Rewarding

Tradition meets transformation

India

04 | 2008

Indias explosive growth has created a talent management crunch. Businesses are struggling to cope as established practices are overturned by a dynamic and ambitious new generation. Can you rise to the challenge? >>

2 Rewarding India

Contents
Big opportunity, big risk Getting to grips with scale The generation gap A talent for over-engineering Finding and keeping talent Get your house in order Get sophisticated Get creative Go the distance 2 4 5 7 8 11 13 14 16

2 Rewarding India

India is one of the most exciting economies in the world, with great opportunities for growth for both domestic and foreign companies. But those who look to India as the source of an inexhaustible supply of highly trained, cost effective talent are likely to be disappointed the reality is rather more complicated.

Big opportunity, big risk

The explosive rate of growth in India has created a phenomenal demand for talent, which the Indian education system is struggling to meet. The gap between older, established workers and the ambitious, up-and-coming younger generation is widening, leaving companies struggling to control internal equity while attracting the graduate talent they need. Reward programs are in crisis as wage inflation spirals and staff turnover rates hit new highs.
The knee-jerk reaction of many organizations to the ongoing challenges in India has exacerbated many of the difficulties faced there. Success depends on a measured and sustainable strategic response, particularly in the area of reward. Those companies who address reward together with broader issues of talent management training, clear career paths, employee recognition will win. The best companies are already laying the groundwork for their future success in India and HR professionals are at the centre of their preparations. India represents one of the most significant HR challenges on the world stage: can you rise to it?

4 Rewarding India

Getting to grips with scale

Everything about India is huge. Its 3.2 billion square kilometers is home to 1.16 billion people one sixth of the worlds population and India is the worlds fourth largest economy in terms of purchasing power parity, with a current GDP of US$1.1 trillion. Economic reforms introduced in 1991 set India on a road to rapid growth. Foreign direct investment trebled in 2006/07, with India second only to China as the most favored destination for investment. The countrys spectacular growth has been driven by the service sector (particularly IT and business process outsourcing), which accounts for 55% of GDP. Its not all about foreign companies taking the opportunities that India offers. Indian industrial companies rank among the top 10 producers in the world in a number of sectors, including Tata Motors in commercial vehicles, Tata Steel-Corus in the metals sector and Ranbaxy in pharmaceuticals. In the past year an Indian company (the state-owned Oil and Natural Gas Corporation) appeared for the first time on the list of the Fortune Most Admired Companies. Its also, famously, a country of economic extremes. While the rise of the middle class has increased the spread of wealth, the gap between top and bottom of the range is enormous. According to Forbes magazine, two of the richest men in the world (thanks to the meteoric rise of the Mumbai stock exchange) are Indian Mukesh and Anil Ambani. At the same time, India is a country where a third of the population cannot read or write and a quarter live on less than 40 cents a day.

The generation gap

Indias emergence onto the world stage has been swift and audacious. Management, corporate structures and, in turn, human resources and reward management have struggled to keep up with the pace of change. Before 1991, 85% of post-matriculation employment was in the public sector. Pay was determined through agreements between the government and unions, salary progression was determined by length of service rather than by performance, and variable pay was rare. Similar conditions prevailed in the private sector, where government pay scales were often used as a benchmark. Job security was the fundamental driving force for the vast majority of employees in India. Its hardly surprising that the people profile of Indian organizations, as a result, developed set characteristics. Typically the workforce featured a large group of people who were dedicated, loyal and proud of their long service with the same employer. They were comfortable with the stringent company hierarchy set by most organizations and expected their career to follow a preset structure. The open economy and technological revolution, though, encouraged the creation of new and dynamic organizations with a new management style and a new type of employee younger, highly qualified and ambitious that sits uneasily within the traditional business and career structure. This new set of employees thrives on achievement, is unafraid of change and expects a rapid ascent up the corporate ladder. This phenomenon is complicated still further by the fact that India is inherently a hierarchical society. Deference is a feature at all levels and, while it is in decline, is still on a par with the experience of the US and the UK in the 1950s. Older workers expect to earn more than anyone younger and there is a close psychological link between pay level and length of service with the organization. But the balance of power is shifting to the younger generation. The growth in population together with increasing levels of education mean that there are now far more of the new generation of workers on the market and their skills are in demand. As a result, many companies have to pay new recruits more than their older, established employees, creating internal inequities.
The median age of Indias population is 24.8 years. Just 5.1% of the total population is over the age of 65.

6 Rewarding India

A talent for over-engineering

Managing a two-tier workforce
The tensions between the older, established workers who have stayed with the same employer for years and the younger, dynamic and ambitious employees (who are a particular feature of the booming service sector) represent a serious challenge for HR. Almost every established Indian organization has these two diverse groups of employees. The solid collection of older (and often disillusioned) workers who have been with them for some time are unlikely to go anywhere in a hurry. The younger employees, on the other hand, see limited chance for progression and so look elsewhere for the promotion prospects they crave. The higher wages demanded and generally received by the new young generation of highly qualified and mobile workers have created resentment among the more established workforce. As an added complication, older workers often have trouble accepting instructions from a younger manager in a society where they have been used to demanding deference from the younger generation. Managing these diverse sets of employees simultaneously and getting the best out of each is one of the biggest challenges faced by established companies in India. New entrants to the market can, to some extent, avoid this legacy but will not escape the talent squeeze caused by a lack of skilled workers. Indian organizations have been known in the past for their love of bureaucracy and hierarchy, and pay is no exception. However, the trend since liberalization has been towards rationalization of reward packages, mirroring the movements that occurred in Europe in previous years.
The historic legacy

market aligned blend of cash and benefits. Indications are that these will reduce still further in future and align with the western concept of base plus bonus, but for now many companies operating in India still need to be prepared to do battle with levels of complexity and bureaucracy long since forgotten in the West.
The move to rationalization

Prior to liberalization in 1991, compensation packages in India tended to be low on cash and high on complex fringe benefits such as accommodation, cars and subsidized loans. In the 1980s, if you asked an employee what their salary was, they would tell you their basic salary, which is not the same as a base salary but was the primary component that anchors the cash allowances and retirement benefits. On top of basic salary would be other nonmonetary benefits such as hard furnishing, housing and travel allowances. As many as 22 benefit types per employee were not unusual. Now, a typical compensation package may have up to 12 elements, which include a

Much of this complexity was driven by the desire to reduce tax. A series of tax reforms has steadily reduced the incentive to continue these practices, while pressures for greater corporate governance and the need to streamline practices have also acted drivers for simplification. Inertia and employee preferences have meant that this legacy still lingers, particularly in the more traditional heavy industries, but many fast-growth companies and new market entrants have adopted a simpler, cost to company model. Its likely this trend will continue as companies look to reduce administration overheads and comply with more rigorous corporate governance requirements.

Indian companies developed some highly esoteric benefits in order to reduce taxable income while maintaining the level of total compensation. One company paid its executive a hefty watchman/security allowance where there was no indication of any security threat to the employee in question.

The legacy practices and cultural influences on Indian business lead to some reward and talent management practices that would be unthinkable in the West. For example, many organizations have minimum length of service criteria that must be met before an appointment to the next grade can be considered. The cumulative effect of this policy in one Asian bank is that a total of 41 years service is required before a promotion to general manager could be considered.

8 Rewarding India

Finding and keeping talent

Quantity doesnt equal quality
The real picture engineering Despite its reputation for producing an endless stream of engineering talent, demand from other sectors means that India is facing the same shortage of technical engineers as the rest of the world. Hay Group research shows that only 25% of technical/engineering graduates are suitable for core engineering jobs.

India has gained a reputation as an almost inexhaustible source of keen, talented, educated and English-speaking talent, particularly in the IT and service sectors. The reality is more complex. While there is no shortage of graduates in India, there is real concern about the quality of new recruits. Indias universities produce three million graduates a year but only a fraction are considered suitable for employment in the business processing and IT outsourcing industries. According to the National Association of Software and Service Companies (NASSCOM), only around 25% of engineering graduates

and 15% of general college graduates are considered employable. NASSCOM believes that the IT sector will face a talent shortfall of 500,000 by 2010, which will seriously compromise Indias position in the offshore IT services industry. Some of the problems can be traced to Indias fragmented educational system. Indian engineering schools are not uniformly endowed. World class institutions like the Indian Institute of Technologies (IITs) and National Institute of Technologies (NITs) co-exist with privately run engineering colleges which are devoid of both proper equipment and trained faculty.

Even if you find them, you lose them

The high level of demand for graduates and experienced employees is driving wage inflation and creating a culture of jobhopping. Staff turnover of 20% or more is not unusual in high-demand sectors such as the service industry, as talented workers jump from employer to employer, following the promise of even higher wages. Wages are forecast to rise by 14.4% during 2008, the fifth successive year of doubledigit growth. This far outstrips wage inflation in China (9.2% in 2007) and is second only to Sri Lanka, where wage growth has been driven by high inflation.

In an environment where employees can achieve a pay rise of between 40% and 50% by moving to a competitor, they are unlikely to stay put. And because younger employees are less likely to place a high value on continuity of service and loyalty, many typically have several employers on their CV within their first five years in the job market. The response to these problems has lacked imagination. Typically, employers make feverish attempts to price and then keep pace with the market, overpaying new recruits and creating resentment among longer-serving employees. But this approach only feeds the problem by driving wage inflation and failing to nurture internal equity.

Engineering schools in India produce around 400,000 graduates a year, 125,000 of whom will be snapped up by the five largest IT companies in the country. Even so, many have to supplement their graduates education Infosys Technologies estimates that it spends twice as much on training (around 4% of sales) at its purposebuilt training centre in Mysore than its US-headquartered competitors.

Sourcing sectors

%
55% 4% 2% 4% 10% 25%

Average annual base salary increase (%) 2005

Clerical Supervisory Middle management Senior management Executives 11 11 12 11 11

Indian engineering talent

Information technology Banking and financial services Consulting/advisory Knowledge process outsourcing Higher studies Core engineering sector (chemicals, manufacturing etc.)

2006
12 13 13 12 12

2007
12 14 16 14 14

Ajay Chopra, a 29-year-old marketing communications manager with an IT services company in Mumbai, is on his fourth job since completing his MBA in 2002. His first position was with a business process outsourcing operation (BPO), where he earned RS 13 lakhs (US$34,600) a year. Just over a year later he moved to an advertising agency with a salary increase of 60%. His third move, to an IT company, resulted in a further 70% rise in basic salary. He moved to his current employer because, he says, there was limited room for professional development with his previous employer the move secured a 40% increase in his wage. There is more room for negotiation with an IT company because there is more money there, he says.

Source: Hay Group research

Indian engineering talent

=  all types of engineers m  echanical, chemical, mining instrumentation, computer etc.

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Get your house in order

There are clearly serious problems that need to be faced by multinationals operating in India and the HR function will play a key role in readdressing the balance. Many of the difficulties faced in retention and recruitment in India have been exacerbated simply because the specific cultural issues have been ignored or avoided. Addressing the problems need not be complicated but it does mean tackling some basic housekeeping requirements now, or risk facing more problems in the future. India is a unique market but reward managers are often hamstrung by unrealistic policies that are set outside of the country. Wages in India are rising, and quickly but in relative terms, Indias wages are still low. But this approach has its limitations, especially in a fast-growing and often volatile market, where the market price can fluctuate as quickly as every quarter. Whats more, the almost instinctive tendency of Indian companies is to over-engineer, and many HR departments fall to ever more specific market cuts in a bid to gain more insight into their competitors practices. The reality is, however, that market pricing in such a fast-changing environment can only ever give a general indication. Whats more, since in-demand graduates are able to move between industries, regions and even job families, highly specific market pricing is, to put it bluntly, a waste of time. An over-reliance on pay information based on a micro-market also runs the risk of upsetting internal equity, as you lose sight of the bigger picture.

Escape the wage inflation spiral

Too many multinationals in India have fuelled their own problems by throwing money at young graduates in the chase for talent. As a result wages have grown out of control, job-hopping is endemic and established workers are increasingly demoralized. Its even debatable whether pushing up starting salaries for new recruits works in the long term sector retention rates and anecdotal evidence suggests strongly that it does not. Given the cultural and historic context of Indian business, consistency in reward can be the single most powerful retention tool available to multinationals in India. An equitable pay structure that does not penalize talented long-stayers can pay real dividends. If youre brave enough to buck the trend, maintaining pay parity between new recruits and established workers can drastically improve overall retention rates.

Market pricing alone is not the answer

With the pressure to retain key talent growing, organizations are naturally falling back on market movements to benchmark their pay. The primary approach to valuing work in India, as in the West, is market pricing. Many organizations undertake a full review of the market twice a year.

Keep your perspective

Managing reward in India demands flexibility throughout the organization.

Case study The in-house Business Process Outsourcing facility of an American multinational imposed a group-wide wage cap in 2007 of 4% as part of a central cost-cutting strategy. Ravikumar, its HR and Rewards manager in India argued strongly that the wage cap would seriously compromise its India operations, where wage inflation in the business outsourcing sector was running at around 18% for entry-level graduates. I asked for a 20% increase in my remuneration budget and was pretty much laughed out of town, he says. The wage cap meant that recruitment levels at the India operations fell by 35% in the first six months of the year. The restriction has since been relaxed for India and other key developing markets.

How effectively does your organization link pay to the market?

A survey of companies in all sectors in India carried out by Hay Group in 2008 showed that the majority of those questioned felt that their organization was effective or very effective in linking pay to the market rate.
Not effective 1 (3%)]

Average 7 (22%)

Very effective 10 (32%)

Effective 13 (42%)

In the late 1990s, a global consulting firm decided to puts its technology and business outsourcing facility in Bangalore, South India. The mandate was to scale the facility to 5000 employee in two years and the brief for the recruitment managers was multiply by 4: raise the salary of any potential recruit by four. This resulted in the closure of number of smaller firms in the city who could not compete with the newcomer.

The growth of key industries has led to an increase in cross-sector opportunities for qualified employees. The construction industry is currently seeing staff turnover at a rate of 25%, compared with 5% five years ago. Employees with experience in the construction industry are being lured into the IT industry, as they are highly valued for their construction industry experience.

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Get sophisticated
Reward practice in India is still hamstrung by ingrained habits and cultural quirks. The best companies are breaking free from Indias employment and reward legacy, while recognizing that India is a unique market with specific requirements. The strategy employed by many companies of pushing up salaries is simply not sustainable in the long term. For the past five years, companies in India have doled out double-digit salary increases but attrition rate still hovers at around 15% across all levels. A more sophisticated approach is needed, which borrows the best from Western reward practice while making allowances for the local market environment. Overall, for example, its cultural heritage means that India scores poorly on linking pay and career progression to performance, and this represents a huge opportunity for employers. There is enormous scope for multinationals to move to a more meritbased attitude towards reward, with a greater concentration on job evaluation and a rigorous approach to performance management. This desire for greater accountability has seen a recent growth in at risk pay in India at levels beyond the traditional domain of senior management. Indeed, in our experience, many CEOs and business leaders are using their variable pay components, not only as a strategic lever to attract and retain talent, but to build highperformance environments. Variable pay is not unusual in India, but its application in practice could be drastically improved. For instance, until recently, employee share schemes have been used simply as a tax-free way of paying employees more. Schemes typically last for just a year and are effectively a bonus paid in shares. They are known colloquially as sweat equity the reward for all the sweat and tears of the previous years work. These short timeframes mean that there is little or no scope for aligning reward to long-term performance measures. India remains far behind the West in the way it uses equity-based compensation and the link between share schemes and performance, in particular, is in serious need of attention. Existing variable pay schemes should be closely examined to check whether they are reinforcing behaviors which bring benefits to the organization, and not just benefits for the individual employee.

Get creative
Instead of competing blindly on price, there is plenty of scope for employers to apply a little imagination to their reward strategy as a way of differentiating themselves from their rivals. No employer can afford to be lazy about the total reward package a little flair goes a long way. The benefits culture is deeply ingrained in India and employees will inevitably expect to see a reward package built on basic pay, with a variety of benefits and cash allowances. This gives plenty of scope to offer incentives that are likely to appeal to the target audience the younger Indian generation value technological gadgets very highly, for example, and training of all types is held in high regard. Instead of offering a basic set of benefits, the best companies are beginning to offer a choice from a menu of incentives that allows employees to optimize their tax planning. Some, such as an accommodation allowance, attract favorable tax treatment while others, such as a company pension, are unusual enough to attract interest. that doesnt necessarily make it an insurmountable problem. The best companies are already finding ways of making Indias culture work in their favor. In terms of reward, this means putting in place more grades, levels and bands (based on clear and quantifiable thresholds) than you would do in other parts of the world. Its also worth celebrating progression through the company hierarchy with even more exalted designations. The pay grades may be on par with the practice in other countries, but there are many more job titles within each level. This goes a long way towards fulfilling the need to see a steady career progression. It also allows for a closer alignment to the market, as the salary differentials between levels of work in India are much higher than in some other markets. The best companies also recognize that Indian culture values knowledge and education very highly indeed. The promise of a certificate can be a major motivator for employees. Many MNCs operating in India offer a wide range of training options with, most importantly, a certificate or some other form of celebration at the end of it. The more noise you can make about individual achievement, the better.

Make Indias culture work for you

The influence of hierarchy in India, particularly in the workplace, is not something that can be avoided. But

A survey of large employers in all sectors in India carried out by Hay Group in 2008 showed that only 42% felt that their organization was very effective in demonstrating a clear link between pay and performance. 32% felt the link was effective and 19% felt their alinks between pay and performance with on a par with their competitors. 7% of those questioned felt the link between pay and performance could be improved. One respondent commented that the link between pay and performance was strong on the drawing board but the evidence of how well the scheme was motivating employees in practice remained to be seen.

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Go the distance
There are serious concerns that Indias potential as a world class economy is being jeopardized by its inability to compete on quality. The sale of Jaguar-Land Rover to an Indian manufacturer was opposed by Jaguar dealers in the US on the grounds that Indian ownership would damage the brand. The reward culture has a part to play in addressing Indias brand quality. The challenge to India is to recognize the value of skills, particularly manual skills. Unless India is able to compete with the quality goods manufactured in Japan and Germany and elsewhere, its long-term economic survival is at risk.
Organizations operating in fast developing economies have a tendency to follow the bandwagon without thinking where its going. India presents enormous opportunities for multinationals, but comes with equal risks. Now is the time to address these issues, while the business environment is positive and companies are enjoying growth. The potential slowdown in the US market will have implications for Indias service industries, while investors who put money into India in past years are going to start looking for returns. This will put increased pressure on companies to reduce overheads and increase performance those who already have their house in order will better weather any coming storms. In the longer term, pay inflation will erode the relative affordability of Indian business and Indian companies will have to work harder to ensure that they are competitive in the global market. Instead of competing on price, India will need to rely on quality, innovation and expertise and reward managers will contribute to this by aligning total reward more closely to quality-based performance measures. The challenges faced by large employers in India are urgent but by no means insurmountable and a successful future lies in a robust but imaginative HR strategy. Its up to HR professionals to deal with some their basic housekeeping demands now, if you are to avoid trouble in the future. Some hard work over the coming months and years will provide the necessary backbone and sustainable framework for managing pay, people and performance in the long term. India is a huge prize but this is a long distance race. Its not the sprinters that will win.

How effectively does your organization use non-cash reward such as recognition programs?
Not at all 2 (7%) Not applicable 2 (7%) Very effective 3 (10%)

Case study A New Delhi-based electronics manufacturer introduced a performance-linked retention scheme in 2006. Employees receive additional incentives only after completing three years with the company. As the length of service increases, so do the incentives, with the maximum achieved once an employee reaches 10 years of service. The scheme also involves transparent and effective communications to all employees. Attrition levels both at the middle and junior management levels have been reduced by half.

Less than effective 4 (14%)

Effective 9 (31%)

Average 9 (31%)
(Hay Group survey, 2008)

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Authors:
Mark Thompson Practice Leader, Asia Reward Strategies Hay Group Email: mark_thompson@haygroup.com Tel: +91 (0)124 417 7414 Mark works with a wide range of organizations in India, UK, and around the world to design reward strategies and to implement reward policies that support business objectives. Sridhar Ganesan Consultant Reward Strategies Hay Group Email: sridhar_ganesan@haygroup.com Tel: +91 (0)9867005323 Sridhar works with a range of organizations in India in the areas of organization design and reward strategies.

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Hay Group is a global management consulting firm that works with leaders to transform strategy into reality. We develop talent, organize people to be more effective and motivate them to perform at their best. Our focus is on making change happen and helping people and organizations realize their potential. Visit www.haygroup.com