IF you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too.
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And—which is more—you'll be a Man, my son!
If (no pun intended) you were to pick up the first few and last few lines of Rudyard Kipling's much acclaimed poem, and use a literary lens to evaluate India Inc's rewards strategy rather just the typical economic barometer, you could make the case for India's coming of age story for 2017.
The trend this year reflects a gradual slowing of rampant pay increases and a higher emphasis on productivity and performance—quite literally a "graying" of salary budgets...
Viewed against the backdrop of a highly difficult year, as wave after wave of "unprecedented" events around the globe shook us—the results of the US elections, Brexit, and closer home the demons of demonetisation and the underperformance of many sectors—it was certainly a time of upheaval and duress. Indeed it was as VUCA (volatility, uncertainty, complexity and ambiguity) as it can get. So, most pundits and practitioners predicted a fairly gloomy picture when the time came to predict and project how salaries would shape up for 2017. However, this time around, a different story has emerged.
Aon recently concluded its 21st annual salary increase study that covered over a whopping 1000 companies with an equal split of manufacturing and services, making it one of the largest and most comprehensive studies on performance and rewards trends ever carried out in India. The survey projected a drop in pay increases to an average of 9.5% across industries from 10.2% last year. Not only is the drop at best marginal, it also downplays the impact of demonetisation which has been felt in certain sectors. The trend this year reflects a gradual slowing of rampant pay increases and a higher emphasis on productivity and performance—quite literally a "graying" of salary budgets for India.
Chart 1: Salary Increase trend in India
Some more gray than the others
Increasingly we are recognising that the India average of 9.5% is actually a very broad number. The truth is that industries are behaving quite differently based on where their growth patterns are and how the "glocal" events have impacted them. Salary increase in India today represents business fundamentals that will not swing wildly each year but will stay on course over a longer term. Questions organisations are asking before deciding the budget are: What is the talent supply–demand gap? Are we making investment hires for future? What is the affordability of the firm? Answers to these questions play a pivotal role in deciding the budget number. Decisions are no longer knee jerk or based on market sentiment. They are based on facts and business realities.
Table 1: Salary Increase Projections—2017
No country for an average performer
So what happens when business performance is average, sentiments are poor and budgets are meagre? People expenses get impacted. With tighter budgets, it is imperative for firms to ensure that their "top talent" is identified and remunerated accordingly. The Survey revealed that the segment of population that features as "high performers/top raters" has fallen to 7.5%, the lowest number recorded in the 21 years of the Salary Increase Survey in India. Consequently, the multiplier that India Inc. is offering these employees is also very high. At 1.8 times, India is one of the highest differentiators across Asia.
Chart 2: 2016 Bell Curve Distribution
Chart 3: Pay for Performance Multiplier
Chart 4: Highest Differentiators in 2016
Employees are coming of age as well
There was a time when attrition used to be one of the greatest challenges for HR to manage in an emerging economy like India. However, attrition is India today stands controlled at 16.4%. The number has been stable for the last two years and is one of the lowest amongst emerging economies around the world.
So what is changing? There are two clear themes. Firstly, for the first time in almost a decade and half, India Inc. does not have a specific industry that is pulling talent from industries or what we term as the "pull" force. In the early 2000s it was insurance, the latter half saw the emergence of telecom and finally in the last five years we saw startup organisations pursuing talent actively and aggressively. Widespread talent hunting from these industries resulted in heavy attrition across industries.
Given the state of the global economy and uncertain times, employees have taken a more mature outlook—they are building their careers rather than indulging in myopic money games.
The second theme is the "push" force. Over the years, firms are investing far more in engaging their employees and ensuring that "regrettable" attrition is controlled as much as possible. Outside of "compensation", organisations are investing far more in L&D, recognition programs, differentiated benefits and an enabling work environment to control attrition. In addition, employees are also clearly getting smarter about rampant job changes. Given the state of the global economy and uncertain times, employees have also taken a more mature outlook—they are building their careers rather than indulging in myopic money games.
And finally, firms are far more cautious about creating every new job. The concept of double hatting is almost an acceptable norm across industries. With relatively fewer jobs being created the attrition levels automatically have gone down.
Fleeting fad or enduring equilibrium?
A fundamental question that is being asked is that if the economic conditions improve and we see softening of the global headwinds as well as a resurgence of the Indian story, will salary increases claw back by next year? Possibly, but in all likelihood not to the higher echelons that we have experienced in the last few years. A range of 9.5-10% is fairly likely and could be achieved as fundamentals remain strong and conditions stabilise, but the graying of the salary budgets and the maturity with which Indian companies manage their compensation decisions will ensure we don't see a resurgence of the 10.5% and above era. We believe this to be the new norm that will emerge given the rising wage costs, P&L pressures and pay for performance equations that confront and challenge most business leaders.
Maturity not only means the prudence and pragmatism that India Inc. has clearly demonstrated—it also means enduring and accepting uncertainty and opacity in a sustained fashion. And we hope we continue to see more of that even if the complexity of global and local conditions doesn't get mitigated in the coming year.