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Optimize Cash Compensation and Maximize Engagement, the Hard Non - Linear Equation!

Over the last decade Salary Increases in India have shown a downward trend. Since Covid, optimizing Total Rewards budgets while ensuring same/higher levels of employee engagement to support business goals during challenging times, has been a common debate.

Shift in focus on Recognition based Rewards, Fungibility of Talent, Upskilling, Flexible/Remote Working has led to additional prioritization of budgets and programmes to these areas since the last couple of years.

Corporate gifting market in India stands at a whopping 12,000 crore and is witnessing a robust growth of 200% per year. According to a survey conducted by SHRM 80% of the organizations reported having an employee recognition-based reward

Code of Wages (changes to labour laws on wages), if agreed on by all State Governments and implemented in its current state could lead a significant rise in cost of statutory benefits, every year

As economy will begin to see an upturn in the latter part of 2021 and in 2022, workforce especially in high growth industries will still want higher Cash Rewards, as Talent War will pick up fast in such markets.

However there seems to be an increased focus on optimizing budgets for Cash Compensation, across industries so that Companies could be better positioned to bear crisis times, avoiding layoffs and loss of pay as much as possible. Here are some strategies for optimizing rewards related Budgets, which could be effective across an organisation: -

Reduce Base Pay increases for Talent already paid at/above Median of Market Pay Range: While this can be good way to contain fixed cost, allowing faster pay progression of top talent will continue to be important. Let’s consider some specific strategies:

Let’s assume, if the Average Pay hike in India in a high growth industry for a Junior Level Staff who is meeting performance expectations is 10%, consider reducing it to 8% for anyone already at Median and to further 6% for those already at top quartile of the Pay range. For middle and senior level staff the reduction could be even sharper, owing to their higher base pay.

Further let’s assume, if the Average Pay hike for top performers at a Junior Level is 12%, consider reducing it to 10% for talent paid already at/above to the Market Median, and reduce it to further 8% for talent paid already in top quartile of the salary range. Sharper reductions for middle and Senior staff could be considered. Ideally top performers get promoted faster but if they are not, consider offering them a retention bonus in addition to their performance bonus, if they are in top quartile of pay range. Consider allocating a retention bonus budget out of the overall Rewards Budget, to keep a tab on incremental costs of base pay.

Use the Retention bonus budget carefully for only those whom retaining makes a difference to the Organization. These could be: -

Top performers in top quartile of pay range, and not receiving promotion due to lack of opportunities. Reason: they have less room for pay progression unless promoted and retaining top performers makes a difference to the organisation, replacing top performers is not easy.

Niche and critical skills, paid above market Median and not receiving promotion, meeting performance expectations or top performers. Reason: Replacing Niche skills talent can be expensive and time consuming as they hard to find

These numbers can be modelled based on industry, company size, impact on base pay due to decelerating increases compared to higher bonus earning opportunities, as per performance group, experience levels and skills

Differently Reward Promotions: A pay hike upon promotion, is a common practice in many countries. But let us re-consider why do we give such pay hikes – to ensure that the person getting promoted is given a pay progression to position him/her in the higher pay range for the new role. But in majority of cases, it may be noticed that the person being promoted may already be at or above the Minimum salary of the new pay range. It is so because pay ranges overlap by design, to allow for smooth salary progression. Top performers typically get promoted faster and having received higher pay increases year on year, they may already be at/above the Minimum of the new pay range, at the time of their promotion. In such cases, giving a pay hike on being promoted, may not be the best way to reward. Keeping in mind ‘Rewards Optimization’, why not consider a ‘One-time Bonus’. Let’s assume in a high growth industry in India, if 10% may be an Average Pay Hike on promotion, why not give it as a one-time bonus. 10% of one’s annual base pay will be a sizeable amount and the person would get it at the time of the promotion in a lumpsum. This could save some of the incremental effect on base pay costs, considering that fact at around 10-20% people receive promotions across industries in India. Pay hikes on promotion could be considered if someone is paid lower than the Minimum of the new payrange.

Location based pay: Remote or Hybrid Working, whether it may/may not be the future of Workplace in certain industries, designing pay ranges according to Cost of Living is complex in India due to lack of location-based compensation surveys and administrative complexity. Cost of Living varies in India primarily on account of Rent. It is possible to study the Average Differentials in home rent costs and use it to discount the salaries for cities with lower rental costs, applying the differential on country wide common pay ranges.

Written by

Vinit Verma

Independent Consultant

(HR - Compensation, Benefits, Policies, Rewards, Compensation Software)

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