Salaries on the Rise: Globalization Brings New Pressures to India

When Hindustan Lever (now Hindustan Unilever) acquired Tata Oil Mills (Tomco) in the early days of liberalization, the companies’ top brass flew from Mumbai (then Bombay) to Delhi for a meeting. Lever’s chairman and his colleagues traveled economy, as was the practice of Unilever worldwide. Seated regally in executive class were the executives of the company being taken over. They condescended to come to the rear — economy passengers are not encouraged to enter the executive class section — and discuss a point or two with their new bosses. Says Irfan Khan, then communications manager at Lever and now a consultant to several companies: “They had to fall in line. No more executive class travel.”

But the executives at the erstwhile Tomco may be better off today. Perks don’t end up in your pocket; salaries do. Indian salaries have been rising more than any others in the world. In its 15th annual Salary Increase Survey released last month, human resource consulting firm Aon Hewitt projected a 12.9% rise in India, higher than last year’s recorded rise of 11.7%. The firm predicts that increases in the 12% to 15% range will continue.

Others are similarly optimistic. In its Global Compensation Planning Report, consulting firm Mercer forecasts an 11% increase in 2011, compared with 10.5% estimated for 2010. The 1,000 or so recruiters polled in job portal naukri.com’s latest biannual survey predict increments of 10% to 20% in 2011. And the Center for Monitoring Indian Economy (CMIE) think tank says government employees will get 7% hikes in 2011-12. This follows increases of 55% in 2008-09, 30% in 2009-10, and 18.7% in 2010-11. “We expect salaries and wage expenses of corporate India to increase by 14.2%” in 2011-12, CMIE says.

The Globalization Effect

As globalization spreads and as the slowdown caused by the financial crisis appears to be history, mergers and acquisitions are looking up. (Though Grant Thornton figures for the first three months of 2011 show a drop of 30% in cross-border M&As compared with the same period of 2010, the 2010 numbers were skewed by the US$10.7 billion Bharti takeover of Zain.) Each merger or acquisition leads to cross-pollination as staff move from one country to another. These global executives require globalization of compensation and perks. “It could take some more time,” says Pradeep Mukerjee, former human resources head of Citigroup’s businesses in India, Sri Lanka and Bangladesh and founder-director of HR consulting company Confluence Coaching & Consulting. “But in a flat world, you will eventually need international norms, standards and structures.”

M&A is not the only factor inspiring consolidation in compensation packages. “MNCs are becoming more centralized,” Mukerjee says. “They see the complex pay packages in India and other countries and ask: ‘What on earth are you doing there?’ There is also an administrative cost in maintaining all these complex structures.”

MNCs coming to India for the first time — inbound M&A is keeping pace with outbound M&A — bring their own norms, and those too are having an effect. Employees and trade unions are using the Internet to compare compensation. A benefit given somewhere in the world becomes a demand at plants in other countries. That doesn’t mean the workers always get it; purchasing power parity must be considered. But the trend is toward greater uniformity.

Change in Perks

More than in pay, where differences in cost of living can be used as justification, the change is evident in perks. Over the years, the Indian government has both reduced tax rates and made several benefits taxable. Companies had been hugely innovative in their compensation structures, availing themselves of every exemption and loophole in the tax laws to ensure maximum benefits and take-home pay for their executives. Company-provided club memberships and domestic staff — including maids, a cook and a gardener (or two) — were common. So was the opportunity to study in foreign universities, with the company picking up the tab for the executive and his spouse. Spare rooms in the executive’s house would be termed official guest rooms and qualified for deductions; cars would be bought in the spouse’s name, then leased to the company, which took over the running and maintenance costs while the executive used the vehicle. “There was a very fine line between what was legal and what wasn’t,” says Shiv Agrawal, CEO of recruitment firm ABC Consultants.

From the 20-odd components of compensation (including allowances for home furnishings and books and periodicals), most organizations are down to five or six. Many of these benefits are now taxable, so it doesn’t make a difference whether they are reimbursements or part of pay. “This is the government’s contribution to the globalization of compensation,” Mukerjee says.

But it’s a little more than that. Executive salaries in India are still nowhere close to those in developed nations and are only reaching parity with those in other fast-growing economies in the region. Before the economy opened up in 1991, the gap was much wider. In fact, a rule under the Companies Act of 1956 made it illegal for managing directors to earn more than the president of India. In the 1970s, that meant a maximum of Rs. 7,500 a month (US$169 at the current exchange rate). The limit was doubled a decade later. Hence, says a report in business daily Business Standard, big organizations offered their C-suite executives “lavish lifestyles in terms of large houses, multiple cars, armies of servants, pretty much subsidizing as many expenses as the tax laws would allow.” (Under the Act currently, an individual manager’s compensation is capped at 5% of net profit. Companies need permission from the Ministry of Corporate Affairs to pay more.)

In the last decade or so, salaries in India, especially for mid-level and senior managers, have shot up. So perks and non-salary benefits aren’t as necessary to make executive pay attractive. “There are no surprises when we review salaries for companies, irrespective of whether they’re professionally or family managed, or even small enterprises,” says P. Thiruvengadam, leader of the human capital advisory at Deloitte Touche Tohmatsu in India. Compensation structures are much more streamlined now.

Mukerjee of Confluence explains, “If a person was getting 50% as salary and 50% in benefits and another was getting 100% as salary and I decided to give them a 40% raise, one would end up with 120 (compared with 100 earlier) and the other with 140. Of course, I could increase the benefits by the same percentage. But a benefit is often permissible up to a limit, besides being difficult to organize administratively.”

Driven by India’s Growth

The backdrop to all this is that India is growing. GDP growth in 2011-12 is expected to touch 9%. In contrast with across-the-board salary cuts and job losses in many countries in the crisis years of 2008 and 2009, Indian salary increases merely slipped from double digits to single digits. “What determines salary increases in companies is the outlook for the industry, the talent market, the health of the economy and where the company is on the growth cycle,” says Nishchae Suri, managing director of human resource consultancy Mercer in India.

HR managers need to worry about the increasing wage bill. According to a Reserve Bank of India study that analyzed private-sector performance during the first half of fiscal 2010-11, increasing raw material costs and rising salaries eroded Indian companies’ profitability. From April to September 2010, according to the report, India Inc.’s staffing costs rose 17% to Rs 71,133 crore (US$15.8 billion); they grew 7% in the same period a year earlier.

The new dispensation should lead to savings in the long run. Broader trends exist that have nothing to do with globalization. They point to greater professionalism entering the HR domain. Earlier, the CEO and CFO would tell the HR head the total increase (say 10%) in the salary budget. He would receive ratings of individual employees from their immediate boss and give them raises around the 10% mean — some got 5% some 15%. Today, peer reviews and 360-degree feedback help define compensation.

Adding to the complexity are trends in salary increases that favor junior and middle managers. Aon Hewitt’s survey predicts a maximum salary increase of 13.3% for those with two to seven years’ work experience, compared with 12.1% for top executives and senior management. Similarly, the Mercer study forecasts an 11% increment for heads of companies, compared with 11.8% for function/business heads and 12.5% for professionals. The contrast is especially stark in IT, where salaries for company heads are expected to grow just 5%, but all others in the organization will see hikes of more than 11%. “Until 2008, senior managers were typically awarded the highest raises. But as the gap widened, attrition in lower ranks increased, and the hikes started tilting toward junior managers,” Mercer’s Suri notes.

Pay for Performance

Across the board, though, the biggest change has been a switch to pay-for-performance. An accepted practice in the West for decades, Indian companies (along with many in the Asia-Pacific region) have been slower to switch to performance-linked compensation. The concept is more prevalent in specific functions, such as sales, where incentives are an established custom. Early adopters were IT companies, which used stock options to attract and retain star performers.

Especially after the slowdown of 2008, however, variable pay linked to targets has become common. While 94% of the companies in the Mercer study say they have a variable-pay program, 97% of those polled by Hewitt said performance was the most important factor influencing pay decisions. The Hewitt report adds that companies award almost two times the salary increase to employees who “far exceed expectations” compared with those who “meet expectations.” Sandeep Chaudhary, regional practice leader for compensation consulting, Asia Pacific, for Aon Hewitt, says, “An increasing proportion of compensation is being linked to short- to long-term performance goals and delivered over a period of time. We have seen both annual incentives and long-term incentives go up as a percentage of total compensation.”

While it’s more common in the services sector, increasingly capital-intensive companies are also adopting some form of variable-pay structure. “For manufacturing companies, employee costs may be just 4% of total costs. For companies in the services sector, employee costs may be 50% of the total. That’s why the management of people costs assumes greater importance in service companies,” explains R Sankar, executive director and head of people and change consulting at PricewaterhouseCoopers.

And it isn’t only the C-suite that needs to balance its risk-rewards equation. Aon Hewitt reports that the share of pay at risk has increased consistently over the last 10 years. From 10% of total pay in 2001, the variable-pay component for junior managers has increased to 12%. Similarly, at top management levels, pay at risk now accounts for 22% of total pay, compared with 16% a decade ago.

Managing Employee Expectations

How are employees across India Inc. reacting to the changes? With resentment and uncertainty, HR heads say. The trouble is, many Indians have a legacy attitude — a sense of entitlement almost — to salaries and promotions, expecting hikes in pay and job profiles that are determined by seniority and tenure. In an interview to fortnightly business magazine Outlook Business, Michael Boneham, Ford India President and managing director, commented on that attitude: “People tend to be very aggressive about wanting to get promotions. They think if they aren’t promoted every year they aren’t succeeding.” Not surprisingly, performance-linked remuneration plans are greeted with resistance and suspicion.

That is where communication and managing expectations become key. Mercer’s Suri says organizations need to be realistic in setting targets. “The degree of stretch and complexity inbuilt in the goals should help the company decide how much to pay,” he says. It also helps if the company makes the new compensation structure appear a winning proposition. At the peak, the variable and fixed components should add up to a higher total than what the employee was earning earlier, ABC Consultants’ Agrawal recommends. “This way the A team of top performers will be enthusiastic, even if the B and C tiers are unhappy.”

Still, managing internal conflict on compensation is only half the battle. More worrying is the macro-level impact of spiraling salaries. As compensation climbs steadily, India is at risk of losing its low-cost advantage. “Over the past two years, especially, our labor arbitrage has been withering away. Unless the availability of employable talent changes, there will be a push-back,” Deloitte’s Thiruvengadam warns.

Companies also need to tackle transparency in compensation. While increasingly strict regulations demand some degree of openness in organizations, it is also a desirable goal in itself. “The pressure on Indian organizations to be more transparent with their pay and performance management processes is increasing,” says L. Gurunathan, professor of personnel management and industrial relations, XLRI School of Business and Human Resources. “The need for more procedural fairness will also definitely increase.”

Khan, the former Lever executive, is not so sure. “After I left Hindustan Lever, I was offered a job by several companies,” he says. At one of them, the offer letter had a miserably low figure. “Is this all?” asked Khan. No, came the reply. The real total was written in the corner in pencil. It was three times the official package, to be paid under the table. “Yes, that was a few years ago,” Khan says. “But some things don’t change. You will still find a pencil on every Indian CEOs desk.”

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