The retention game: Higher variable pay in CTC, bigger rewards for top talent

Even firms that previously lacked this component—particularly those from the manufacturing sector—are now introducing company performance-linked payouts in the cost-to-company (CTC) structure to reward and retain top talent.

“Organizations now prefer a ‘we earn; you earn’ mentality. When the volatility of business outcomes is high, the volatility of compensation is also high. This helps firms avoid an overload of fixed compensation costs in their profit and loss," said Pawan Dinkar, a director at professional services provider Deloitte India, who focuses on executive performance and rewards.

Wheat and the chaff

“We are seeing traditional sectors (such as manufacturing), which have majorly relied on a fixed component, introduce variable pay to manage employee costs better and ensure a stronger linkage to performance," said Roopank Chaudhary, partner and head of data solutions for consulting firm Aon India.

"This ensures a lesser burden on the company when business is not performing, and incentivizes employees to perform better (to get higher payouts)," he added.

For instance, Dalmia Bharat Ltd, India’s fourth-largest cement maker, moved away from a completely fixed-pay model and inducted variable pay at senior- and mid-management levels at the beginning of 2025-26.

“This will be the first year… from next year onwards, or over the next few years, we will make it (the variable pay) broader. And the total amount of variable pay will be around 15% to 25% of the total pay," said Puneet Dalmia, managing director and chief executive, during the company’s earnings call in October.

He explained that an employee’s variable payout will depend on three key parameters: the company’s performance, the individual's performance, and the safety measures followed during manufacturing processes.

The weight of each performance metric will differ by the seniority level. “At a senior level, company performance has a larger weight. At a mid-level, individual performance has a slightly larger weight than the company performance," he added.

And how would the company's performance be defined?

“These will be our internal metrics where we have certain budgets in terms of what we need people to perform on. But these metrics will basically align management compensation to shareholder outcomes," replied Dalmia when an analyst sought to understand if the company's performance would be linked to return on capital employed, Ebitda (earnings before interest, taxes, depreciation and amortization), or sales volume.

The move came as the cement maker reported a 39% sequential decline in profitability to ₹239 crore, although it remained 387% higher year-on-year.

Similarly, Vedanta Aluminium, a business of Vedanta Ltd, has increased the emphasis on business performance while determining payouts, a move that, according to Praveen Purohit, chief human resources officer, allows high-performing employees to earn more.

It has increased the variable pay component for its junior- and middle-management employees to 15-25%, from 10-15%, of total compensation, “making it more attractive", said Purohit. For general managers and above—400 employees out of the group's 16,000-strong workforce—variable pay now constitutes at least 35% of total compensation.

Vedanta Ltd reported a 59% decline in profit attributable to an exceptional loss, to ₹1,798 crore, in the September quarter, while Ebitda rose 12% year-on-year to ₹11,612 crore.

One of the country's top five steel makers also pointed to an “upward revision of middle- and senior-management variable pay from this fiscal onwards". Those who advance from assistant general manager to assistant vice-president grades will now have 25-30% of their compensation as variable pay, from earlier 20%, a senior official at the steel maker told Mint.

In comparison, variable pay for seniors was restructured to 40-60% as against the 30-40% in 2024-25, the official added.

A Mumbai-based conglomerate, until 2024-25, had three tiers of variable pay. For juniors, it was 10-12% of their compensation, for middle-level employees, 15-20%, and for seniors, 30%.

“Typically, 90% of the variable pay was rolled out every year, and then we realized, employees were not getting benchmarked according to their own and business performance," said a senior executive in the firm, on condition of anonymity.

From this fiscal year onwards, employees were informed that, although their variable pay component would remain unchanged, business performance would be added as a parameter.

Juniors' variable pay would depend 80% on individual contribution and 20% on company results. For middle management, the split would be 40:60. For seniors, it would rise to 20:80.

Par for the course

The insurance sector, which is facing attrition rates exceeding 25%, is also resorting to tweaks in variable pay. One of the top five life insurers restructured its conditional payout for senior executives towards the end of 2024.

“We had fixed pay, variable, and stock-option plans. But now, if a leader meets parameters like bringing in new business or hitting profit targets, they receive a bonus on top of their compensation," said a CXO at the firm, on condition of anonymity.

Tinkering is also underway in the IT sector. HCL Technologies announced changes to its variable pay structure in October. The IT firm, with a global headcount of 226,640 employees, decided to merge its quarterly variable pay with the fixed pay component.

“For the vast majority, the variable pay was linked to project-level performance. We are merging it with fixed pay so that it gets paid monthly," said Ram Sundararajan, the IT player's chief people officer. “Quarterly performance-level pay was largely linked to junior employees, and they will be the beneficiaries."

He added that the merged pay structure will benefit junior employees by ensuring more predictable monthly earnings. “However, annual performance-linked bonuses will continue for mid- and senior-level staff, keeping performance-based rewards intact," Sundararajan said in a 13-October conference call after the quarterly results. HCL did not respond to Mint's queries sent on Tuesday.

India’s third-largest IT services company saw its net profit rise 8% sequentially to $486 million in the second quarter of 2024-25, while its profitability jumped 110 basis points to 17.4%.

Catch 22

Keeping the top deck intact is crucial for companies to stay afloat amid external-market undercurrents. Salaries are one of the best ways to achieve this aim. The median remuneration for top executives in the Nifty 500 companies in 2024-25 rose by 11.1%, slightly slower than the 14% rise in 2023-24, showed a separate Mint analysis of the latest annual reports.

This follows a turbulent post-pandemic period, which saw pay trends swing from hefty counteroffers and job-change hikes during the high-attrition years of 2021 and 2022 to tighter budgets amid global and market uncertainties. While attrition has eased, retaining top talent remains a challenge, prompting companies to increase the pay gap between high performers and the rest.

Most companies have a variable component built into their pay structures, though the share and parameters vary. For junior- and mid-level employees, 10-25% of cost-to-company (CTC) is typically variable pay, linked to their own and their team's performance. However, as one climbs up the ladder, the variable payout can be as high as 40%, tied more closely to business and company performance. Sales and marketing roles usually have a higher variable component than research-focused positions.

Deloitte's Dinkar noted that some sectors, such as financial services, have traditionally offered high bonuses or variable components. Similarly, service-oriented companies tend to link a higher share of total pay to bonuses than their manufacturing counterparts, as individual effort has a greater impact on their outcomes.

In the consumer industry, for front-line staff, variable pay can be flexible, and during the festive season, a larger percentage of their targets can be attached to variable pay, said Aon's Chaudhary.

“(However) some of the new factors being introduced focus on behaviours and other qualitative aspects. For instance, in financial services, beyond revenue numbers, the quality of the loan book as well as any misselling would be reflected in the payouts," he added.

The ball is now in employees’ inboxes: Will they hit reply or move it to junk?