The Hindu Business Line : ‘CEO pay has also risen due to high person premiums’

Battling attrition is a major challenge for many companies. But while it remains a major issue, it must be recognised that not all attrition is bad, according to Padmaja Alaganandan, Principal Consultant, Mercer Human Resource Consulting, India. Speaking to The New Manager on a range of issues related to talent retention and best HR practices, she said: “We have worked with organisations where low rates of employee turnover have caused issues such as high resistance to change, low levels of engagement and the development of strong informal networks or ‘cliques,’ which could hamper productive working. Having said that, attrition above acceptable levels can definitely be a cause for concern.”

She added that in addition to addressing the drivers of retention such as learning and development, career growth opportunities and integrated rewards policies, HR departments need to look at segmenting their workforce and designing focused strategies for minimising attrition among certain key employee constituent groups.

According to her, early warning systems to recognise potential attrition need to be instituted within the enterprise. “The role of line managers in controlling attrition is key, and HR needs to sensitise them to recognise these signs and take the necessary action. Deferred reward plans, including equity grants, also help manage attrition, though to a lesser extent,” she added.

The Prime Minister, Manmohan Singh, had recently admonished corporates on the high level of CEO salaries. Alaganandan said that though pay levels in India are “far below” levels in mature markets such as the US, she finds it disturbing in India that growth in CEO pay is not always linked to company business performance or shareholder value created.

“Stronger governance and a bigger role for boards and remuneration committees are needed to drive greater alignment between performance and pay.” She pointed out that a Mercer analysis of leading companies has shown that CEO pay has risen by more than 60 per cent in the last two years. “A key trend has been higher levels of increase in pay for promoter CEOs, as compared to non-promoter CEOs,” she pointed out.

The expat impact

According to her, the global mobility of CEO talent has been a key contributory factor for growing CEO pay. Several sunrise sectors in India — such as aviation, real estate, retail and insurance — are bringing in expatriate talent with the necessary industry expertise to drive growth in India.

“This scenario is a little different from what was prevalent earlier, where expatriates in senior positions came in on a ‘global package’ that may not have impacted local pay levels,” Alaganandan said. In addition, she stated, the availability of high-quality leadership talent has not kept pace with demand in India.

“As a result, CEO pay has also risen due to high ‘person premiums’ being paid out to individuals with the credentials and capability to build a business from the ground up,” she said.

Now that the rupee is strengthening, is there a possibility of companies opting for salary cuts to maintain margins? “Reducing levels of fixed pay has not been a common practice in India,” she said.

“Industries with margins under pressure are more likely to see higher proportion of variable pay in their total compensation structure and sharper differentiation in compensation based on ‘person premium’ and individual performance, as well as reducing rates of future compensation increase, if the rupee continues to strengthen.”

On the trend among companies to segregate HR and recruitment functions, Alaganandan said that in people-driven businesses such as IT and biotech, the recruitment function is strategic and comparable to any supply chain or sourcing function in the manufacturing sector. “Some India-based IT companies have had to scale back their business targets purely because of their inability to recruit quality talent at the pace and scale called for. In such organisations, and in those with large scale of hiring, recruitment needs to be seen as a separate function with strong linkages to the business.”

In her view, the ‘HR generalist’ role works with each of the businesses, and compensation and learning and development are ‘specialist functions,’ usually at the corporate level. In smaller organisations, all of these may be handled by a common HR function.

Despite India being recognised as one of the large talent pools in the world, given the demographics and track record of Indian managers and technopreneurs who have succeeded globally, a lot needs to be done to develop this pool, according to Alaganandan.

“There is a demand supply mismatch with respect to the necessary competence sets and their availability. The HR function needs to work with line management in aspects such as leadership development and building cultural sensitisation to ensure that there is a constant flow of talent through the leadership pipeline within the organisation.” She informed that corporates have been seeking outside help in these areas, including from globally renowned experts.

“However, there are also concerted efforts being made to build these capabilities and manage these programmes in-house, particularly for companies with the scale to do so. External help is being sought in areas where an objective view is required, or where the organisation does not have the necessary expertise. It is also being sought to drive large change management programmes,” she said.

HR challenges

India is now in the thick of hectic M&A activity, with a flurry of deals being signed every day. One of the biggest HR challenges is to retain the talent of the acquired company, and Alaganandan believes that exodus of talent is not inevitable. “A well-thought, thorough change management strategy and orchestrated communication consonant with demonstrated actions is critical. Proactive identification and addressing of possible issues at the company, functional and individual levels can go a long way in minimising post-merger dissonance.”

With several companies scaling up in a significant manner, headcounts running into tens of thousands are not uncommon these days. On how companies handle this issue, from a HR standpoint, she said that companies with large headcounts usually have clear structures, where people managers are accountable for their team.

“These teams are reasonably sized to allow for a level of personal empathy to be built, and the people managers are responsible for the learning and development as well as the growth of their team members. Hence, in a sense, companies are splitting the workforce into manageable teams.”

However, it is important to recognise that one of the key employment value propositions of large organisations is the fact that there is a greater canvas of opportunity. “Employees can look to move to other roles in other parts of the organisation and this can be a major retention factor. While workforce is split into manageable sizes, systems must be in place to ensure consistency of basic HR values. They also need to help employees maintain ‘connectedness’ with all parts of the organisations,” she declared.

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