MANAGEMENT
COMPENSATION
by
Ashit K.
Sarkar,
Management Advisor & Consultant, Ph/Fax: (080) 2554-0393 &
4112-8153 Cell:
(0)93412-33095
3E,
E-mail: [email protected] Home Page: http://uk.geocities.com/ashitsarkar
The objective of this article is to look back at the history and past practices of the progress of the managerial compensation system followed generally in prominent multi-national commercial organizations in India, and attempt to evolve some criteria best suited to the present competitive scenario.
The evolution of the management compensation system for the larger organizations came mostly from the pre-independence British companies, or from the Indian government system - which too was initiated by the British, and was generally paternalistic & protective. The system provided a 20-30 year grade scale of Basic Salary for each grade or level of employees - generally linked to age, with other fixed Allowances � differing for each grade. It was felt that with increasing age & the family size, their needs increased, which required consideration in the compensation. Annual increments were provided with increasing steps as one progressed through the Salary scale, even though the increases were often ad-hoc. Festival, Puja or Annual Bonus was paid to meet the social needs - usually once a year, and was often linked to the profits of the Company. To meet the inflationary trends, a Dearness Allowance system was introduced during the World War II days - in the early forties, but this was generally not applicable to management staff - Basic Salary remained the main component of compensation for them. Benefits frequently included housing - often furnished partially or fully - or an allowance in lieu, annual leave travel expenses, generally quantum linked to the family size & fares to hometown or nearest hill station, use of Company transport or cars (from limited use to extensive, with or without driver - grade related), medical coverage or assistance, and retiral benefits. To encourage Managers in social & sporting activities, either Company clubs existed, or financial assistance was given to join or use local clubs - depending on the level. Overall compensation increased with grade, age & service, with only very limited linkage to performance, and which was often ad-hoc at the discretion or pleasure of the boss. The Company was usually quite actively concerned and involved with the manager�s family life & style of living, and strongly believed that the Company's image demanded this conforming discipline from the family members as well.
Most multinational Companies operating in India had a fair number of expatriate staff - even as late as in the sixties - having vastly different terms & conditions of service as compared to the local staff at the same level. This continued partially out of necessity to attract them to overseas postings, and also due to past colonial & historical reasons. Excellent furnished housing was provided to them, and many other personal or social needs for them and their family members were mostly taken care of by the Company, including overseas education for their children, home leave & travel expenses etc., as well as protection of benefits available at the home country to their compatriots. Class distinctions existed even amongst the expatriates - they were generally separated as 'blue blood' at top positions, and 'commoners' at middle management positions! The local Indian Covenanted cadre managers identified for senior positions were often higher in hierarchy than the expatriate middle managers in rank, but their gross terms were generally lower. The junior management local staff were a class apart, and their terms were substantially lower, but were in line with the above philosophy, and therefore, while the cash component may have been low, the benefits of furnished housing, leave travel expenses, use of Company vehicles etc. enabled the overall living standards during the service period remain at a good level. With limited opportunities, retention of management staff was not an issue at all those days. Revisions in overall terms were usually done after 3 to 5 years. The Management salaries were considered to be a highly confidential topic, and any discussion on this subject was seriously frowned upon by the top brass. The management style did not inspire openness, and the lower levels were expected to follow orders obediently. Participative style was not practiced or encouraged generally. Employee & Managerial costs were a small part of the total expenses, and profits were easily made by most of these large corporations having little competition in near monopoly conditions in India.
From the sixties onwards the salaries of bargainable workers increased phenomenally due to the successes of the Unions in negotiations - at times by pressure tactics. At the same time, the Government statutorily limited the Directors maximum Basic salary at a very low level - in line with the socialistic philosophy. This resulted in the need for creating other indirect compensation mainly through perquisites for the management staff due to the salary compression. These perquisites & benefits given to the management staff gradually started being valued by the authorities, and had to be included for tax purposes, thereby further compressing the "in hand post tax" compensation range drastically - with the junior or middle managers being affected most adversely, while the top management were �taken good care of� by the Company. The marginal tax rates had also risen to very high levels, and so was the inflationary trend, requiring much larger increases to meet the employee expectations. The earlier 'taboo' regarding management salaries being a close subject for discussions was also disappearing and the top management started recognizing disparities that needed urgent attention. It started dawning on most progressive organizations that the compensation governance needed clear cut philosophy and policy, instead of the ad-hoc solutions of the past, and that motivation & retention of capable managers was getting to be a very crucial need in the growing scenario in India. Some of the Personnel directors or Heads of major companies informally discussed these issues at regular intervals, and shared data & policies with each other, at what later became the Remuneration Clubs, to address this important subject.
Many Companies had chosen to use somewhat 'shady' reimbursements or perquisite routes, in order to maximize the �in-hand� amounts or benefits, & contain the overall costs, with the assumption of these being considered non-taxable, and therefore, meeting the compensation needs more easily, rather than the larger cost of taxable increases for the same net gain. The Basic Salary as the main component of overall compensation had also consequently become lower - with reduced indirect component costs that affected the retiral benefits substantially, often ignored by the Company.
The above stated traditional system started being challenged during the last two decades by the "money for the job", "total cost to the Company", "flexible package" & "Variable Performance Pay or Bonus" concepts followed by some of the well known large new organizations, with annual increases mostly linked to performance, results and inflation, rather than gradually increasing salaries with traditional 'grey hair' philosophy of age! The protective long term security of employment was shaken by these companies with easier hire & fire practices, with second raters & non performers not being acceptable or retained. This resulted in much larger compensation packages being suddenly available to young and confident managers without having to wait for years, as in the past. This so called "American" compensation strategy conflicted with the traditional (British) methodology, causing unexpected upheavals.
The Government had in the meanwhile realized the futility of very high rates of taxation which encouraged tax evasion, and had also relaxed the compensation limits for the Company directors as well. This provided an opportunity for companies to rectify tax irregularities, and realign their compensation philosophy moving away from the shady perquisite oriented style, and becoming competitively market driven. They recognized the need for greater freedom to their managers to choose their own standard or style of living, with remuneration systems based on the external compensation trends. With liberalization came greater competition and new opportunities for jobs, and therefore both organizational excellence and retention of key managers became paramount. The need for an effective impartial performance appraisal and reward systems therefore became essential, which in the past was generally weak, if at all present.
The Y2K era opened the floodgates for the Indian IT industry & personnel for lucrative overseas jobs, and easier to & fro movement, which created new paradigm for managing the aspirations of IT professionals - so very different to the traditional managers in Indian Industry. Job security, & long term employment needs came much lower down for these people, and the international compensation based on declining exchange rates created newer benchmarks. The Retiral benefits were discarded as a major need by many of the young professionals. The distinction between manager and an entrepreneur faded in small start-up companies, as did compensation & profits through value addition for such people. Stock options suddenly became a part of the remuneration package despite tax implications, and international compensation systems influenced the Indian scenario substantially, which did not remain unique to the IT industry only. For such 'Knowledge workers' in the organizations, changes in compensation strategies were needed that had to be extended to the traditional industry, which had become very competitive.
Management compensation therefore, now plays a very significant part along with the working style & environment, empowerment etc. in the organization�s success strategy. While individual organizations may have differences in their methodologies based on factors best suited to their perceived needs, some general directions are evident, and are discussed below:
To conclude, the need to regularly carry out detailed compensation reviews both within and without, and with full support & commitment from the top is essential. The specific needs of the organization must be identified and addressed during such reviews. Openness and transparency are important to the managers in the very sensitive and personal issue of management remuneration, and therefore policies and practices should match the rhetoric. The remuneration & the rewarding systems have to be, and seen to be, fair and just, non bureaucratic & dynamic, and which are dealt with human feelings and necessary speed, and still remain competitively attractive � quite a management challenge in today�s tough & highly aggressive scenario!
One of the most vital factors for the motivation, retention and the morale amongst the employees is the compensation system, policies and review philosophies of any organization. While the unionized bargainable employees generally have their unions to negotiate or periodically revise their terms with the Management - which are governed by the Long Term Settlements - the terms of the Managerial employees are mostly seen to be at the sweet mercy or the goodwill of the organization or the top bosses, reviews of which may or may not be regular or timely, or often do not seem to meet the expectations or logic of such management staff!
or, to see an article on "Performance Based Award Scheme".