Aon Hewitt: Salary hikes at India Inc to hit 10 pct this year, lowest since 2009

Written by Agencies | New Delhi | Updated: Feb 28 2014, 03:58am hrs
Salary hikeIn 2013, the average salary increase was 10.2 per cent while in 2009, it was 6.6 per cent.
India Inc is expected to dole out a 10 per cent salary increase in 2014, the lowest in five years, according to a survey by Aon Hewitt.

In 2013, the average salary increase was 10.2 per cent while in 2009, it was 6.6 per cent.

According to the global human resource solution provider, the average salary increase for 2014 as projected by over 500 organisations in India stood at 10 per cent, with a range of 8.8 per cent to 12 per cent across industries.

The years 2012-14 are witnessing a sort of "plateauing" in salary increases as compared to the high double-digit increases in the last decade, according to the report.

"This period reflects the easing off of the unsustainable, turbo-charged, pre-crisis economic growth. Even though growth appears to be strengthening in both advanced and developing economies, it is expected to be muted and slower paced than in the pre-2008 era," Aon Hewitt India Rewards Consulting Practice Leader Anandorup Ghose said.

Sectors largely reliant on the domestic economy such as pharmaceuticals, chemicals, engineering services and consumer goods, project the highest salary increases, typically above 10 per cent for 2013-14.

Retail, financial services and hospitality forecast a lower range of salary increases, with these businesses affected by the slowdown in the economy and consumer spending.

Globally, Venezuela projected the highest salary increase (24.9 per cent), followed by Argentina (24.3 per cent) and Vietnam (11.1 per cent).

Continuing the trend of the previous few years, the developed economies of the US, the UK and Japan show salary increases in the range of 2.4 per cent to 3 per cent.

India leads salary increase projections across key APAC countries, followed by China.

Reasons for lower budgets include concerns over fluctuating economic conditions, cited by 57.6 per cent of the respondents. A third (33.5 per cent) said their organisation is undergoing cost reductions.

Some organisations are managing wage cost escalation by freezing hiring, transferring salary increases from fixed pay to variable pay and recruiting replacements at lower salaries.

Interestingly, the pace of top management salary increases has been slowing over the past seven years.

Rewards for key talent are likely to continue. As against an overall salary rise of 10 per cent, key talent would get a 13.9 per cent salary hike this year, the report said.

"Organisations are exercising prudence in overall salary increases but investment in key talent continues. Gap between salary increase awarded to key talent vs others is widening year-on-year," the report said.

Overall attrition reduced to 18.5 per cent in 2013 from 19.3 per cent on account of slow economic growth and limited job opportunities, the report said.

Other Emerging Trends from the Study

With shrinking salary increase budgets, the one definitive change observed in the compensation philosophy of organizations in India is the increased reinforcement of the performance and rewards linkage. Top performers are projected to receive an average 15.3% increase in 2014, almost 1.5 times the average increment provided to employees meeting expectations. This gap has been widening over the last decade. Additionally, in just the last five years, the percentage of employees in the top performance rating has dropped by 30%, implying that organizations are not hesitating to differentiate sharply on the basis of performance and then allocate a disproportionate share of the total increase budget to top performers, thus encouraging a high performance culture.

Mr. Ghose added, Fundamentally, this is the most distinctive change in the approach towards pay management. With shrinking pay budgets, companies are more clearly differentiating talent and performance and providing better pay increase budgets to higher performers.

Slow economic growth and limited opportunities in the market impacted attrition in 2013. It fell to 18.5%, almost 1% lower than previous years, with a reduction of almost 3% at the entry level. With a growing recognition that motivated, high-performing talent is a sustainable competitive advantage, organizations are reshaping their strategies to safeguard their key talent. This is reflected in the lower average attrition for critical talent of 4.5%, down from 5.7% a year ago.

On the back of increased cost prudence and rewarding true performance, spending on variable pay as part of total compensation has been steadily growing over the past few years. This indicates a shift in overall pay philosophy, as employers are tying a greater percentage of each employees pay to individual and overall company performance. Top/Senior Management see 23% of their total compensation as variable (up from 16% in 2001) and even the lowest rung entry management gets approximately 12% of their salary as variable compensation (up from 10% in 2001).

Mr. Ghose commented, While having a successful performance-based incentive plan is important, it is critical to ensure that the right set of performance measures is used for the plan. We often find that companies focus on the wrong drivers of performance and value, or let legacy rules and metrics distort the current performance picture.

Industry Outlook

The Pharmaceutical Industry, with a projected revenue CAGR* of 12% and backed by higher disposable income, the increased penetration of health insurance, focused medical infrastructure improvements, and increased consolidation within the sector, has projected the highest salary increase for 2014 at 12%.

Factors such as availability of qualified talent; cost effectiveness; capability to deliver high-value, complex services; and abundance of design opportunities in domestic sectors like power, infrastructure, mining, oil & gas, etc., make the long-term growth projection robust for the Engineering Services Industry. This reflects in the industry projecting a high salary increase of 10.6% in 2014.

The Consumer Goods Sector has been among the top salary increase industries over the last five years, and remains so this year, though the growth has come down compared to earlier years. Factors such as the rise in competition; pressure on margins given the high input prices; high spend on advertisements & promotions to fight competition, amid limited scope for increasing prices; rising interest rates and import costs; and cuts in discretionary consumption expenditure took the sheen off the Consumer growth story in 2013. Accordingly, the projections for this year stand at a conservative 10.3%.

The Automotive Sector in India continued to slow down in 2013 in terms of growth, in view of increasing fuel prices, rising interest rates, and the economic slowdowns impacting consumer spending. The industry projected a modest salary increase of 9.5% in 2014, down from 2013s projection of 11%.

Unstable macroeconomic conditions in India for most of 2013; M&A deals drying up; low consumer spending impacting sectors like insurance, retail broking and retail banking; along with the volatile stock markets; made it a tough year for the Financial Services Industry. The projected salary increase for 2014 is 9.1%, a marginal increase from the actual percentage of 2013. The industry remains hopeful of a stronger performance in 2013, with the announcement of the new banking licenses and improving global cues. Non-Banking Financial Companies led with a projected 2014 increase of 10.1%, followed by Insurance at 9.4%, Asset Management at 9.3%, and Banks at 9.0%.

Driven by macroeconomic and sector-specific challenges such as delays in clearances, lack of funds, and projects getting postponed, the RE/Infrastructure Sector is projecting a relatively low salary increase of 9.1%. However, the sector is hopeful of resurgence in 2014, on account of upcoming general elections and government support for infrastructure projects across roads, railways, and airports. The Cabinet Committee on Investments has cleared the way for 296 projects with an estimated projected cost of 6.6 Lakh crore.

The Hi-Tech Industry projected an average salary increase of 10.2% for 2014, with the semiconductor industry leading at 11.3%, closely followed by software products at 10.8%. The IT market is expected to grow by 13 to 15% during FY 2014--15, driven by factors such as greater offshoring by certain countries, and the offshore outsourcing model gaining acceptance in previously untapped economies. Growth is also expected from somewhat underpenetrated domestic markets, coupled with rising consumer awareness, and government initiatives.

In the face of considerable global uncertainty, the Indian ITeS industry is projecting an average increase of 9.9% for 2014. Banking and other captives are projecting a salary increase of 10.3%, on the back of a stronger US dollar. Third-party service providers, on account of tougher global economic conditions and increased cost pressures, are projecting an average salary increase of 8.2%. The Knowledge Process Outsourcing firms are witnessing a resurgence and renewed investments, thus their salary increase projections for 2014 are up from earlier this year to 11.9%.

Anandorup Ghose added, Wage inflation will continue to be a high pressure point for sectors where wage cost is a significant part of operating expenses and revenues. This year will be a complex one for organizations, offering no clear signals as to how either inflation or business numbers will move in the next two quarters. It might be a good time to be conservative and focus on ensuring that key compensation and productivity metrics are actively tracked.

Aon Hewitt surveyed over 500 organizations representing 20 primary and 30 secondary industry sectors. This is the most comprehensive research in the area of rewards and performance. The study measures actual and projected salary increases, and compensation practices for five specific job categories, namely top/senior management, middle management, junior manager/professional/ supervisor, staff and manual workforce. The data for the survey was collected over December 2013 - January 2014.