A new-age payments technology firm has been exploring the option of tweaking the compensation structure of its senior management to raise the variable pay to 50 percent of the cost-to-company (CTC) from the current 40 percent. The idea is to cap fixed costs and increasingly link the pay to performance.
As companies grapple with cost pressures, linking variable pay or the performance-based component of the compensation package of senior management to the company's performance is becoming an alternative.
This could mean the variable pay will be raised to 50-55 percent of the CTC in 2020. At present, it constitutes 40-45 percent of the CTC for top management while it is between 25-30 percent for the junior staff.
With a drop in corporate earnings in the September quarter, there is increasing pressure on companies to link a large quantum of the pay to performance. Employee cost that is almost 30-35 percent of the expenses weighs down the earnings.
“The variable component of the CTC also takes into account how a company performs and not just an individual employee’s performance. Hence, it makes sense to have a larger quantum of variable pay,” said the chief human resource officer at a large financial services firm.
A rise in variable pay directly means that the yearly in-hand compensation could be much lower. This is because even if an employee completes all targets and the company performs well, only 80-85 percent of the variable pay will be given.
For instance, if an individual has an annual CTC of Rs 10 lakh, of which Rs 4 lakh is in variable pay, then the take-home compensation will be Rs 6 lakh excluding taxes. However, an increase in the percentage of variable could mean Rs 4 lakh will now be Rs 5 lakh and reduce the take-home to Rs 5 lakh. It is also important to note that variable compensation is usually paid as a bulk amount and will attract taxes.
"Instead of hiking the annual salary substantially, firms will only increase a large chunk of the variable portion in 2020. So while on paper an employee's CTC goes up, the actual salary may stay constant," said the India chief executive of a global HR firm.
On the one hand, corporate earnings have slowed, while on the other there is a consumption slowdown. For consumer-facing industries like FMCG, retail and e-commerce, this leads to further concern. Hence, the variable pay to match this change.
India’s gross domestic product (GDP) grew 4.5 percent in July-September 2019, the lowest since the fourth quarter of 2012-13, confirming fears of a deepening slowdown in the economy as households aren't spending enough to buoy demand and companies aren't adding capacities or hiring more.
HR sources said the top management will be the biggest hit while there will be a partial increase for the entry-level staff as well.
Which sectors would be impacted?
Among sectors, BFSI, FMCG/retail and e-commerce would be the biggest hit. In e-commerce, for instance, the variable pay that stood at around 30 percent three to four years ago has now increased to almost 40-45 percent for the top management.
In banking, Reserve Bank of India has said that top executives will have to receive half of their salary in variables which will be linked to the bank's performance. This comes into effect from April 1, 2020.
This will help save banks on the salary costs with entities struggling with rising bad loans and a slump in real estate sector impacting loan disbursals.
However, traditional sectors like education that have not yet linked pay to performance may continue to see this trend at least for the next three to four years.
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