi-year journey and we want to lock in our employees long term into that," said Seth.
“The variable compensation that we pay out— a part of that we’ve substituted with stock. The proportion (of stocks) increases the more senior you are. So at a very junior level, there is none, but as we go up, 40% of your bonus could be paid via stock," added Seth.
Flipkart currently has over 50 senior vice-presidents and vice-president-level executives.
The stock options are being handed out on top of the ESOPs (employee stock ownership plans) that managers are eligible for. Flipkart’s compensation for managers comprises fixed pay, variable pay (that is determined based on the performance of the individual and the company in a specific period) and stock options.
Employee costs are one of the largest areas of expense for e-commerce companies, after marketing and discounts. By replacing cash with stock, Flipkart is cutting part of its spending on salaries. The company is also hoping that the move will push employees to work harder.
“Converting variable pay to long-term ESOPs basically means less cash in hand in the near term and is a signal for people to pull up their socks if they want to earn their stock options over a period of time," said one of the people cited above.
The change in the payout structure comes as CEO Bansal is attempting to revive sales growth and cut costs to turn around the fortunes of India’s e-commerce poster boy, which has conceded significant market share to Amazon India over the past 12-18 months.
Flipkart is widely regarded as the best paymaster among India’s start-ups. Last year, the e-commerce giant went on a hiring spree across levels. It hired technology and product talent from Silicon Valley and also recruited senior managers in marketing, finance and other functions. The company also rapidly expanded its overall staff count.
All of this was done to prepare Flipkart for managing tens of billions of dollars in sales that it was expecting to generate over the next few years.
The stagnation of online retail so far this year and the market share gains by Amazon have made it clear that kind of sales growth isn’t going to materialize, meaning the company needs fewer employees and has to cut spending on salaries.
In July, Flipkart said it cut as many as 600 jobs, after already shrinking its workforce to 30,000 from 33,000. Two months before that, Flipkart suffered a backlash after it deferred by six months the joining date for graduates of IIMs to whom it made job offers.
Apart from Flipkart, other large Indian Internet companies such as Snapdeal and Zomato have also cut jobs after disappointing results.
Seth said Flipkart’s employees had generally reacted positively to the new incentive structure.
“The reaction from employees has generally been positive—anything to do with compensation you will never have 100% positive reaction. For a majority of the company, especially with the junior employees, it doesn’t impact them because the cash flow issue is more critical for somebody who is an associate working in a call centre or working in logistics or at a lower cash level," said Seth.
“The 40% is at the senior-most level—we’re talking about the senior vice-presidents and vice-president level. It kind of starts from 10% of the bonus and goes up to 40%," he added.
Rising salaries were one of the defining features of the go-go years of 2014 and 2015 in the nascent start-up business. Led by Flipkart, start-ups paid unheard-of salaries to engineers, management graduates and experienced professionals from other companies and industries, as investors poured more than $9 billion into Indian start-ups since the beginning of 2014.
But starting late last year, investors started pulling back and Internet start-ups have been forced to cut staff and avoid paying preposterous salaries.