Myths and illusions of performance pay

Whenever there is a change in management, professionals lose out on performance pay, if it is not in writing and committed by the management in clear terms. This is especially true for businesses that are cyclical and companies that are volatile to business cycles.

COMPENSATION IN today's context is no more rigid. With the liberalised economy, the salary structure in private sector has undergone a phenomenal change. With a tougher stand taken by the IT department, gone are the days when corporates were generous in cash reimbursements, which escaped tax. Apart from coming to terms with loss in cash components, the employers now have to be beware of companies, which have introduced flexible pay structures.

Ideally the senior management salary is divided into two components: fixed pay and flexi-pay. The rationale behind these is:

* First, this structure motivates employees to achieve or even outperform their targets there by the company benefits in terms of managerial productivity.

* Second, new companies and start-ups do not risk high salary and so introduce fixed and flexi-components. This restricts the fixed commitment cost on the part of the company. If targets are achieved, the additional contribution will facilitate the company to meet the flexi-pay component.

This provides two benefits to the company:

* Employees are motivated to achieve targets and

* Break-even levels can be brought down as part of the salary is discounted as variable cost.

* Third, established companies, which reach a plateau in growth, have high managerial costs. They look for avenues in cutting managerial cost. These are the companies which introduce flexi- salary structure as part of restructuring to motivate managers for improving the performance or look for avenues outside.

* Ideally flexi-pay is to be linked to individual performance levels. This would work only when there is a written performance planning and appraisal system.

This also requires proper budgeting system. Performance pay in most of these companies is loosely woven. A few typical examples are given here to understand further the complexities in performance salary.

A company incurring huge losses mainly because of high leverage was on the verge of becoming a non-performing asset(NPA). With working capital renewal still pending and with huge amount of payables, it recruited a Vice President - Finance whose salary had fixed and flexi- components. The flexi-component had 1 % share on interest reduction for the company. This employee joined the company in June and the financial year is from April-March. He didn't participate in budgeting exercise and so, restarted the exercise. However, for his flexi-pay component, interest paid last year was fixed as the reference point. In spite of his best strategies for the company, the top management removed him in November of the same year. The employee did not know the depth of the company's problem and was required as a fire fighter for six months, in the processing burning his pockets! The company, on the other hand smartly saved on managerial costs!

Normally performance pay or incentive pay for senior management happens in case of projects operating at two levels: The hard core project team will have performance pay, sometimes to the extent of 30-40 % of their pay. The flexi-pay will be linked to project milestones. At the time of recruitment and beginning of the project, there will be tougher targets, which the team in their enthusiasm will agree to accomplish. As the project progresses, the bottlenecks would emerge and the team will become frustrated due to the delay in the project as well as the compensation cuts. The management would have the unpleasant task of controlling costs and at the same time they need to keep the team together. In such circumstances, it is wiser to talk to the team and refix the compensation realistically. Most managements lack the will and initiative to do this. In the process they lose some key personnel.

Whenever there is a change in management, professionals lose out on performance pay, if it is not in writing and committed by the management in clear terms. This is especially true for businesses that are cyclical and companies that are volatile to business cycles. Even big groups, which take-over businesses may default in this, as a part of cost cutting exercise. Here again the companies are fair to the extent that they put the new structures on notice and meet the commitments made earlier.

Finally performance or incentive pay for mergers, acquisitions and restructuring could be ticklish. The professionals opting for such a structure must decide to what extent is this linked to the overall pay packet. Most of the times, such deals are risky and cannot be individualised. The standards of performance cannot be objective and many a times it's the promoter or the top management who decides on the performance rating. Such times it would be better to treat such a pay as an ex-gratia or an incentive and not reckoned as part of regular compensation package.

Here, ESOPs are not covered though many start-ups use ESOPs as part of flexi-component of the salary. In the Indian context ESOPs are yet to mature and ideally the employees must be aware of risks associated with this component of compensation. It helps to understand what should be the portion of salary and period under normal circumstances for which one has to stay to benefit from this component.

To conclude, it may be worthwhile for employers and employees to be fair in understanding performance parameters in the right perspective and handle this component in earnestness. In most cases, the employee will be the loser. But the employers may also note that the employees who are going to lose will bad mouth the company for the rest of their lives especially when they leave the company. The company's chances of attracting good professionals will go down. Nine times out of ten, the prospective employees of the company believe the past employee's version rather than version of the company itself.

N. CHANDRASHEKHAR

chandrashekhar.hydKcareercommunity.co.in