Paying for performance

When it comes to variable pay as a share of total employee compensation, private banks are among the most aggressive.

The 'pay at risk' parameter (ie, the share of variable pay in total employee compensation) has seen a sharp increase in India's private sector banking space.

The share of variable pay in total employee compensation in other segments of the financial sector (asset management companies and financial services"" 29.3 per cent and 23.5 per cent respectively) is higher; but the rate of growth of the variable component has been the highest in banking.

It rose to 23.3 per cent in 2005 from just 13.5 per cent in 2001, according to HR consulting firm Hewitt Associates' India Annual Salary Increase Survey 2006.

The increases for other industries were: manufacturing 11 per cent to 16.2 per cent; IT 10.9 per cent to 13.7 per cent; IT enabled services 12.9 per cent to 16.4 per cent; telecoms 14 per cent to 17.8 per cent; and FMCG 13.3 per cent to 16.5 per cent.

A high attrition level of 20 per cent among private banks has prodded them to pay more to retain high performers, and as Shiv Agrawal, CEO of ABC Consultants, points out, performers like variable reward structures.

Nita Law, regional head-India and South Asia at Standard Chartered Bank, adds: "Variable pay is driven purely by performance. The improvement in Standard Chartered's performance has been driven by individual performances. We are purely a performance-driven organisation."

It's not a coincidence that this four-year period has also seen phenomenal growth across retail banking, investment banking, wealth management and bank treasuries.

Says Sharad Vishvanath, Practice Leader, Analytics Consulting (India and West Asia), at Hewitt Associates: "The trend has really taken off in the last five years. Higher growth possibilities have made possible a higher share of variable pay. And employees now see variable pay as opportunities to earn rather than as a risk."

Public sector banks do not have a system of variable pay, though the government has allowed banks to make performance-linked payments.

However, the overall amount that can be disbursed under this head is capped. The government is also considering bonuses for CEOs and executive directors of public sector banks.

The highest amount that a CEO can get as bonus is Rs 10 lakh, provided his bank is able to meet all the performance targets agreed upon at the beginning of the year.

S. Bhattacharya, vice president at UTI bank, points out: "Banks are moving towards a variable pay structure which is purely determined by performance. The variable pay for the banking sector has been increasing by 18-25 per cent year-on-year.

The proportion of variable pay is higher for the top management cadre, as every bank's performance is dependent on it. It is based on the principle of pay as risk."

Vishvanath offers two other explanations why variable pay has taken firm hold. First, he believes that today's employee is more 'transactional' and focused on the 'here and now', which is why traditional perks and benefits (subsidised company loan, company-leased flat, car with unlimited petrol) are no longer effective retention tools. This has led to a shift to cash-rich compensation structures.

Secondly, with the introduction of the fringe benefit tax last year, benefits and perks"" which were traditionally treated as components of compensation that could facilitate effective tax planning for the employee"" lost their tax advantage.

Vishvanath says compensation structures vary with industry sector, depending on the vintage of the sector ('young' sectors such as IT and IT enabled services on the one hand, versus FMCG and manufacturing) and employee demographics.

Banking, he points out, "which has been a traditionally benefits-heavy sector, is rapidly moving towards a simplified cash-oriented structure."

On the other hand, FMCG and manufacturing, "though simplifying their compensation structures, are still inclined towards retaining key benefits which have perceived employee value, given the vintage of their sectors and relatively older employee population."

ICICI Bank, however, says it is increases in basic salary that has increased variable pay"" in absolute numbers, not in percentage terms. The bank pays performance bonus once a year as a percentage of basic pay.

The bonus of its managing director and CEO, K V Kamath, has risen in absolute terms, but there's not much change in it as a proportion of his remuneration. For employees other than investment banking, treasury and wealth management, there is little change in the proportion of performance bonuses.