Covid-19 Impact: Companies looking to raise Variable Pay Component

Going forward, employees may see their pay packets having a stronger linkage with their company’s performance.

There is a pay structure realignment happening as a response to the Covid-19 crisis where certain organisations are looking to increase the variable component in salaries, particularly of those in middle and senior management, in order to link compensation more to performance, multiple experts told ET.

“The crisis has highlighted the inelasticity in compensation costs and there will be a move towards making these more variable over the coming years,” said Anandorup Ghose, partner at Deloitte India. “We believe this impact will be more pronounced in middle management compensation, which, across most industries, represents the largest component of the overall pay cost.”

These are levels where employees are also decision makers and, therefore, increasing performance orientation is a more logical message, he said.

According to Deloitte, broadly across levels the fixed to variable mix would be about 85:15, going up to 50-75% of fixed pay at senior management levels.

Arvind Usretay, director of rewards at risk management advisory Willis Towers Watson, said companies are evaluating possibilities of optimising their compensation programmes so as to preserve cash for immediate business requirements in the wake of widespread disruptions caused by Covid-19.

“Specifically, companies may evaluate the potential introduction of long-term incentives in addition to existing short-term incentives for middle and senior levels, in order to closely link the variable payouts to company performance over a longer duration than just the immediate results,” he said.

On an average, the variable pay ranges are 5-10% for entry level, 10-20% for junior management/experienced individual contributors, 20-30% for middle management, and 30-50% for top management, across industry sectors, according to Willis Towers Watson.

“We expect that the pay mix may not change much for entry-level roles but may be reviewed and updated for middle management and above,” Usretay said.

Companies in sectors such as pharma, IT, financial services, fintech, FMCG, and ecommerce are expected to lead this shift to ‘pay for performance’ concept, experts said.

A salary restructuring – with a bigger allocation to the variable component – will give some breathing space to organisations to remain afloat in these crisis times, ensuring performing employees don’t lose their jobs, said Devashish Sharma, founding member at human resources solutions firm PeopleStrong.

“Tangible objectivity of achieved business results will govern variable payouts in future,” he said.

This will signal a significant cultural change in India Inc’s work ethic and will drive employees to work harder to earn most or all of their variable component, Sharma said.

Namita Bharadwaj, principal – career at HR consulting firm Mercer, said, “While there may not be much change at the entry or junior levels, the variable pay may be increased for middle to senior levels to bring in greater individual accountability for leading the organisation through these tough times.”

Source Article

Lois C. Ferrara

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