The slowdown has made the general economic environment uncertain but companies remain optimistic on salaries. Of the 48 Indian companies surveyed across 22 sectors, 69 per cent don’t anticipate a freeze on base salaries in the next 12 months as a result of the recent economic events though most of them expect options to be re-priced, according to a new report by consulting firm Mercer.
The base salary, notes the report, is determined by individual and company performance and 58 per cent firms consider base salary to be the most effective pay element to align executive remuneration to organisation strategy. Executive compensation includes both short-term incentives (STI) and long term incentives (LTI), which are decided by another set of factors.
Around 38 per cent companies expect lower STI payouts with 54 per cent anticipating a change in the STI performance. Absolute company-wide financial measures such as EBIT performance against the budget are considered vital for STI but relative company-wide financial measures such as relative performance versus competitors, is not important.
Executive base salary increase in case of STI is decided by individual performance, company performance and comparator/market practices whereas tenure and prior year’s increases are the least important factors. On the LTI front, 60 per cent companies have plans and among these, 78 per cent offer options. Individual performance, strategic contribution and potential of employees are the three most important factors in determining eligibility for option plans in LTI. Target grant LTI value in India is calculated using a percentage of total remuneration and the executive’s level in the organisation.
Among the companies with option plans, 31 per cent use "value divided by current stock price" to calculate the target grant units, and about 26 per cent also use Black Scholes for option pricing, reflecting that market is gradually moving towards more scientific approaches to valuation and grant determination.
Going ahead, in the next 12 months, 84 per cent companies don’t plan to enhance executive compensation disclosure in their annual report, while 16 per cent companies do.