Uncertain economic scenario: Employees brace for a dip in year-end variable pay

MUMBAI: Employees across sectors are keeping their fingers crossed on the year-end variable pay in an uncertain economic scenario.

“It is still early to say, but sentiments right now are negative and if this continues, companies will review their forecasts. But then they also need to retain talent,” says Thiruvengadam P, senior director, human capital advisory, Deloitte in India.

Even so, companies are not sending out warning signals yet. “Philips India is on track,” says human resources and global chief learning officer Yashwant Mahadik, adding that variable pay for 2014 may take a hit at FMCG firms if the economy continues this way. Deferments, too, are largely ruled out but consulting companies and a few professional services firms may look at payments in tranches.

Employees in relatively better-performing sectors like pharmaceuticals and oil and gas will not take a huge hit. Manufacturing and service sectors, however, could see a smaller percentage of variable pay than the comparable period last year. The HSBC/Markit purchasing managers index for India’s manufacturing industry contracted for the first time in over four-and-a-half years to 48.5 in August.

Expectations with which companies had started this year have changed. “The first half is over and one should not expect a high variable pay this time,” says Anandorup Ghose, practice head for executive compensation and corporate governance at Aon Hewitt.

The biggest issue organisations are dealing with is uncertainty, and to an extent this has been factored in while setting targets and budgets. Therefore, those who have variable plans linked to performance against goals should not see a big difference, at least in junior and middle management, says Padmaja Alaganandan, executive director at PwC.

“Slower fixed pay increase and a larger share of the upside through variable pay will continue, which means at senior levels, alignment with business financial performance will strengthen,” she says. In the case of operational incentives including sales incentives, there could be more swings depending on geography or business-specific performance, adds Alaganandan.

At the same time, a sharper focus on the employee’s report card is guaranteed,says Nishchae Suri, head of people and change practice for KPMG India. Suri says goals for next year will get stretched and for those who will give out bonuses, the bell curve will be more accentuated. Therefore, a top performer will get twice the bonus of the averagerated employee.

For a professional services companies like Towers Watson, bonuses are “self-funded”, depending mostly on the employee’s performance and not on an overall budget. “This year, variable payouts will be hit, with most companies (around 60%) paying less than target (roughly between 50% and 70%). The rest may not make any payouts,” says Subeer Bakshi, director, talent and rewards, Towers Watson India.

According to Aon Hewitt, variable pay is typically 22% of compensation for the top management, 16% for the middle order and 12% to 13% for the foot soldiers. A recent Deloitte study on compensation trends in 2013 stated that across industries, variable pay is 17.3% of one’s cost to company, after an increase of 1.3% points in 2013 over last year. This means, a larger chunk of salary is dependent on the overall economy. The financial sector, for one, has the largest component of variable pay and its employees are now likely to take the hardest hit.

Employees on their part are prepared for a lower variable pay this year-end. Prakhar S (name changed), a middle manager in the sales team at a Mumbai-based telecommunication firm, says he will have to re-think his plans to buy a car. He earns Rs 15 lakh a year, of which Rs 2 lakh is bonus. “Every month, I try to save up to Rs 30,000 and planned to make the down payment with my variable pay. But I do not see that happening now”. However, his company has not sent its employees any communication on the issue.

Firms have queued up before compensation experts to understand the impact of lesser variable pay on retention, deferments and how to make performance metrics sharper. “More companies are coming for help this year than in 2008-2009, because that downturn was sudden for many. But this one has been progressive over one year,” says Ghose.