Salaries on the Rise: Globalization Brings New Pressures toIndiaWhen Hindustan Lever (now Hindustan Unilever) acquired Tata Oil Mills (Tomco) in the earlydays of liberalization, the companies top brass flew from Mumbai (then Bombay) to Delhifor a meeting. Levers chairman and his colleagues traveled economy, as was the practice ofUnilever worldwide. Seated regally in executive class were the executives of the companybeing taken over. They condescended to come to the rear -- economy passengers are notencouraged to enter the executive class section -- and discuss a point or two with their newbosses. Says Irfan Khan, then communications manager at Lever and now a consultant toseveral 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 dont end up inyour pocket; salaries do. Indian salaries have been rising more than any others in theworld. In its 15th annual Salary Increase Survey released last month, human resourceconsulting firm Aon Hewitt projected a 12.9% rise in India, higher than last years recordedrise 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 firmMercer forecasts an 11% increase in 2011, compared with 10.5% estimated for 2010. The1,000 or so recruiters polled in job portal naukri.coms latest biannual survey predictincrements 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 increasesof 55% in 2008-09, 30% in 2009-10, and 18.7% in 2010-11. "We expect salaries and wageexpenses of corporate India to increase by 14.2%" in 2011-12, CMIE says.The Globalization EffectAs globalization spreads and as the slowdown caused by the financial crisis appears to behistory, mergers and acquisitions are looking up. (Though Grant Thornton figures for thefirst three months of 2011 show a drop of 30% in cross-border M&As compared with thesame period of 2010, the 2010 numbers were skewed by the US$10.7 billion Bhartitakeover of Zain.) Each merger or acquisition leads to cross-pollination as staff move fromone country to another. These global executives require globalization of compensation andperks. "It could take some more time," says Pradeep Mukerjee, former human resourceshead of Citigroups businesses in India, Sri Lanka and Bangladesh and founder-director ofHR consulting company Confluence Coaching & Consulting. "But in a flat world, you willeventually need international norms, standards and structures."M&A is not the only factor inspiring consolidation in compensation packages. "MNCs arebecoming more centralized," Mukerjee says. "They see the complex pay packages in Indiaand other countries and ask: What on earth are you doing there? There is also anadministrative 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 unionsare using the Internet to compare compensation. A benefit given somewhere in the worldbecomes a demand at plants in other countries. That doesnt mean the workers always getit; purchasing power parity must be considered. But the trend is toward greater uniformity.
Change in PerksMore than in pay, where differences in cost of living can be used as justification, the changeis evident in perks. Over the years, the Indian government has both reduced tax rates andmade several benefits taxable. Companies had been hugely innovative in theircompensation structures, availing themselves of every exemption and loophole in the taxlaws 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 thecompany picking up the tab for the executive and his spouse. Spare rooms in theexecutives house would be termed official guest rooms and qualified for deductions; carswould be bought in the spouses name, then leased to the company, which took over therunning and maintenance costs while the executive used the vehicle. "There was a very fineline between what was legal and what wasnt," says Shiv Agrawal, CEO of recruitment firmABC Consultants.From the 20-odd components of compensation (including allowances for home furnishingsand books and periodicals), most organizations are down to five or six. Many of thesebenefits are now taxable, so it doesnt make a difference whether they are reimbursementsor part of pay. "This is the governments contribution to the globalization of compensation,"Mukerjee says.But its a little more than that. Executive salaries in India are still nowhere close to those indeveloped nations and are only reaching parity with those in other fast-growing economiesin the region. Before the economy opened up in 1991, the gap was much wider. In fact, arule under the Companies Act of 1956 made it illegal for managing directors to earn morethan 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 areport in business daily Business Standard, big organizations offered their C-suiteexecutives "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 Actcurrently, an individual managers compensation is capped at 5% of net profit. Companiesneed 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 arent as necessary to make executive payattractive. "There are no surprises when we review salaries for companies, irrespective ofwhether theyre professionally or family managed, or even small enterprises," says P.Thiruvengadam, leader of the human capital advisory at Deloitte ToucheTohmatsu in India.Compensation structures are much more streamlined now.Mukerjee of Confluence explains, "If a person was getting 50% as salary and 50% inbenefits 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, Icould increase the benefits by the same percentage. But a benefit is often permissible up toa limit, besides being difficult to organize administratively."
Driven by Indias GrowthThe backdrop to all this is that India is growing. GDP growth in 2011-12 is expected totouch 9%. In contrast with across-the-board salary cuts and job losses in many countries inthe crisis years of 2008 and 2009, Indian salary increases merely slipped from double digitsto single digits. "What determines salary increases in companies is the outlook for theindustry, the talent market, the health of the economy and where the company is on thegrowth cycle," says Nishchae Suri, managing director of human resource consultancy Mercerin India.HR managers need to worry about the increasing wage bill. According to a Reserve Bank ofIndia 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 havenothing to do with globalization. They point to greater professionalism entering the HRdomain. Earlier, the CEO and CFO would tell the HR head the total increase (say 10%) inthe salary budget. He would receive ratings of individual employees from their immediateboss and give them raises around the 10% mean -- some got 5% some 15%. Today, peerreviews and 360-degree feedback help define compensation.Adding to the complexity are trends in salary increases that favor junior and middlemanagers. Aon Hewitts survey predicts a maximum salary increase of 13.3% for those withtwo to seven years work experience, compared with 12.1% for top executives and seniormanagement. Similarly, the Mercer study forecasts an 11% increment for heads ofcompanies, 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 togrow just 5%, but all others in the organization will see hikes of more than 11%. "Until2008, 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,"Mercers Suri notes.Pay for PerformanceAcross the board, though, the biggest change has been a switch to pay-for-performance. Anaccepted 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 conceptis more prevalent in specific functions, such as sales, where incentives are an establishedcustom. Early adopters were IT companies, which used stock options to attract and retainstar performers.Especially after the slowdown of 2008, however, variable pay linked to targets has becomecommon. While 94% of the companies in the Mercer study say they have a variable-payprogram, 97% of those polled by Hewitt said performance was the most important factorinfluencing pay decisions. The Hewitt report adds that companies award almost two timesthe salary increase to employees who "far exceed expectations" compared with those who"meet expectations." Sandeep Chaudhary, regional practice leader for compensationconsulting, Asia Pacific, for Aon Hewitt, says, "An increasing proportion of compensation isbeing 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 oftotal compensation."While its more common in the services sector, increasingly capital-intensive companies arealso 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. Thats why the management of people costsassumes greater importance in service companies," explains R Sankar, executive directorand head of people and change consulting at PricewaterhouseCoopers.And it isnt only the C-suite that needs to balance its risk-rewards equation. Aon Hewittreports that the share of pay at risk has increased consistently over the last 10 years. From10% of total pay in 2001, the variable-pay component for junior managers has increased to12%. Similarly, at top management levels, pay at risk now accounts for 22% of total pay,compared with 16% a decade ago.Managing Employee ExpectationsHow are employees across India Inc. reacting to the changes? With resentment anduncertainty, HR heads say. The trouble is, many Indians have a legacy attitude -- a sense ofentitlement almost -- to salaries and promotions, expecting hikes in pay and job profilesthat are determined by seniority and tenure. In an interview to fortnightly businessmagazineOutlook Business, Michael Boneham, Ford India President and managing director,commented on that attitude: "People tend to be very aggressive about wanting to getpromotions. They think if they arent promoted every year they arent succeeding." Notsurprisingly, performance-linked remuneration plans are greeted with resistance andsuspicion.That is where communication and managing expectations become key. Mercers Suri saysorganizations need to be realistic in setting targets. "The degree of stretch and complexityinbuilt in the goals should help the company decide how much to pay," he says. It alsohelps 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 whatthe employee was earning earlier, ABC Consultants Agrawal recommends. "This way the Ateam 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 themacro-level impact of spiraling salaries. As compensation climbs steadily, India is at risk oflosing its low-cost advantage. "Over the past two years, especially, our labor arbitrage hasbeen withering away. Unless the availability of employable talent changes, there will be apush-back," Deloittes Thiruvengadam warns.Companies also need to tackle transparency in compensation. While increasingly strictregulations demand some degree of openness in organizations, it is also a desirable goal initself. "The pressure on Indian organizations to be more transparent with their pay andperformance management processes is increasing," says a professor of personnelmanagement and industrial relations, XLRI School of Business and Human Resources. "Theneed for more procedural fairness will also definitely increase."Khan, the former Lever executive, is not so sure. "After I left Hindustan Lever, I was offereda job by several companies," he says. At one of them, the offer letter had a miserably lowfigure. "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 wasa few years ago," Khan says. "But some things dont change. You will still find a pencil onevery Indian CEOs desk.