Inflation bite may force hike in variable pay

Performance-linked component can save companies 10-40% on labour costs during bad times

MUMBAI:  When the going gets tough, the tough get going, doing all they can to survive bad times. Now that inflation has gone above 11%, India Inc has tightened its belt further.

After slowing down on fresh recruitments, cutting down on employee travel and entertainment and handing out pink slips to employees for bad performance, companies are looking at restructuring employees’ cost to company (CTC) to save on labour costs.

CTC essentially covers each expense that a company is willing to incur on an employee. It includes basic salary, allowances, perks, annual performance bonuses (also known as variable pay), interest subsidy on company loans, statutory deductions such as a company’s contribution to provident fund, premium towards mediclaim and even gratuity.

Of these, the variable pay component offers firms the best tool to trim costs, because it is linked not only to an employee’s performance but also to that of the company. Given that over 20% of a company’s expenditure is usually on labour, the savings could be big.

Marcel Parkar, chairman of Bangalore-based HR solutions company Ikya Human Capital Solutions, says, “The variable component is given to enhance an employee’s productivity. It is determined not just by his/her performance but also that of the company.” According to Sandeep Chaudhary, business leader of the US-based human resource consulting firm Hewitt

Associates, fixed pay is what has been committed and variable pay the part that is not committed.

Since offering lower salaries in not an option in these times of talent crunch, companies may lower fixed component of the salary and increase the variable one, says Vishal Chhiber, the head of human resources at staffing company Kelly Services.

If the trend of double-digit inflation continues, CTC restructuring might be on the cards. “Increments for this year have already come. So it’s possible that in the next season, companies rejig the CTC by increasing the variable component by 5-10% for non-sales roles, and 15-20% for sales roles,” says Chhiber of Kelly Services.

Though variable pays have swelled along with the CTCs in recent times, the fixed to variable ratio is becoming more and more skewed towards the performance-linked component, points out Kris Lakshmikanth, the founder chief executive and managing director of human resource firm HeadHunters India.
From 90:10 in the past, this ratio has gone to 70:30 and even 60:40 in some cases. This means that the fixed component has gone down considerably and more money is being pooled into the variable component. So if the organisation fares badly, in this case due to inflation, it has the choice of not handing out the variable pay, saving between 10% and 40% on labour costs.
Industry experts see variable pay as a subtle tool to protect a company’s finances during bad times. Kotak Mahindra Bank’s executive vice president (human resources) Subhro Bhaduri admits that an employee doesn’t get variable pay if “the organisation is unable to earn either due to the performance of key personnel or market conditions”.

The HR head of a Bangalore-based IT major reveals that the company has offered 10% as variable pay to freshers and 20% to experienced professionals. “But the variable component may be hiked in the future.”

The story is pretty much the same in a top insurance company based in Mumbai, which may hike the variable component of 15-20% by 5-10% for junior- and mid-level employees.
Before saying yes to that next job, you might want to take a closer look at the break-up.

g_priyanka@dnaindia.net