Companies in India are going all out to lure high-potential executives with generous performance-linked payouts as a talent crunch at the top is prompting many of them to remove the ceiling on variable pay. Human resource heads and executive search experts said variable pay is increasingly becoming a game changer in CXO compensation, rising up to 200% of the commitment in cases of exceptional performance.
Called “stretch” variable in industry parlance, a higher variable pay, which is no longer restricted to a fixed percentage of the total cost-to-company (CTC), incentivises excellence and also spells reduction in fixed pay, said industry experts.
“If you cap variable pay, people don’t stretch themselves and it puts a cap on performance for both the individual and the company,” said S Venkatesh, president, group HR at RPG Enterprises, which has interests in tyres, infrastructure and IT. “This used to be the philosophy for sales people earlier.
We have brought the same philosophy to the leadership level, and one can now earn 180% of the variable pay at peak performance.”
R Suresh, founder of boutique search and consulting firm INSIST Executive Search, which specialises in CEO and CXO searches, said an increasing number of companies are removing the cap on variable pay as they are trying to structure senior management pay as per the required output. “As total compensation of the top management goes up, companies want to introduce these clauses to make sure payout is for the performance delivered,” he said. The correlation of pay and performance has traditionally been low in India, primarily because the established compensation structures had a high fixed component and a low variable. However, this is changing now, leading to high-risk and high-return opportunities for CEOs and senior management. “You cannot keep increasing fixed salaries,” said Navnit Singh, chairman, Korn/Ferry International. “A lot of CEOs and CXOs are getting minimal fixed pay while the variable component is increasing – partly linked to the individual and partly to the company performance.”
Besides, as company sizes in India increase, CEO pay mix is changing in favour of higher variable pay, with the performance-linked portion constituting 30-40% of the total pay on average, according to an earlier survey by human resources consulting firm Aon Hewitt.
Industry estimates suggest that the variable component in salary (both short-term and long-term incentives) in a few cases could be as high as 55% of the pay mix, a significant shift from five years ago. “Companies are increasingly trying to find ways to look at compensation as a driver of performance culture,” said SV Nathan, chief talent officer, Deloitte India.
In the past, organisations sought to attract senior talent with employee stock ownership plan, but ESOP is no longer a big draw and hence they are focusing on performance-linked variable pay, said Nathan. “Organisations are looking at how to make variable pay elastic as giving big increases year-on-year in fixed pay does not make sense,” he said.
Traditionally, IT and ITeS companies have been more aggressive with long term incentives as they competed with global rivals for talent. However, companies in other sectors such as manufacturing sector are now getting more aggressive on variable pay, said compensation experts.
“Variable pay is a huge motivation at the senior level for people who have to move the organisation engine,” said Prince Augustin, group HR director, Mahindra & Mahindra. “We go up to 170% of the variable pay.”
Suresh Bose, director at metals and mining conglomerate Vedanta group, said the idea is to compensate for a job done. “We are seeing more potential leaders in this way who could be a future CXO,” he said.