aon hewitt trq vol 4 issue 2

India Volume 4 Issue 2

Pharmaceutical Industry: Finger on the Pulse

22

Financial Engineering to Financial Inclusion Ramesh Ramanathan

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Fortune Favors the Fittest

Locational Differentiation in the IT-BPM Industry Myth or Reality?

04

whats inside

04 32

cover story

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Locational Differentiation in the IT-BPM Industry Myth or Reality? 04Financial Engineering to Financial Inclusion Ramesh Ramanathan

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Pharmaceutical Industry: Finger on the Pulse22Performance Management: At the Brink of Evolution Ken Abosch

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Trend Check The Middlemen of Sales!

32Survey Calendar34

In the face of high business pressures, India Inc. has no choice but to play favorites towards high performers, further differentiating them from the rest.

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Anandorup Ghose

Director Talent and Rewards, Aon Hewitt

For more information, please write to us at [email protected]

Total Rewards QuarterlyIndia Volume 4 Issue 2

www.aonhewitt.com/india

Dear Reader,

As you read this, the new government of the country would have taken office and the first policy decisions would be coming into effect. A lot is expected from this new force and corporate India is eagerly awaiting a certain degree of radical change in the way the government conducts and interacts with business.

There is a palpable sense of excitement about what the next few years will hold for India and our 12th Total Rewards Quarterly edition also intends to provide you with a field glass to see the changing world of performance and rewards, both in the Indian and global context. We believe that the whole concept of how organizations differentiate performance and performers as well as reward them is undergoing a silent shift the age of normalization and bell curves is gradually giving way to some dramatic new thinking. Within Aon Hewitt, we are keenly analyzing this trend around the world and one of our global Performance & Rewards leaders, Ken Abosch, has shared some of his insights in this edition. Our Annual Rewards Conference this year, also focuses on this theme and we hope to identify the trends in conversation with CEOs and experts at the event.

This edition of the Quarterly brings to you Aon Hewitts in-depth research on salary increases and the linkages of salary increases with inflation, cost of living, savings potential and GDP. Also captured are our perspective and insights from the pharmaceutical industry on compensation rewards and trends. The pharma business is growing rapidly in India and the evolving business has led to changing rewards strategy. We are glad to also bring to you our research on whether locational differences affect cost and performance dynamics within the IT-BPM industry.

In this edition, we are particularly excited to share our conversation with Ramesh Ramanathan, Chairman of Janalakshmi Financial Services on his perspectives around the financial services business and the interplay between inclusion and growth. Ramesh is a truly unique individual and post hearing him talk, we really wish that there were many more like him amongst us!

Here is hoping you enjoy this edition. We sincerely look forward to your feedback, so please do write in to us with your comments and suggestions.

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Roopank [email protected]

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India Volume 4 Issue 2totalrewards QuARTERLy

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Over the last few years, Indian technology and outsourcing firms have struggled to maintain their profitability on the back of increased pricing pressures and slow top line growth in the wake of the harshest recession since the Great Depression. The traditional models of talent management and rewards have not been able to help organizations insulate their cost models given the rate of salary increases prevalent in the Indian market. This gets more pronounced as jobs and processes get industrialized and commoditized further, and clients look towards their outsourcing partners being able to do the job at a lesser cost year-on-year. This high emphasis on operational and cost efficiency has made technology and outsourcing firms look at multiple cost mitigation opportunities. These range from process automation and just-in-time hiring to moving jobs out of high cost locations in India towards

smaller cities where cheaper talent is potentially available, along with the associated lower cost of infrastructure.

Its About Three Things: Location, Location, Location...Locational strategy isnt a new or unique approach being adopted in India alone. Developed markets like the uS have been using city-based salary differentials for a while now based on the cost of living indexes across different cities. Organizations there have been moving less complex work out of the bigger cities to smaller towns to take advantage of the wage cost differentials. On the face of it for India as well, Tier II cities (Chennai, Kolkata, etc.) and Tier III cities (Coimbatore, Jaipur and Chandigarh, etc.) offer a compelling growth story. not only do they have large catchment areas of

Locational Differentiation in the IT-BPM Industry Myth or Reality?

www.aonhewitt.com/india04

Apples to apples or apples to oranges: On the face of it, the migration of talent from Tier I to Tier II and Tier II to Tier III seems to be a no brainer. In the Third-Party BPO space, the per FTE (Full Time Employee) costs across individual contributor and management levels seem to be starkly different across Tier I, Tier II and Tier III cities making a strong case for organizations to strengthen their locational play.

Third-Party BPOs Tier-Wise Differentiation

IT Services Tier-Wise Differentiation

Source: Aon Hewitt IT/ITeS Database 2013-14

IT services on the other hand shows a clear cost benefit at the Junior Professional and Senior Professional levels; however, the cost advantage gets significantly reduced at the management levels. We believe that this is an indication of the maturity of the locational strategy models that organizations have adopted. Over a period of time, IT services firms will have to evolve to increase the location differential in FTE costs for Tier II and Tier III cities. However, a closer look into the data reveals that the location advantage exists only for certain jobs. Highly commoditized jobs seem to have a much larger locational cost advantage as compared to the more complex jobs. Case in point is the trend in data we see in the Third-Party BPO space. 1st Gen BPO jobs (jobs like data entry, voice, transaction processing) which have been around in

educational institutions around them churning out trained graduates and postgraduates who are willing to work in or near their hometowns, popular belief has it that they are also willing to work at lower compensation in these cities than they would work for in the Tier I cities (Bangalore, Mumbai, etc.). Aon Hewitt conducted primary research with the aim of validating or refuting these myths and helping organizations understand the trend that we see across the outsourcing market in terms of leveraging the cost and talent advantage that non-Tier I cities offer. For the purposes of this article, we have focused on the IT services and Third-Party BPO organizations, which are sectors that have led the foray into the non-traditional cities. In fact, from data available to Aon Hewitt over the last five years, it is apparent that Third-Party BPOs were the organizations that pioneered the entry into Tier II and Tier III cities with IT services organizations following suit.

Sector-Wise Population Distribution (%) Across Tiers


PERSPECTIVE


05

India since the beginning of the outsourcing trend seem to have a far higher locational cost difference as compared to 2nd Gen BPO jobs (banking back office, finance & accounting, etc.) and KPO jobs (research & analytics, modeling, etc.). In fact, for specific roles in KPOs and 2nd Gen BPOs, we see the per FTE cost to be in line and in some cases higher than the per FTE costs observed for these processes in Tier I cities. This is predominantly due to demand-supply imbalances for these niche skills in Tier II and Tier III cities. Another factor that is contributing to this trend is the fact that a lot of organizations have transplanted employees at the mid and senior levels from Tier I cities to seed the new locations and provide management guidance and therefore, their compensation levels were more in line with Tier I cities rather than Tier II and Tier III cities.

KPO Locational Differential

2nd Gen BPO Locational Differential

1st Gen BPO Locational Differential


In the IT services space, we see clear cost arbitrage in lower end development and technology support jobs such as testing and infrastructure maintenance as opposed to the trends that are seen in the higher end application/software development. The cost advantage that is seen at the lower levels for development support jobs disappears at the management levels. This, in all likelihood, is a factor of the fact that IT services organizations have a location strategy that is still maturing and the management staff has been placed in these cities inorganically from Tier I cities rather than growing them internally in Tier II and Tier III cities. Aon Hewitt predicts that this trend will normalize over the next few years given that the individual contributors in Tier II/Tier III cities would have matured to take on management roles by then. The other interesting trend that we see in IT services is the fact that there is not a significant cost arbitrage between Tier II and Tier III cities even for development support jobs. This again, we believe, is due to the fact that as compared to Third-Party BPOs, IT services firms have not aggressively pursued a Tier III city strategy. The most important reason that comes across for this trend, i.e. the IT services having smaller differences in the per FTE cost as compared to Third-Party BPOs, is the entry level hiring strategy and talent mobility. Third-Party BPOs hire their entry level talent locally from the talent pool available around the Tier II or Tier III city and more often than not, the employee will be based out of that Tier II/III city for a large portion of his/her career. The talent pools hired in Tier I/II and III cities do not get trained together or work together. IT services firms hire talent nationally, train them together and deploy them across Tier I/II/III cities based on project demand. Such a central hiring strategy along with higher talent mobility in IT services prevents them from having

We do see some of the larger IT services organizations adopting a more localized hiring strategy for the lower end development support jobs by hiring non-engineering graduates from local catchment areas.


significant differentiation in compensation based on the city in which the employee would be based out of. However, we do see some of the larger IT services organizations adopting a more localized hiring strategy for the lower end development support jobs by hiring non-engineering graduates from local catchment areas who would come in at significantly lower cost. This trend as of now is not broad-based; however, given the pressures on cost and optimization, we predict that this would be one of the key trends to look out for over the coming years.

Application/Software Development Tier-Wise Differentiation

Development Support Tier-Wise Differentiation


Fortune at the bottom of the pyramid: Based on the analysis done by Aon Hewitts Workforce Analytical Tool, it can be deduced that not only are the less complex jobs moving to Tier II and Tier III cities, but the nature of the jobs that are moving to Tier II and Tier III cities are based on the capabilities being created in those cities. Taking a deep dive into the 1st Gen BPO jobs across the locations, we see a prevalence of voice jobs in Tier III cities and transaction processing jobs in Tier II cities. We see a clear value chain in the jobs moving from Tier I to Tier II and then to Tier III cities based on process maturity and levels of industrialization.

Tier-Wise Distribution of Key Outsourcing Jobs


not only do we see a clear trend of the types of jobs that are moving from Tier I to Tier II and Tier III cities, we also see a difference in the complexity of jobs that are moving. The headcount pyramids we see in Tier II and Tier III cities are comparatively more bottom-heavy compared to Tier I cities signifying that even for the job families that are moving from Tier I to Tier II and then to Tier III cities, the complexity of the job keeps on reducing either through greater process stability or through rapid industrialization. Technology and outsourcing organizations will, over a period of time, evolve their version of BOT (Build Operate Transfer) to ensure that their locational strategy is successful from a cost containment perspective.

Pyramid Distribution 1st Gen BPO

Pyramid Distribution Development Support


And it gets better: Traditional rewards philosophy states that ceteris paribus, as you reduce the level of compensation of individuals, there is usually an increase

PERSPECTIVE


07

in employee disengagement and attrition within the organization. This one fact alone has deterred cautious organizations from entering the Tier II and Tier III cities with lower compensation figures as compared to their counterparts in Tier I cities. To test this hypothesis, Aon Hewitt looked at what we call Talent Resiliency i.e. what percentage of your organization tends to continue with you over a period of time.


Surprisingly, in Third-Party BPOs and IT services firms, the locational strategy instead of increasing the attrition is actually resulting in better retention in Tier II and Tier III cities. Given that they have been in existence for a much smaller duration, it is encouraging to see that the 4-6 years of experience bracket has higher retention rates in Tier II and Tier III cities as opposed to Tier I cities. We conclude, based on the trend data available with Aon Hewitt that as organizations incubate the Tier II and Tier III locations more, we expect to see greater talent resilience at the 8-12 year experience bracket as well. The fact that there are still limited organizations present in most Tier II and Tier III cities means that the talent does not have enough opportunities in the location resulting in lower attrition. This fact along with low talent mobility and higher cost of living in Tier I cities leads us to believe that the lowered attrition rates in Tier II and Tier III cities is sustainable at least in the short-term. So whats the bottom line? We believe that the locational strategy being driven in the technology and BPO space will only strengthen in the future. As more and more processes/technologies mature, organizations will look at moving them to lower cost locations to further insulate their cost structures thereby triggering a second wave of outsourcing but this time within the country. However, at

least for IT services that would mean a substantial shift in the talent acquisition and management mentality. Employees would need to be made less mobile and more silo-ed at least for the development support jobs to drive meaningful cost difference across locations. These organizations would have to look at committing to moving entire Centers of Excellence (CoEs) to Tier II and III cities to really benefit from a locational strategy while not upsetting the employee dynamics that exist in organizations. For organizations that have not made the play into Tier II and Tier III locations, we believe that the markets have matured enough at this moment for these players to enter this market and deploy a Build talent strategy to hire pre-trained talent while still maintaining a cost arbitrage as compared to Tier I cities. Having said that, we believe the key to making this model successful for the latecomers would be identifying the jobs to move to these locations. Broadly, we believe that lower end voice, transaction processing, infrastructure support and maintenance work can be shifted to these locations. However, the key to identifying the jobs to be moved and the locations to which these jobs need to be moved has to be based on empirical platforms which can facilitate intelligent decision-making processes and give the business leaders insights of the cost benefit analysis of such moves. Aon Hewitts Workforce Analytical Tools have demonstrated considerable success in this area, and have helped organizations make this shift in a pragmatic and sustainable manner.

For the purpose of this research, we have considered Mumbai, Bangalore,

Delhi-NCR and Hyderabad as Tier I (cities which have the highest

concentration of IT-BPM organization headquarters, matured organizations

and workforce), Chennai, Pune and Kolkata as Tier II and Coimbatore,

Kochi, Thiruvananthapuram, Jaipur and others as Tier III.

In this paper, Per FTE cost refers to the salary cost per Full Time

Employee (FTE).

Anuradha MohantySenior Consultant, Aon Hewitt


Lalit GurnaniConsultant, Aon Hewitt


For further details and queries, please write to us at [email protected]

"total rewards statements" (trs )An impactful approach to communicating your total rewards programOur research suggests that a majority of companies are spending vast sums of money on complex Total Rewards packages, which many employees do not fully understand or appreciate.

At Aon Hewitt, we believe that progressive organizations offer compelling rewards to employees. But the leverage of these offers is lost if it is not communicated effectively to the employees.

Aon Hewitt's comprehensive and customized approach to communicating Total Rewards can help:

We have built a comprehensive and robust online portal that communicates your Total Rewards programs. This portal generates unique and customized Total Rewards Statements for each employee, helping them see the value of their Total Rewards package.

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Financial Engineering to Financial Inclusionramesh ramanathan Chairman, Janalakshmi Financial Services

Q. What pushed you to conceptualize Janalakshmi Financial Services and how have you been able to connect such a unique business model with your people?A. The journey for us began when we were living overseas. We were like any other nRI couple who had moved abroad in search of a better life. In the early years, when we got that success, we attributed that success mostly to ourselves. But the more we thought about it, we realized that there was a larger ecosystem from which we

were able to leap forward and achieve the things that we wanted. The possibility of vertical mobility and the idea that one can take control of their destiny is something unique to great societies. It is that ecosystem that enables families and individuals to achieve this success. As we thought about our lives in the uS, we realized that we were the beneficiaries of this ecosystem. The societal framework in developed societies is like the springboard which allows you to put in your own effort to be who you

want to be. It gives you that platform, which doesnt exist in our country. In fact, in India, it is like a fishing net where more people than not, slip through it. For no harm of an individual, for having just lost what Warren Buffet calls the Ovarian Lottery, they are resigned to a life where they cant be the best they can be. The more we thought about it, the more we felt that this was unfair. It was wrong of us to go into another society that generations of people had built and reap the benefits.

Ramesh Ramanathan is a social entrepreneur, and works on urban issues in India. Along with his wife, he is the Co-Founder and Co-Chairperson of Jana Group, a clutch of social enterprises focused on urban transformation in India. Janalakshmi Financial Services, one such enterprise, is a financial institution servicing the micro finance needs of urban India, with a market-oriented focus. Ramesh also works closely with the government on urban issues in a pro-bono capacity. Prior to his social initiatives, Ramesh held leadership positions with Citibank in New York and London, in the banks capital markets business.


So, that was a major motivation for us and we decided to come back. Fortunately for us, we had achieved our financial and professional goals, so this was in many ways the right time for us to come back. That translated into Janalakshmi, because given my background in financial services, it was the most logical place to act as an enabler for people to fulfill their destinies.

Q. Janalakshmi Financial Services (JFS) offers a very unique employee value proposition in comparison to other financial services firms. Being a part of the same financial ecosystem, how have you been able to create something so distinctive?A. A part of it is driven by the kind of institution that we are. The fact is, there is something unique about financial services, when it comes to addressing the challenges of poverty and inclusion. Financial services sector is the most intimately connected with the issue of poverty when compared to any other sector. Also, it is most uniquely suited to being market-oriented. In interventions like education or healthcare which also play a huge role, it is hard to create market-oriented institutions. In financial services, and the credit for this goes to Muhammad yunus of Grameen Bank and many other stalwarts in India itself, who have shown that one can create capable organizations in this sector. When we set out to build Janalakshmi, this concept of micro finance already existed. We just adapted it to suit the organization that we wanted to build. While we wanted to be a market-oriented organization, we didnt want any personal money out of this. So, there is a two-tier structure. One is a for-profit operating entity and the other is a not-for-profit Section 25

holding company which has the promoter share. It is an attempt to create an organization which has a commercial purpose and is driven by the power of the market and all the positives of it, which is scalability and innovation and customer centricity, but at the same time, has an inherent safeguard against the danger of the market which is greed. This structure also allows us to answer that question about greed. For all the good we want to capture from the market, we have protected ourselves from this greed. Especially as the founders, we need to lead from the front on this. Authenticity is the most important currency that we have when we want to get people onboard and align them. There is nothing more authentic than to be open about your own motivation. This practice has allowed us to demonstrate, in a very credible and transparent way, that our only aspiration for the organization is to be able to help millions of people and there is no personal gain in it for us. The fact that we dont have any stake in the game in terms of personal money has not diluted our passion. This system and spirit helps us get the right kind of people onboard and helps us to stay motivated. Q. In such a unique business model, what is the value proposition that you offer to your employees? A. Over the years we have observed, that the typology of talent that comes into our organization is a vast range. At the senior level, we have people like me, who have 20-30 years of experience in the formal banking system, and are motivated by the same larger purposes and a sense of legacy, wanting to be a part of something larger than themselves. On the other

end of the spectrum, there are people who join JFS to be feet-on-street executives. So over the years, we have created different EVPs for different employee segments. They resonate differently for different employee levels. For example, somebody who is joining us as feet-on-street, is looking for security and identity. The larger noble mission is a nice-to-have, but not the driving purpose. Then in the middle tiers, are people who are looking for growth, recognition and to make organizational impact. So we have unbundled the EVP into five different buckets from security and identity at one end to learning, personal growth and recognition, organizational impact and finally accomplishment and legacy at the senior most level. you can almost think of this like a radar, where some of these things are more important for people at some levels and others are at the other end of the organization.

Q. How do you use rewards/pay effectively to drive the right behaviors in the financial services industry?A. We believe talent is everywhere. Just because one doesnt have a degree doesnt mean he/she doesnt have the talent. Our main focus is to primarily test skills, so we dont look at only certificates. We offer employees tools to bootstrap themselves up the organization. Two years ago, a new initiative called naukri, Degree, Makaan was introduced. Our offer to employees was people join as 19-year-old diploma holders. If they want to develop themselves further, they are offered a loan to get a college degree in English. If the employees stay with us for two years, the interest on the loan is waived. If they stay for more than two years, then the loan is waived

THEIntervIeW

India Volume 4 Issue 2 11totalrewards QuARTERLy

off. So over a 4-5 year period, the employee can go from a 19-year-old earning `10,000 as a field executive to a 24-year-old Area Head, earning `40,000 with a college degree. At this point, they are also offered a housing loan. So they go through a naukri, Degree and a Makaan. In some sense, it is making the promise we made to people come true. It is also creating enlightened self-interest because if this is done consistently; we reduce the churn on the feet-on-street level and the investments made. I genuinely believe that in 15 years, the CEO of the company will be someone who grew in the ranks in the company.

Q. In financial services, and in most private sector jobs, we have sort of accentuated the entire war for talent. How have you managed to make training a vital constant in your growth trajectory?A. Six months ago, we introduced a new recruitment drive. We are today a pan India organization in 70 cities across 14 states. We decided to go into the communities where our customers are. Very often, even the children who are customers could be potential employees for us. So we tried reaching out within the customer community and it was a runaway success! At a certain location, 35 positions needed to be filled. We put up fliers among our customers and did a lightweight testing. Around 600 youngsters turned up for those 35 positions. Out of those, a 100 of them were outstanding. So not only were those 35 positions filled out but we ended up over-recruiting. And the cost of acquisition was one tenth of the traditional channel of doing this. The point is, it makes eminent economic sense if we think differently about talent acquisition both in terms of methods as well as

the people we can bring onboard, as opposed to everybody coming in with that clichd degree.

Q. At the industry level, what are some of the fundamental shifts that you have seen in the last five years. And what are the shifts you would like to see in the next five years?A. Soon after the financial crises, I was on the panel for the World Economic Forum, and the focus was on greed and how we are overcompensating people. I think that is the single biggest existential question for us in the financial sector, globally. We have gone overboard in the way people are compensated, but currently, I dont see any way out of this. unlike in many other sectors like consumer products or in manufacturing, where the attribution of ones value-add to the profits is not so straightforward, in financial services, it is very easy to point out the exact profit that was brought in by an individual. In such cases, it becomes very hard to retain talent without using money as the only currency. So everybody becomes a mercenary and the culture becomes completely distorted. One of the major questions that financial services institutions need to address is how do we come back to a compensation formula that doesnt bring out the worst in people? Everybody has a desire to invest in the larger purpose, and if the job doesnt give you that avenue, it can leave you parched at some level. At Janalakshmi, we believe there are enough people out there, for whom compensation is important, but not the only driving force. We offer a credible narrative on how the job at JFS can fulfill an individuals need for purpose. Our association with Aon Hewitt has been about codifying this philosophy and we can see it bringing

out results as well. For instance, in terms of compensation, our approach when hiring feet-on-street is very different from that for our senior management. But as employees move up the organization, other factors such as ability to make an organizational impact and do larger good for the country take prominence over compensation. So in a way, its a balancing act.

Q. What do you think are some of the lessons that the larger financial services or the banking industry, which always seems to be looming under pressures of talent paucity, can learn from the JFS model of conducting business and engaging with their workforce?A. I am a product of the financial market and a student of outstanding financial services companies. Having worked in a large multinational bank, the only thing I would say is that financial services sector is a unique sector because we are at the heart of a countrys economy. Therefore, we have the ability to articulate our role in larger purpose terms. So if we can hold on to that purpose and sharply define, it can be a very important strength for an organization, to then be able to bring onboard the right people, to address this challenge of greed vs. purpose and overcome conflicts. But that requires the right leadership. It requires leaders who are willing to think larger than their own needs and will lead from the front and lead by example.


12 www.aonhewitt.com/india

Fun Facts

With 65,000 colleagues in more than 120 countries, Aon is the leading global advisor on the topics of risk and people. We provide innovative solutions to our clients around six key areas: health, talent, risk, retirement, data & analytics and capital. Below are some fun facts on Aons global presence and the many ways in which we serve our clients.

Aon plc

HR Solutions

Out of the top 10 firms in each industry, how many are Aon clients?

Aon administers benefits for one of every 20 Americans.

Aon directs uSD8 billionin health care premiums/equivalents annually.

Aon moves more than uSD400 million nightly and uSD145 billion annually among investment fundson behalf of our clients.

Aon holds more than17 million survey responsesin engagement databases.

Risk. Reinsurance. Human Resources.

More than 8,000,000 job candidates are assessed byAon on an annual basis.

Aon administers morethan 10,000 unique healthplan designs.

Aon provides investmentconsulting services foruSD4.2 trillion in assets globally.

More than 330,000 client employees are expected to enroll in Aons multi-carrier private health care exchange.

Fortune 500

P&C insurance

Technology

Healthcare

Consumer

Financial

Utilities

Telecom

Risk Solutions

Aon clients are responsible for designing and manufacturing 70% of the worlds 20 best- selling pharmaceutical products.

In the u.K., more than five billion liters of milk a year are supplied by companies insured through Aon.

There is one in two chance that your mobile phone was produced by an Aon client.

In 2013, more than 80% of worldwide passenger volumefor cruise companies wasinsured through Aon.

Aon has brokered the aviation insurance for American Airlines since 1936.

Aon placed the insurance offour 2013 Academy Award winning films.

Aon was the first organization to develop catastrophe models for a number of country-specific perils including floods, earthquakes and terrorist attacks.

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Cover Story



and 22% in projected 2014 increases, this trend is only getting reinforced. This fact that pay disparity between the salary of top management and entry staff (in absolute terms) is as high as 624 times, has led to salary increases for this level fall the most over the last seven years. A large part of the increases at this top management level are in fact being delivered through incentive compensation, both short and long-term. Junior management level continues to receive the highest salary increase as compared to other career levels on account of being a highly mobile group of employees with the highest voluntary turnover rate, low base pay and possibly the highest impact of inflation rates within the country. However, what continues to be a challenge for organizations is to justify whether the 2% higher increase at junior management as compared to senior management is enough to support these differences.

Salary Increase % by Levels of Management

Source: Aon Hewitt Salary Increase Surveys 2007-14

For a country like India, an election year is always studied with more scrutiny than any other. The selection of leaders, agendas and ideology that will shape the country for the next few years foreshadows growth for all facets of our economy. Organizations and individuals alike battle the air of ambiguity with aid of trends which become the cornerstone for everything from projections to budgets for the coming fiscal. Where the corner office and the elevator conversations both speak of a sense of perceived optimism in the outlook for Fy2014, the numbers reflect a higher degree of caution rather than optimism for salary increases for the year. This period reflects the easing off of the unsustainable turbo-charged pre-crisis economic growth. Even though growth appears to be strengthening in both advanced and developing economies, it is expected to be muted and slower paced than in the pre-2008 era. This sentiment is reflected in Indias salary increase projections for 2014 which stands at 10%. This is marginally higher than the projections made in September 2013 (9.8%), but still the lowest the country has seen in a decade (barring Fy2009 when markets became extremely cautious post the global financial crisis). Salary increase trends across major APAC markets mostly remained unchanged since 2013, with India leading the pack yet again followed by China. While salary increases in India echo the volatile sentiment of the economy, with projections lower by 2.6% from the levels of 2012, Chinas increase projections dipped during this period, but appear more relatively stable across the decade.

Increasing Dispersion Across LevelsDispersion in salary increments across levels has been increasing with a view to sustain and manage within limited budgets and reduce impact on the overall wage bill. With dispersion of 12% in 2010 between the highest and the lowest salary increase across levels, 19% in 2012

COVERStory

Salary Increase Budget (%)

Source: Aon Hewitt Salary Increase Survey 2013-14

Even though growth appears to be strengthening, it is expected to be muted and slower paced than in the pre-2008 era.

15India Volume 4 Issue 2totalrewards QuARTERLy

The Industry DivideSectors largely reliant on domestic economy such as pharmaceuticals, chemicals, engineering services and consumer goods, are projecting the highest salary increases, typically above 10% for 2013-14. In these industries, compensation costs represent a smaller percentage of the total cost structure. However, the cautious streak is evident as projections for 2014 have reduced by an average of 30 basis points from the actual increases provided in 2013 by these industries. Service industries like retail, financial services, and hospitality bring up the rear in salary increase projections, with these businesses impacted by the slowing down of the economy and consumer spending. In these industries, compensation costs are a significant portion of their total cost structure, thus managing salary costs has become an important element in their overall cost management strategy.

Highest & Lowest Salary Increase Projections for 2014

Lead Industries 2014 Projections

Lag Industries 2014 Projections

Pharmaceuticals 12.0% Automotive 9.5%

Chemicals 11.2% Energy (Oil/Gas/Power)

9.2%

Cement 10.8% RE/Infrastructure 9.1%

Engineering Services

10.6% Financial Institutions

9.1%

Consumer Products

10.3% Retail 8.8%

Source: Aon Hewitt Salary Increase Survey 2013-14

It is important to note that the dispersion between the highest paying and the lowest paying industries has narrowed in 2014 to about 2-3%, as compared to the 5-7%

dispersion observed in 2013. This can largely be attributed to the year being marked by high inflation, resulting in companies protecting the minimum salary increase being provided to employees to help set off this impact. In fact, on further analyzing sectoral patterns in salary increases across the last 14 years or so, it is evident that increases in the manufacturing sector have remained fairly stable. It is however, the increases in the services sector that have reduced significantly in the period post the global financial crisis. These are industries which have high compensation costs as a percentage of revenue and hence have been reducing increments to ensure sustainability in the long run.

Top Talent to ThriveWith concerns over fluctuating economic conditions, India Inc. turned to the Darwinian principal of natural selection; only the strong shall survive. With shrinking salary increase budgets, the one definitive change observed in the compensation philosophy of organizations in India is the increased reinforcement of the performance and rewards linkage. Top performers are projected to receive an average 15.3% increase in 2014, almost 1.7 times the average increment provided to employees meeting expectations. Industries with the highest differentiation in salary increases between a top and average performer are telecom, retail and financial institutions (1.8:1), where individual performance has a far bigger impact on business performance. On the other hand, capital-intensive industries such as energy, infrastructure and chemicals reported the lowest differentiation (1.5:1 & 1.6:1) in salary increases between a top and average performer. Organizations are also ready to re-define what it takes to be a top performer and ensure that the entry into this

Salary Increase (%)



Dispersion between the highest paying and the lowest paying industries has narrowed in 2014 to about 2-3%, as compared to the 5-7% dispersion observed in 2013.

esteemed club isnt just a knock on the door. In the last five years itself, i.e. since 2007, the percentage of employees in the top performance rating has dropped by 30%, implying that organizations are not hesitating to differentiate sharply on the basis of performance and then allocating a disproportionate share of the total increase budget to these individuals, thus encouraging a high performance culture. An increase of >100% in employees receiving the lowest rating since 2007 coupled with 18% organizations resorting to lay offs/redundancies as a measure to control fixed cost escalation in the overall wage bill, further confirms the Darwinian principal of survival of only the fittest at the workplace!

Salary Increase % by Performance Levels


In the face of increased cost prudence, the other critical lever that organizations are using to reinforce the performance and rewards linkage is variable pay. Spending on variable pay as a part of total compensation has been steadily growing over the past few years. This indicates a shift in overall pay philosophy, as employers are tying a greater percentage of each employees pay to individual and overall company performance. Top/Senior management see 23% of their total compensation as variable (up from 16% in 2001) and even the lowest rung entry level management employee gets approximately 12% of their salary as variable compensation (up from 10% in 2001).

Executive Compensation Too Inches Towards Pay for Performance The Executive Compensation Study 2013-14 confirms

that progressively more and more HR departments are facing a challenge of managing lower pay budgets for the executive pay increases while ensuring sufficient employee motivation. Client conversations reveal an increasing interest of redefining the benefits and incentives structure for the executive team to ensure that retention hooks are established not just on short-term pay but also through long-term for modes ensuring appropriate value sharing between the management top team and the key stakeholders. Over the last year, India has also witnessed a fair amount of regulatory changes around compensation, and related governance aspects. The Indian Parliament has enacted the new Companies Act, 2013 in August followed by updated rules in March 2014 resulting in a significant overhaul on corporate governance norms in India companies especially those which are publicly listed. Hence, the Remuneration Committees are now facing a three-pronged agenda the need to drive performance, the need to attract, retain and motivate executives with smaller pay budgets, and a plethora of new governance and regulatory changes.

Gradual Increase in Performance AlignmentThe study showed a growing discipline in determination of top management compensation levels through higher alignment of executive pay with both the business size as well as the performance. The following charts show the salary increase for executive positions witnessed from Fy2012-13 to Fy2013-14 on different anchors of pay1. There is an increasing trend of loading higher pay increases on variable compensation than on fixed for the executive roles this has further accelerated the change in pay mix for executives with increasing quantum of pay being delivered through performance-based elements. This trend was specifically noted for critical functional and business level positions.

COVERStory


The CEO position analysed approximately 112 incumbents showing an average increase of 10% on fixed pay, 13% on fixed + variable and 19% on fixed + variable + LTI. This indicates an increasing focus on loading compensation on performance and variable payments thereby providing executives an opportunity to earn higher on meeting and exceeding set performance targets. Another interesting observation is an increase in the number of companies benchmarking executive compensation on anchors including annual variable pay and long-term pay by 15% and 27% respectively over the previous year. This reflects the increasing importance of these elements while comparing market pay levels and to arrive at the realistic pay differentials to the market and to the peer group. The regulations around pay for performance as well as investor and shareholder activism in India is gradually picking up pace. Promoters and shareholders are increasingly voicing their concern over disproportionate increase in the levels of pay to executives in light of actual financial performance. Over the last quarter, there is a sudden splurge of companies moving towards business performance linkage during their discussions on executive pay increase. The study indicates that 53% of the participants in the survey are either in talks to change their compensation structures or have

implemented a performance and retention-based plan to counter disproportionate disbursement of compensation to top executives. In the current year, we noted a far greater focus on long-term pay than on annual incentives while certain industries such as banking have had regulatory requirements drive this change, a wide variety of other industries also seem to be adopting a greater focus to incentives being delivered over 3-4 years than through annual incentives. In fact, the study noted a direct correlation between higher compensation increases and higher mix of short and long-term variable components in pay. This is presented in the chart below.

Source: Aon Hewitt Executive Compensation Study 2013-14

Companies where significant portion of compensation is being delivered through variable components (short and long-term incentives >50% of total compensation) showed an average salary increase of 20% compared to companies where pay mix is skewed towards fixed payments. This compensation increase factor again gets loaded more onto the long-term component than the annual component of pay. We note that mature Indian companies are raising the

Salary Increases on TCC with LTI

Source: Aon Hewitt Executive Compensation Study 2013-14

Regulations around pay for performance as well as investor and shareholder activism in India is gradually picking up pace.


bar for future performance along with linking it to higher compensation for its executives if targets are achieved.

Increased Correlation with Business FundamentalsCorrelation between executive remuneration and underlying business fundamentals is a highly debated conversation not just in the developing countries but also in the developed economies of the west. In India, this has been under significant scrutiny over the last few years and it appears that Remuneration Committees are becoming more aware of this issue while determining executive pay levels. The correlation factor for the CEO compensation with the size of the business (revenue and turnover) has improved from 28% last year to 40% in the current years analysis covering over 190 Indian CEOs. However, it may be noted that the mathematical correlation between executive pay in India with business fundamentals is far lower compared to global standards the values are less than half the global levels. The R square factors between compensation and revenue for the uS-based CEOs are 0.60 on Total Annual Compensation and 0.75 on Total Compensation including long-term incentives. The following table provides a broad analysis of these correlation factors (compensation costs with revenue size) seen in India and the uS for certain critical positions across key sectors:

Role Industry India Data US Data

CEO Overall 0.35 0.40 0.65 0.75

CEO Manufacturing 0.40 0.45 0.65 0.70

CEO Consumer Goods 0.15 0.25 0.35 0.40

CEO IT 0.25 0.30 0.45 0.50


CFO Overall 0.30 0.40 0.55 0.60

CFO Manufacturing 0.30 0.35 0.50 0.55

CFO Consumer Goods 0.20 0.25 0.45 0.50

CFO IT 0.25 0.35 0.70 0.75


Bus. Head Overall 0.40 0.45 0.55 0.60

Bus. Head Manufacturing

0.45 0.50 0.55 0.60

Bus. Head Consumer Goods

0.20 0.25 0.40 0.45

Bus. Head IT 0.45 0.50 0.70 0.75

Sources: Aon Hewitt India Executive Compensation Survey 2013-14 and

Aon Hewitt US TCM Study 2013

Increase in correlation factors signifies an increased linkage between the compensation levels and the underlying business fundamentals and also shows greater alignment with performance.

Measuring Executive Performance We have talked about an increased prevalence of performance to pay relationship, but what would it take to measure the executive performance? The Aon Hewitt study captures and closely analyses the performance metrics for executives. The following table shows the categorisation of performance anchors into financial and non-financial measures. The higher financial measure linkages are seen for the CEO as well as the business heads, while non-financial measures tend to be more important for functional positions.

CEO/CXO Scorecard: Weightages of Performance Metrics (n = 102)

Measures Financial Measures Non-Financial Measures

Average Median Average Median

CEO 77% 80% 42% 40%

Business Heads 68% 70% 52% 50%

Functional Heads 57% 50% 62% 70%

The performance measures are in principle similar to those seen for larger developed economies with financial measures being focused around profitability, revenue, and cash flow measures along with strategic initiatives. non-financial measures are typically around service, quality, customer and employee-related matters. Despite differences expected in the way performance might be evaluated in different businesses of different sizes, the study couldnt identify any specific trends based on sector, ownership or size. The broader buckets for measuring performance remained similar to the overall trends noted by us above.

Mathematical correlation between executive pay in India with business fundamentals is far lower compared to global standards.

COVERStory


To Sum UpAs companies manoeuvre a complex economic environment with increased political risks and uncertainties, regulators are stepping in with increased scrutiny and compliance norms. Companies naturally seem to be reacting with some level of caution the high salary growth years seem definitely behind us for now as shareholders have also increased the debate on pay. Performance is the key word and more compensation necessarily will come with significant performance expectations.

Looking AheadThe equation on the surface seems simple sluggish business growth, rising inflation, squeezing margins and continued political and global economic uncertainty should lead to a reduced pool of salary increases being projected by India Inc. But economic wisdom seldom has all the answers, as we have seen. Organizations are working through a myriad set of factors, from external benchmarks on salary increase trends, business performance, affordability parameters and impact of macroeconomic factors, especially high inflation rates while deciding this number on salary increases. In the face of these observations, we can expect to see the following rewards strategies being adopted by organizations in 2014: We expect organizations to closely monitor the

macroeconomic developments and competitive activities over the course of the next few months. An optimistic approach on salary increases can be expected, should the Indian economy display definite signs of growth, which is what the popular sentiment seems to be in the wake of the new stable government taking reins

With limited compensation budgets, employers perceive a higher risk of losing critical talent. Thus, the rewards gap will continue to widen to embed and showcase recognition and differentiation to top performers

Increasing usage of variable pay with moderated salary increases will begin to represent the new normal. An aggressive pay mix, with approximately 24-26% of total pay for top executives, down to 10-11% even for officers apportioned towards performance-based pay, could drive motivation for employees to be productive and provide employers with greater flexibility to compensate based on individual and organizational performance

It will be important for compensation managers to provide strong business justification to increase payroll costs in a situation where the revenue line might

not be growing and the cost base could be subject to inflationary pressures. Double-digit increases can continue so long as organizations can maintain ratios such as compensation cost as percentage of revenue, i.e. increases supported by growth in revenue or profits

Even if business activity and related gains were to resume the growth path, we expect the fundamental linkage of rewards and performance to continue and strengthen, and become a more sustainable and normal way of managing compensation, going forward.

About Aon Hewitts Salary Increase SurveyAon Hewitt concluded its 18th Annual India Salary Increase Survey. The

survey measures actual and projected salary increases and compensation

practices for five specific employee levels top executive/senior management,

middle management, junior manager/supervisor/professional, and entry

level staff. Information used in this report was collected during the period

of December 2013 to January 2014. India saw a participation of 565

organizations across 18 industry and 20+ sub industry classifications.

About Aon Hewitt Executive Compensation SurveyWith over 370 companies across 12 industry clusters and different

ownership types sharing their top executive data, the Aon Hewitt Executive

Compensation Survey 2013-14 is the largest and the most comprehensive

study of salary and compensation trends of senior executives in India. This

study captures salary trends across fixed and variable pay (including long-

term incentives such as ESOPs) as well as details on the kind of benefits and

perquisites that top executives are provided across corporate India.

Data Source:

1. The analysis is based on common positions by company from repeat

participants to the survey as well as actual salary increases as reported by

the participants over the previous year.

Sidhant GuptaSenior Consultant, Aon Hewitt


Poonam ChopraSenior Consultant, Aon Hewitt


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Pharmaceutical Industry: Finger on the Pulse

Consistently in the forefront for the last few years, the pharmaceutical industry in India has become a force to reckon with. In this article, we set out to decode the transformational growth that this burgeoning sector has witnessed, and the myriad HR and talent implications that will fuel as well as foster this evolution.

Tracing the FootstepsThe Indian pharma industry has seen nothing less than a dream run over the past many decades. From almost being non-existent and niche, it has transformed and re-invented itself into being a hub of high quality branded generics drugs. This evolution and phoenix-like rise can be traced to three distinguished phases: Phase I (pre independence): Largely dominated by

Foreign MnCs, involved in importing bulk drugs and formulations from overseas while their Indian counterparts were mostly limited to repacking the formulations produced by Foreign MnCs

Phase II: Enactment of The Patents Act, 1970 was a game changer which eventually translated into a conducive environment for the Indian players to reverse engineer drugs without paying a licensing fee; this also led to the exodus of Foreign MnCs from India

Phase III: Beginning of the golden era of the Indian pharma industry marked by the amendment of the Patents Act, 2005 Foreign MnCs flocked back and rightly realized that India was a destination to be in, while Indian players were shaken up outside their comfort zones and forced to rethink their existing business strategies

Tailwinds for the Next DecadeAs the market trends point out, the Indian pharma industry is expected to reach uSD 45 billion by 2020. The next decade will be nothing less than transformational for the industry but at the same time, this is not likely to happen overnight. Lets look at what might be the key catalysts for the next few years:


Shift towards specialty pharma/innovator drugs: While India is primarily a branded generics market (90%), it is imperative that it enters the innovator/specialty pharma space. With the increasing margin pressures that the generics business has been lately witnessing, it is important that the players focus on niche therapeutic categories like oncology, dermatology, diabetes amongst others and have at least a couple of innovator drugs in their portfolio

Consolidation and mega mergers: In the last half a decade, there has been a distinct evolution in the various strategic alliances that have happened. While earlier alliances were restricted to product/geographic expansion or vertical integration, there have been numerous pipeline, licensing and co-marketing deals that the industry has witnessed. The recently announced Sun Ranbaxy deal could potentially open the doors to some mega mergers in the industry leading to a scenario wherein only the big fish dominate the space

Compliance and regulatory framework: Regulatory framework will continue to tighten its noose effective compliance will form part of the core strategy for the pharma players, going forward. With the increasing stringency of the Food and Drug Administration (FDA) around Good Manufacturing Practices (GMP), there would be a considerable focus around state-of-the-art high quality manufacturing facilities. While there can be limited strategic responses to price-related regulations (Drug Price Control Order), cost discipline, i.e. cutting the flab will be a key focus area

Despite shakeups here and there, the pharma industry has always been a blue eyed boy of the investors. This has been adequately reflected by the salary and rewards trends in the industry.

Salary Increases Mirror the Growth StoryThe salary increases for the pharmaceutical industry have been higher than that of the overall industry for a decade which is a result of the higher growth that the industry has seen when compared to the overall GDP growth rate. For the period 2009-13, the GDP growth rate has been 6% while the pharma industry has grown by 20% (domestic growth at 18% and exports have grown by 26%). This possibly explains why pharma has sustained the spot of being the industry with the highest salary increase. This is compounded by the fact that

traditionally it has been associated with lower base pay, and the recent years have seen a catch up momentum.

Table 1: Pharma Industry vs. Overall Industry Salary Increases 2009-14

Industry Comparison

2009 2010 2011 2012 2013 2014 proj.

Pharma Industry

13.4% 13.0% 14.8% 13.6% 12.7% 12.4%

Overall Industry

6.6% 11.7% 12.6% 10.7% 10.2% 10.0%


The pharma industry has witnessed the highest net addition of jobs across the years to support the consistent growth rate most of these additions have been in sales and as a result, the junior management has seen the highest salary increases across all levels of management.

Salary Trends for Indian vs. Multinationals: In Line with their Strategies The Indian organizations which are on a massive global expansion spree are observed to be heavily investing in getting high quality talent for their top management and lead the foreign players by at least more than 10% in terms of Total Cost to Company (TCC). This also showcases their efforts in getting leaders who can lead the transformational changes the Indian players are going through. The foreign multinationals were observed to pay higher at the junior and middle management cadre with a 25-30% premium on both Total Cost to Company and Total Fixed Pay over Indian companies. But over the years, with increased war for talent and in their efforts to remain market-competent, Indian companies with a sustainable higher growth rate than multinationals have been making conscious efforts to bridge this gap which has translated into higher overall salary increases for Indian companies vis--vis foreign multinationals.

Table 2: Salary Increase Comparison Across Indian and Multinational Companies

Type 2009 2010 2011 2012 2013

Indian 13.8 13.7 15.0 13.0 13.0

MnCs 12.8 12.1 14.8 12.9 12.5


PERSPECTIVE

India Volume 4 Issue 2 23totalrewards QuARTERLy

Rewards Transformation Complements Business Revolution

A) Pedal on PerformanceThe pharmaceutical industry has been more performance- focused than other industries. Performance differentiation can be done through differentiated salary increases, relevant normal curves and pay mix. 1. On performance differentiation through salary increases while the overall industry has looked at an index (Far Exceeds vs. Met Expectations rating) of 1.7 across the last three years, its the pharmaceutical industry that has pushed the index from 1.6 to 1.76 in the last three years. The industry is increasing its performance focus to ensure that performance is recognized and rewarded. 2. Due to the overall industry performance, the bell curve is more tilted towards far exceeded expectations, but that hasnt stopped the industry from differentiating aggressively on performance. While the overall industry

has been constant at 12-13% on the bottom 2 ratings, the pharmaceutical industry has increased this percentage from 11% to 16% across the last three years to ensure a truly high performance culture.

Table 3: Performance Curve Overall vs. Pharmaceutical

Pharmaceutical 2011 2012 2013

Performance % of Emp % of Emp % of Emp

Far Exceeded Expectations 9.3 9.7 10.4

Often Exceeded Expectations 25.3 29.1 27.5

Met Expectations 53.8 46.2 45.4

Often Did not Meet Expectations

9.2 10.9 11.9

Did not Meet Expectations 2.6 4.0 4.9

Overall 2011 2012 2013

Performance % of Emp % of Emp % of Emp

Far Exceeded Expectations 8.7 8.7 8.7

Often Exceeded Expectations 25.3 24.3 23.8

Met Expectations 54.5 54.8 54.6

Often Did not Meet Expectations

9.7 8.9 9.4

Did not Meet Expectations 2.5 3.2 3.5


3. The industry has seen a steady aggression on pay mix with more focus on variable pay over the last three years. The industry, including both Indian and multinationals consider variable pay as an important element of the Total Rewards proposition. While multinationals are more

The industry has seen a steady aggression on pay mix with more focus on variable pay over the last three years.

Table 4: Pharmaceutical Pay Mix Comparison: Indian vs. MNC

Management CadreMNC MNC Indian Indian Overall Overall

year TFP Vpay TFP Vpay TFP Vpay

Junior Management 2013 83% 17% 88% 12% 84% 16%



Middle Management 2013 88% 12% 90% 10% 88% 12%



Senior Management 2013 85% 15% 85% 15% 85% 15%



Top Management 2013 82% 18% 83% 17% 83% 17%

Top Management 2012 85% 15% 86% 14% 86% 14%

Top Management 2011 85% 15% 88% 12% 87% 13%



aggressive at junior management (field sales level), the multinational and Indian companies converge across all other management levels.

B) Pronounced Functional Premiums and Pay StrategyThe industry has seen a more pronounced functional pay strategy evolve. The functions can be clustered into four types mentioned below on the basis of similar talent and work patterns.

Cluster Functions

Cluster 1 Intellectual Property, Medical & Regulatory, Packaging Development, Pharmacovigilance, R&D

Cluster 2 Engineering, Manufacturing, Quality, Supply Chain

Cluster 3 Admin, Corporate Affairs, Corporate Communication, Finance, HR, IT, Legal, Strategy & Planning, BD, Marketing, Marketing Research, Medico Marketing

Cluster 4 Sales, Sales Training, SFE

These functional clusters have seen a clear pay differentiation strategy evolve. As tabled below the transition from 2011 to 2013 shows a sharper differentiation across functional clusters. Cluster 3 and 1 emerge as the functions with premium Cluster 3 which has all the corporate functions is high on premium as most pharma companies are increasingly looking at other sectors like FMCG, banks, telecom, IT to get talent for support positions; Cluster 1 which has all the R&D and related functions has seen a major talent war within the sector as R&D budgets for most Indian companies have seen a year-on-year growth of 20-40%. Cluster 2 manufacturing and associated functions are very region-specific and thereby the compensation is usually driven by the region and its endemic talent pool. This has historically been a function with the highest discount with respect to compensation and continues to be so. Cluster 4, the sales force makes up for the majority of the workforce, especially at the junior levels, and this cluster has been observed to be the one nearest to the level median.

Table 5: Pharmaceutical Pay Functional Premiums

Year Cluster 1 Cluster 2 Cluster 3 Cluster 4

2013 1.108 0.873 1.137 0.961

2012 1.083 0.873 1.135 0.949

2011 1.036 0.908 1.113 0.924

Source: Aon Hewitt India Pharmaceutical Forum 2011-13

C) Client ConsiderationsAon Hewitt interviewed some of the notable C&B professionals of pharmaceutical companies, to understand their thoughts around rewards and the overall business. We have summarized some of the extracts, based on our discussion: Some of the organizations have adopted a wait and

watch approach, i.e. while they are optimistic about the future prospects, they would exercise some bit of caution given the larger economic sentiment. They are aligning their existing strategies to cater to the immense growth opportunities, while they are keeping an eye on costs as well

Do more with less is the key message across the board. Having said that, priorities continue to be investment in the form of rewards initiatives (compensation benchmarking, benefits, internal pay ranges, etc.) such that rewards programs keep fueling business transformation

More transparency and manager involvement: While earlier all strategic discussions were limited to boardrooms, there has been an increasing involvement of managers in the decision-making process. This has led to increased sense of ownership and accountability in the minds of the employees with respect to rewards programs

Buoyed by strong growth drivers, the Indian pharma industry is all set for an exciting journey going forward. now with a stable government at the helm, its growth story seems more sound and sustainable.

PERSPECTIVE

Nivedita SrivastavaSenior Consultant, Aon Hewitt


Ketika KapoorSector Lead FMCG & Pharma, Aon Hewitt


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Q. there have been increasing conversations about focus on performance-based rewards. Basis your experience, do you actually see a lot of companies questioning the bell curve model and trying to re-engineer performance management?A. If you refer to OBoyles research on Revisiting the norm of normality of Individual Performance1, it calls into question the validity of the bell shaped curve and suggests that there are very few elite performers who are

not only extremely valuable but also extremely rare. This is probably the most provocative challenge to the thinking today about the use of a bell shaped performance curve. That research is also careful to point out that their research may not be applicable to all types of businesses. The study is based on the performance of lead athletes, entertainers, politicians, etc. There are several categories and it is believed that while the data does correspond to business, it may not to all types of businesses.

Performance Management: At the Brink of Evolution


The majority of companies and HR professionals are pursuing the belief that performance does, in fact, look like a bell shaped curve. The problem here is, very few organizations actually have a bell shaped curve. In order for the curve to be a normal distribution, you need to have as many performers at the bottom of the performance as you do at the top. So when 90-95% population falls under the top three categories, it is not possible to have a bell shaped curve. Some organizations have tried to address this by having fewer levels in the performance ranking system to have a better distribution. Other organizations try the forced performance ranking distribution approach. This is successful in the short run in giving a better distribution, but it is more of a compliance measure, as opposed to helping organizations assess performance. Virtually, no organization is satisfied with their performance management system today. usually when I speak to an audience of 300 or more and ask if they have an effective performance management approach, I usually get one or two hands in the audience and thats the most we see. This is an area that continues to be perplexing to organizations probably because there is the design aspect as well as the execution aspect. HR professionals

tend to think it is the design problem, but most HR professionals dont realize it is an execution problem more often than not the program is just poorly executed. The training, selection of managers and supervisors to do this effectively, commitment by leadership are all very important aspects of execution which tend to get missed out.

Q. Can you give a few examples of these newer/next gen practices with respect to performance and rewards? A. HR is always looking for the next breakthrough practice. But I think in this case, there isnt anything pathbreaking. Simply put, it is about going back to the fundamentals of performance management. There are two critical elements i) how organizations approach goal setting, the communication and further cascading of those goals, and ii) selection of effective resources to manage this process. I know that doesnt sound very next gen but thats what best-in-class organizations are focusing on. One of the most serious problems is that managers dont know what defines good performance. So they dont know when some goal has been achieved or not. Having clear goals, cascading them down, giving examples of how they have been achieved are critical to an effective performance management system.

Q. Do you think there are many companies which are doing away with bell curves or are looking at alternate approaches? A. yes, there are organizations which are experimenting with the performance management systems while there are others, which are

doing away with the performance ratings altogether. They work on a calibration type of arrangement. Managers use performance calibration to discuss how to apply similar standards for all employees. So in a way, it takes away the possibility of manager bias or unjust review system by establishing a fair and equitable standard by which all employees are measured. For example, reviews between two teams with different managers would be calibrated to take into account the different reviewing styles and get a better idea of actual performance. After implementing calibrations, the managers will hold each other accountable for their ratings and extremely hard and extremely easy reviewers will be brought into line with the rest of their peers for more transparent performance reviews.Organizations are trying to be more effective at this. But it boils down to the two things I said earlier i) having clear goals and outstanding execution, and ii) recognizing performance and providing honest feedback. These are some of the key parameters of effective performance management.

Q. With the increasing interest towards alternate approaches, are more companies actually looking at differentiated rewards or rethinking the approach to pay for performance? At what stage of maturity does an organization usually adopt such practices?A. This is an interesting question since this moves into a different dimension, where we are talking about differentiating rewards. Our data shows that in the uS, around 25% of companies are taking a more aggressive approach to provide

One of the most serious problems is that managers dont know what defines good performance.

ASKoUrEXPERT


significantly greater rewards to top performers and no rewards to average or below average performers. That includes salary increases as well as bonuses. However, thats a minority and 66% of uS companies are still spreading the budgets across the entire population to give something to everyone. Even the last two ratings are also given salary increases and bonuses. And the surprising thing is, most organizations arent even aware of this happening. It is not by design but by practice. Organizations also have a fear of upsetting the average and below average population which forms the majority of the employee base. However, the irony there is that they are keeping the average and below average population satisfied or almost satisfied at the expense of top performers. OBoyles research clearly shows that the top 1% performers give 10% of business results while the top 5% of performers give 26% of business results. There are other studies to show that the return from a star performer is almost 200%, for an average performer it is 100% and for a below average performer it is about 40% to 50%. If organizations looked at this as an economic model, then they would differentiate rewards for top performers significantly.

There are two series that come into play and are important here. One is the incentive effect and the second is sorting series. Incentive effect basically focuses on creating a very strong relationship between results and rewards. This will translate in the existing employee population responding as per business requirements. This will ensure higher productivity and better performance. It states that there is a strong relationship between high performance and high rewards and low performance and low rewards. The sorting series says that if there is high dispersion of rewards based on performance, then over time, the set of talent that the organization draws will be high performing as compared to other organizations. The sorting effect in essence says that high performers will stay with organizations that have high performers and leave organizations that have more of average performers. Its almost like organizations are saying that either you shape up or shape out. There is no place for mediocrity.

Q. Is it realistically possible for organizations to define the first among equals in their top performers set? Do companies actually identify and differentiate these elite performers? Do you think the next gen practices make it easier for organizations to identify these elite performers?A. I think it is absolutely possible to define the first among equals. Organizations need to establish criteria to define and articulate what exactly constitutes high performers. And yes, organizations do differentiate these elite performers. Currently, only 25% of the organizations in the uS

are following this practice, but yes, more need to follow suit. What would work in this scenario is deciding the Dual Rewards Strategy. The organization would need to define the rewards parameters for these elite performers and communicate those to the entire organization. After this, the organization also needs to define the rewards parameters for the non-elite performers, which should also be communicated to everyone. A few examples of the different parameters that an organization should define and communicate throughout the employee population for elite and non-elite performers can be

Elite Performers

Significantly larger salary increases

Positioning at the 75th to 90th percentiles

More frequent salary reviews

Multiple forms of recognition

More exciting tools, projects and opportunities

Non-Elite Performers

Continued employment

Minimal salary growth or reward through lump sum increases

Positioning at the 40th percentile

Less frequent salary reviews (18 to 24 months)

non-monetary rewards

Q. Do you think currently compensation is efficiently distributed across performance levels? What are some of the ways in which compensation can be efficiently distributed across performance levels followed by sharply differentiated rewards programs for performance levels? A. I think, in the current model of performance management, average

Organizations need to establish criteria to define and articulate what exactly constitutes high performers.


and below average performers get more compensation than they should for their performance and by consequence, the top performers get lesser rewards for their performance. Organizations in the uS have a 3% salary budget. Ideally, the top performers should get a 6-8%. The only way to accomplish this is by ensuring that the average performers do not get a 3% increase. Thats the only way for the math to work. They have to get 1.5-2% increase or maybe get no salary increase but a lump sum amount which is not counted in perpetuity. The last two ratings should definitely not get any increases. That would be the ideal way to distribute the rewards given the returns the organization gets. Ill quote the Sturman2 study since it is a great example of quantifying the economic value from different levels of performance. It states that there is tangible evidence that high

performers give almost 200% returns which justifies the cost they receive. The bottom ratings do not even cover their cost, so it would not make sense to give further increases.

Q. Do you see companies actually measuring the correlation of performance, pay and business results? What do you think are the results? A. From a salary increase standpoint, the size of the budget that is established each year does reflect the business results to some extent. Organizations that are struggling to stay in business will obviously not be able to provide a full budget for increases. On the other hand, organizations which are extremely successful will have a slightly higher budget. That is one way I see it happening but it is really subtle. When it comes to performance bonuses, yes organizations do want a correlation between performance pay and business results as executed through a well-designed bonus payout plan. Increasingly, the bonus payout plans are being appropriately designed to cover quantitative and qualitative goals. For example, if I am in the IT department, a part of my bonus would depend on company performance, a part on how the IT department performed and a

There is tangible evidence that high performers give almost 200% returns which justifies the cost they receive.

Obstacles to Differentiated Pay for Performance

Insufficient funding Managers lack skills

Skewed performance distributions Affinity to take care of all levels of performance

Faulty goal setting no clear definition of performance

Lack of consequences

unrealistic employee expectations Counter culture (dont believe in emphasizing stand-out performance)

Poor modeling by executives The new work (teaming)

Only strong performers remain Impact on intrinsic motivation

third part would depend on my contribution to the organization. In such a scenario, if an employee is in the bottom two performance ratings, then he/she would not be eligible for bonus. Thats how we have seen organizations connect business results to performance.

Data Source:

1. Ernest O'Boyle Jr. and Herman Agunis, The best

and the rest: revisiting the norm of normality of

individual performance, Personnel Psychology,

2012.

2. Sturman, Trevor, Boudreau, Gerhart, Evaluating

the Utility of Performance Based Pay, Personnel

Psychology, 2003.


ASKoUrEXPERT


The size and complexity of the Indian market makes it uneconomical for organizations to invest in a sales & distribution network entirely of their own, leading to organizations appointing Distributors or Stockists/Super-stockists or Manpower Agencies by geographies. These distributors purchase stocks in bulk from the FMCG manufacturers, re-distribute it to retailers, maintain stock of the products and conduct field level marketing activities such as in-store promotions, etc. They have their own employee base to conduct various sales activities. These employees, on the rolls of the distributor or outsourcing agencies, are the feet-on-street representing the FMCG companies. Organizations play a crucial role in setting targets, monitoring & measuring performance, providing guidelines for salary fitment and funding sales incentives for this population. However, the FMCG organizations struggle with managing this population as they have a high turnover (approximately 31%) and their salaries need to be governed by the Minimum Wage Act, 1948. Given this backdrop, Aon Hewitt conducted a comprehensive benchmarking for this Off-Roll Field Sales Force population, typically employed by a Distributor or Manpower Outsourcing Agency.

The Real Salesmen; Composition of the Off-Roll Field Sales ForceDistributor Sales Representative (DSR)

Pilot Sales Representative (PSR)

Merchandisers Beauty Advisors/Shop-in-Shop Promoters

Employee on Distributor/Third-Party payroll, typically in Urban Markets

Employee on the Distributor/Third-Party payroll usually in Rural Market (serviced through hub & spoke model)

Employee on Distributor/Third-Party payroll, typically in Urban Markets

Prevalent only on a case-to-case basis. Employee typically on Third-Party payroll, found in Urban Markets

Key responsibilities: Order Booking, Collection & Merchandizing

Key responsibilities: Order Booking from Sub-distributors, Billing, Collections & Merchandizing

Key responsibilities: Product Placement, Brand Visibility, Share of Shelf, FIFO and Store Hygiene

Key responsibilities: Consumer Interaction, Brand Promotion, Product Placement & Sales

A Typical Day in the Life of a Distributor Sales Representative % of Time Spent on Activities

The Middlemen of Sales!Trend Check


TREnDCHeCk

How does the Compensation Stack Up?

The Feet-on-Street Behind the Sale of Fast Moving Consumer Goods (FMCG)

Overall Analysis on Total Cost to Company (TCC)

Source: Aon Hewitt FMCG Off-Roll Field Sales Force Study 2013

Market Median Figures in `000 per month

Total Cost to Company represe

aon hewitt trq vol 4 issue 2

Documents

compensation rewards

rewards strategy

financial services business

bpm industry myth

rewards quarterlyindia

annual rewards conference

corporate india

evolving business