Making variable pay work

Making variable pay work

Last Updated: Sun, Sep 16, 2012 19:53 hrs

While studies show that variable pay is being used successfully across the globe, many firms in India have failed to make it work. Here’s what they can learn from a handful that seem to have cracked the formula

A report released last month by Aon Hewitt, the Lincolnshire-based global human resource solutions business of Aon plc, found that companies in the US continue to use variable pay as a tool to retain talent, reward employees and grow their business. A whopping 92 per cent of 1,300 companies that participated in the survey used variable pay plans compared to 75 per cent in 2005-06. In a prepared note from the company, Ken Abosch, compensation marketing, strategy and development leader at Aon Hewitt, said, “They (companies) are spending less on base pay… and instead rewarding high performing workers with larger performance-based awards… allowing better control spending, while still providing incentives for their best employees.”

Now consider another recent report conducted among 142 companies in India by Deloitte Human Capital Advisory Services, an audit, tax, consulting and financial advisory services firm. In its “variable pay 2012-13 analysis” Deloitte found that the trend veered towards an overall decrease in variable pay across industries. In fact, across industries, the variable pay component reduced the most — by as much as 2.5 percentage points — for the top management. The highest variable payouts hovered around 30 per cent compared to 41 per cent last year.

In short, while variable pay seems to have taken root in the West, it is yet to prove its merit in India.

The Strategist spoke to a whole host of companies — including those that continue to use variable pay and those that have given up on the concept after some early hiccups — to figure out the possible scenarios where a variable pay plan can go completely haywire. First, like any other HR strategy, there is no one-size-fits-all variable plan. Each plan has to be designed keeping the individual employee in mind. The plan for technical staff in an IT company, for instance, has to be differently designed than that of, say, sales staff, where measuring the performance matrix is relatively simpler what with target goals clearly defined. Or, for that matter, variable plans for the ad, sales and marketing team of a television media company has to be measured differently than, say, the script writing team where target goals have to look at quality of writing, not quantity. “The first step to ensure success of a variable pay plan is customisation,” says Subeer Bakshi, director, talent and rewards, Towers Watson, India, a leading global professional services firm.

Second, variable pay plans suffer when companies opt for poorly designed key performance indicators (KPIs). A plan has to be designed after discussion with the individual employee. Here two things come in — transparency and communication. According to Muninder Anand, director, information product solutions, Mercer Consulting India, besides poor design, lack of transparency, communication gaps between managers and employees, poor implementation and unrealistic goal structures are reasons why variable pay plans fall flat.

Third, when introducing such a structure for the first time, it is best to allow individuals time to gain confidence in their own ability and gradually increase the variable component of the package. In other words, allow time for the whole concept to settle in. “Most professionals don’t fully understand what they need to do to influence their bonus, most prefer a larger base pay because they are not confident about their ability to influence their incentives,” adds Bakshi.

Teething troubles
Those in the business of human resource management believe that effective variable pay programmes will be the trend for India Inc. “The emphasis — and the challenge is on what companies can offer to their employees without having to increase the ‘dollar value’,” says Anand adding that organisations see variable pay as a compelling value proposition. “The idea is to move away from ‘compensation’ to a more ‘reward-based’ approach, which is pegged on both, the individual’s performance along with company’s performance,” he says.

Little wonder, there are a whole host of companies that are working hard to get the strategy right. Tata Motors, for instance. The biggest manufacturer of buses and trucks in India, Tata Motors faced a communication lacuna in that many employees didn’t know — or understand — variable pay programmes. What shocked Prabir Jha, senior vice-president and head of HR, Tata Motors, was the realisation that many employees who earned a bonus didn’t have a clue on just how they’d earned it. So, last year, when it rolled out its reworked variable pay policy for employees, it was based on blueprints that were worked and debated for almost a year. As part of the process, Jha says, the company relooked at its entire compensation philosophy.

HR managers spoke to managers in different departments, discussing their goals and expectations. The new variable pay plan drawn up is a combination of company and individual goals. The final plan was put up on an internal website for each and every employee to see. “Basically, we realised the need to have our variable pay plan clearly communicated… something that didn’t happen as effectively before” says Jha.

Today, everyone at Tata Motors — from the trainees recruited at various management institute campuses to the top management team — has some portion of their salary in the variable form. This can range between 9 per cent (typically for newcomers) and 40 per cent or more (for the top management). Jha says that employees who do exceptionally well can bring home twice the “target variable pay”., a popular e-commerce company engaged in the business of lifestyle products, learned early how lack of customisation can render a plan useless for the employee. A pay-for-performance plan was rolled out two years back to reward the above-average performers in the company, says Priyanka Malik, head, HR, But the company soon realised it had to draw up dedicated blueprints for different departments within the organisation. After all, the role of sales staff in the organisation, for instance, is starkly different from the editorial team that works on the company’s website, newsletters and other initiatives.

Now it has different pay plans for different departments and the payout period varies from monthly (sales) to quarterly depending on the department. While typically the ratio of fixed to variable pay in the company is 80:20, the variable component goes up as you climb the organisation ladder. Over the next few months, the company will introduce some more changes in the variable pay plan for the topline management with more emphasis on e-sops, profit sharing and other “non-financial” variables. In short, is still learning the ropes but hopes to get there sooner than later.

Samsung India Electronics, a Korean consumer electronics company seems to be equally optimistic. It has increased its variable payouts to 20 per cent compared to 15 per cent last year, according to Sanjay Bali, vice-president, corporate HR. In his view, the ‘pay-by-performance’ method has worked to the company’s advantage as it marks out clear goals for individual employees, allowing the company to separate the above-average performers from the average. While monthly variables (based on performance) are available to the sales (also defined as ‘core’ staff) in the company, other departments (non-core) get a half-yearly variable pay component. Focus groups have been created within various departments of Samsung to work out strategic goals and plans that allows employees to get a better understanding of the variables.

Advertising agency Cheil India Pvt Ltd, which has a “performance bonus” for all its employees, felt it was necessary to have performance rewards. According to Saswati Sinha, head, HR, Cheil India, this is not part of the salary package of employees. In her view, the idea makes sense particularly when there’s an economic upheaval. “Even if the average increment is lower (during an economic downturn), the performance bonus is given to people who deserve it,” says Sinha. This bonus allows the company to maintain a certain base of salary cost, she adds.

Not every company is sold on the idea though. Prashant Deo Singh, head, HR, Panasonic India, the Japanese electronics and home appliances major, says, “We don’t philosophically believe in keeping very high variable pay plans. It’s not in line with the mission of our company.” In his view, when the market is tough, it becomes difficult to achieve individual targets, which in turn impacts the variable payouts, thus, leaving the employees in a flux. The company started its variable pay plan for everyone in the company two-three years ago (ranging between 5 and 20 per cent).

Get smart
Smart companies, say experts, are those who can keep working their variable pay plan in a negative economy. Wipro is one such company. Unlike Infosys, which announced a steep cut in variable pay post a salary freeze across departments, thus leading to dissatisfaction among employees (the topline management of 300 people took 70 per cent variable cut, it was reported), Wipro recently announced that it had tweaked its variable pay programme for both the junior- and mid-management employees. Junior staff in the company (roughly 80 per cent of the IT department) now has to clear customer satisfaction surveys once a quarter to be eligible for the variable pay (10-12 per cent of their salary).

Wipro’s mid-management staff will also be measured on company’s performance along with customer satisfaction and employee satisfaction scores. Earlier, 50 per cent of the junior employee’s quarterly bonus was dependent on the company’s performance. Wipro’s decision, say experts, has been a smart one in that the company tweaked its programme in good time.

Even as India Inc struggles to get its variable pay formula right, analysts agree what will help make the variable pay concept mainstream is the young work force that demands salaries based on merit, performance and achievements of targets. A recent study by Mercer India reflects the changing mood: “…performance based pay and variable pay measures will continue to remain an area of interest and innovation across levels,” it says. “The current business scenario is leading companies to emphasise return-on-investment (defined as a way of considering profits in relation to capital invested), thus prompting their respective HR managers to respond more innovatively through incentives like variable pay,” says Anand.

A quick word with the expert

An ideal variable pay plan…
Does at least one of the following: reduce risk of business fluctuations by holding back a percentage of wages till the business has clarity on financial viability for the cycle; links performance to rewards, acts as a wealth creation vehicle.

Why companies fail in implementation…
The lack of customisation, poor design, failure to tweak it at the right time, poor communication, misunderstood plans: Performance linked incentives should be reserved for employees that can contribute to business on the whole. Where such a line of sight is difficult, variable pay should only be business- and not performance-linked.

In a negative economy…
Variable pay will emphasise on the “purpose” of business, boost alignment and increase cohesiveness of different functions in organisations thus giving leadership greater control in managing direction and pace of the company, which can drive messages of strategic direction or clarify short- to medium-term business objectives. Companies can also influence company behaviour and culture.

Subeer Bakshi
Director, talent & rewards, Towers Watson, India

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