Salary increments: It’s likely to be old normal in 2021

The salaried class looks forward to increments every year, but in 2021, the anticipation is much higher. After all, per the Workforce and Increment Trends Survey that Deloitte Touche Tohmatsu India LLP concluded in February 2021, only 60 per cent of India’s organisations gave an increment in 2020. This number is expected to go up to 92 per cent in 2021, pulling the average India increment up from 4.4 per cent in 2020 to 7.3 per cent in 2021. But what about companies that did not give an increment in 2020? Are they planning to compensate employees for their loss of income? About 3/4th of them are not. Similarly, while of the 25 per cent companies that extended a pay-cut in 2020, 83 per cent have either already reversed or are planning to change pay-cuts; most are not paying any arrears or compensating employees via higher bonuses and increments.

There is no denying that today’s economy is in much better shape than six months ago. The containment in the spread of Covid-19 and the responsible reopening of affairs have revived business, consumer, and market sentiment. Survey results show that 80 per cent of companies expect revenue growth to be equal to the past three years’ average. All sectors are expected to offer higher increments in 2021 compared with 2020. However, it is interesting to note that the increase in increment is still relatively contained. The average increment of 7.3 per cent is considerably lower than 8.6 per cent in 2019. It is easy to forget that the Indian economy was not particularly booming in 2019 either.

This trend is in sharp contrast to what we observed during the 2008-09 Global Financial Crisis (GFC). While average increments in India quickly went back up to double-digit levels after the GFC, in 2021, the optimism is more cautious. There are three key reasons for it. First, output loss due to Covid-19 is much more than the GFC. Per the IMF’s World Economic Outlook Report, India’s real GDP growth was +3.9 per cent in FY2008-09, much higher than -8.0 per cent projected for FY2020-21. Second, average inflation in India, as measured via headline CPI, was much higher earlier than it is now (justifying a higher increment). Finally, India Inc. came under some criticism in how it dealt with the aftermath of the GFC in terms of lay-offs and rescinding of campus offers. This time organisations have preferred saving most people’s jobs over offering higher increments and bonuses to a few – a much more responsible and mature approach to decision-making.

How organisations approach increments

Another interesting element is how little Covid-19 has changed the way organisations approach increments. High-growth sectors, such as technology, life sciences, and FMCG, continue to offer increments above the all-India average. The manufacturing industry, which has historically witnessed lower attrition and has a sizeable tenured workforce, offers lower increments. The non-tech services sectors, although recovering, are still offering some of the lowest increments. Covid-19, after all, is not over yet. Another aspect that has not changed about increments is that the focus on ‘person’ is more than ‘role’. Increments are being differentiated amongst employees based on performance rather than their ‘job’ in most companies. With limited budgets, one would expect that increments would be higher in functions that are more ‘critical’ and require ‘niche skills.’ However, in reality, being a top performer in a low-growth industry is likely to get you almost the same increment as an average performer in a fast-growing technology company in most places. The sector matters more than the role.

It is not as if nothing has changed this year. For starters, companies are likely to place fewer employees in the “below expectations” category in 2021. The percentage of employees expected to be promoted is expected to increase from 7.4 per cent in 2020 to 10.2 per cent. The average additional increment to promotees is also expected to go up from 5.4 per cent in 2020 to 6.9 per cent in 2021. While most companies are not planning to differentiate increments by employee location, a few IT companies have begun contemplating differentiating increments for employees working from home on a full-time basis. It will be interesting to see how this unfolds in the future with the increased adoption of hybrid work arrangements.

What matters is not how different actual increments will be from projections but whether job creation will satiate the demand of an aspirational country with a young workforce. Only 30 per cent of companies said their aggregate compensation cost would rise by more than their increment budget. This implies that they identify redundant jobs and not back-filling them or replacing incumbents at a cheaper rate. About 14 per cent of organisations are looking at a permanent workforce reduction in the workforce over the next few years. This is mainly due to a relentless focus on driving efficiency through organisational restructuring and technology adoption. Despite its best intentions, any corporation will find it challenging to carry employees throughout their career if they do not see enough value. However, what it can help do is to ensure that its workforce is abreast with the future skills.

(Anandorup Ghose is a Partner and Dinkar Pawan, Associate Director at Deloitte Touche Tohmatsu India LLP)

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