Performance Premiums | Getting the reward right6 min read . Updated: 12 Nov 2007, 12:28 AM IST
Performance Premiums | Getting the reward right
Performance Premiums | Getting the reward right
Rewarding top performers is one of the most effective tools to attract and retain the right talent. And, rewards don’t always mean heavier pay packets.
In a rapidly growing market marked by a shortage of skills and a high turnover of employees, companies in India are now moving away from traditional rewards systems—skewed towards cash compensation—to ‘total rewards’.
Total rewards include compensation in both cash and kind. Lifestyle perquisites such as a house, a car or a club membership, profit-linked incentives, deferred gratuity, and wealth building programmes in the form of stock options and soft loans have been popular for some years. But now, companies are adopting a slew of new rewards practices.
These include work-life balance programmes; competency pay where niche skills are compensated; and career opportunities such as overseas assignments, new projects, etc.
“All good companies (in India) have been practising (the) total rewards method to keep their best people," says Prabir Jha, global head, human resources, Dr Reddy’s Laboratories Ltd.
This shift away from cash rewards promises high returns in terms of employee satisfaction while reining in galloping salary scales.
Says Rajan Srikanth, human capital business leader, Asia Pacific, Mercer Consulting: “There are still many companies which use cash compensation as the primary driver for reward. They are, however, running the risk of irresponsible compensation."
In contrast to cash-based rewards, total rewards score higher in terms of customization, fungibility or exchangeability and strong differential, say experts. These rewards can be tailored to suit the top performers’ aspirations to achieve maximum effect. However, as in the case of cash rewards, the effectiveness of a total rewards initiative is dependent on the selection of the top performers.
Drawing the line
Evaluation of performance plays a key role, not just in rewarding an individual employee, but also in setting standards for others, say experts. “HR managers need to put in place a fair and transparent performance management system" so that deserving employees are rewarded, says Jha.
One such example, according to Ganesh Shermon, partner and head, human capital advisory service, KPMG India, is the performance management system of oil and gas company Bharat Petroleum Ltd, which has instituted a balanced scorecard based on key result areas to measure performance.
“Only when you have identified the performers can you create a rewards plan which can get the desired results," says Shermon. Also, companies need to communicate the value of total rewards programmes and bring about supporting organizational change for efficient rewards delivery, Srikanth adds.
For a reward system to yield maximum dividends, however, it is necessary to go beyond the top performers, and engage the middle rung. “Rewards for the top rung are mostly well addressed by companies in India, but the same can’t be said about the second rung, which is not (only) just as critical, but is also a very dynamic part of (the) workforce," says Srikanth. It is easier to address this challenge through total rewards than cash rewards as it affords more variation and customization.
Experts say a strong differentiator is the hallmark of a good rewards practice.
The differentiator can be based on individual aspirations, career level, demographics, market forces and even gender. For instance, family-oriented benefits work for IT consulting company MindTree Consulting Ltd, where women comprise 23% of the workforce. “Most women prefer benefits that can be enjoyed with (the) family as opposed to individual gratification, and thus, family-oriented rewards find favour with them," says Srikanth.
Health care business process outsourcing (BPO) firm Ajuba Solutions (India) Pvt. Ltd, which was recently voted one of the top emerging IT-BPO employers by the industry body, National Association of Software and Services Companies (Nasscom), uses training and career development as the key differentiator to attract and retain talent. “Ours is a very specialized business, and the guidelines we work on are very different and unique to the US health care industry," says Devendra Saharia, co-founder and president, Ajuba Solutions. “Our training is recognized as a benchmark within the industry and is one of the strongest reasons for employees to join us," he says.
Top performers are usually on a fast track in terms of career progression at Ajuba, with non-cash rewards including sponsorship for higher education, and the chance to lead new projects early on. The result: a number of managers at the BPO are in their mid-20s.
While Ajuba took the training route, HCL Technologies Ltd appealed to its employees by going against the market trend. Two years ago, the software and services firm instituted trust pay—in which a company pays a fixed salary irrespective of performance—for 85% of its employees when rivals were moving to a performance-based pay system.
The rationale behind the move was that targets are often so high that employees are able to get only a small portion of the variable pay.
Commenting on the success of the trust pay experiment, Vineet Nayar, chief executive officer, HCL, says in a Harvard Business School case study:“It increased our cost base but it was intended to reduce transaction volume and increase trust...It re-energized the company as suddenly people from the competition began joining us."
Reward systems also need constant appraisal. What works for one company at a particular time may lose effectiveness over time.
Samsung India Electronics Pvt. Ltd, which moved to a performance-based pay system two years ago, revisits its compensation and rewards programme every year. Says Sanjay Bali, vice-president, human resources: “At each level, there’s a different need, and rewards should ideally be worked around the need for them to be effective." Giving an employee what she doesn’t want takes the “teeth" out of the reward, he adds.
In a market short of talent, companies are seeking to spruce up their rewards practices since they not only work as a good attraction and retention tool, but also boost productivity and foster a strong employment brand.
“Although you are paying for the past performance through rewards, you are creating hope for the future. An unhappy guy is less likely to be productive, or stick around," says KPMG India’s Shermon.
WHAT IS TOTAL REWARDS?
It is a system of rewards more comprehensive than traditional cash-based compensation packages. Companies are now using a variety of rewards to encourage top performers.
• Base pay and fringe benefits in the form of perquisites in line with the lifestyle and aspirations of employees, such as housing, car or club membership
• Wealth-building programmes in the form of stock options, soft loans, annuity, Key Man insurance
• Variable pay, including short- and long-term incentives that are profit-linked or benefit-linked programmes
• Benefits package including medical, pension, provident fund, work-life balance programmes
• Recognition in the form of non-cash rewards such as company-sponsored dinners, holidays, etc.
• Deferred gratuity programmes in recognition of the work performers are expected to do
• Learning- and competency-pay where niche skills are compensated
• Performance-based career opportunities such as overseas assignments, new projects, etc.
HOW DOES IT HELP?
A total rewards system helps:
• Maintain a steady salary structure, while retaining or attracting talent.
• Include middle-rung performers in the rewards net
• Vary rewards to suit the individual needs of employees
• Have more effective incentives for other employees