Variable pay reforms: Junior executives’ compensation models in flux

For instance, while some are eliminating variable pay from the salary structure for junior employees, others are excluding “organizational performance” as a factor.

Linking a part of a junior executive’s performance to a company’s overall performance is often unfair and an employee’s performance should be evaluated with peers and her team members, said industry insiders.

“Companies have been changing their pay mix and we continue to see higher variable pay at middle and senior levels as compared to junior levels. At lower levels, there is a strong focus on fixed pay considering that it is also the segment which sees higher attrition,” Roopank Chaudhary, partner, human capital solutions, India, Aon, said.

The debate over junior employees’ variable pay has intensified due to higher attrition, especially among firms that are driven by cost-efficiency initiatives, industry insiders said. Such organizations are worried about the departure of junior staff as it necessitates recruiting lateral hires, which is far more expensive, they added.

For instance, variable pay has been discontinued for executives below the managerial level at Yokohama Off-Highway Tires, the local unit of Japanese tyre maker Yokohama Rubber Co.

“There are five grades below managers and linking part of their compensation (10-15%) to overall performance of the company and business didn’t really get any traction either in terms of line or sight or performance,” said Amit Chincholikar, chief human resources officer, Yokohama Off-Highway Tires. “They are getting measured on their contribution and within their team. However, levels of managers above and seniors will continue to have variable pay linked to overall business performance . We brought this change in 2021 .”

The junior order typically makes up the bulk of a company’s workforce and the percentage of variable pay varies from 10% to 20% . The percentage of variable pay components in services is higher than manufacturing.

That said, when it comes to middle and senior executives, the variable pay gets steeper as scrutiny from stakeholders increases. Even for firms that are sales-facing and target-oriented, like those in the insurance sector, the focus is to make variable pay simpler and achievable.

“We have recalibrated the key performance indicator to remove the organization metric from variable pay for our junior workforce . Their quarterly incentives now depend on their own performance as well as the department’s performance,” said Santanu Banerjee, chief human resources officer at Bajaj Allianz Life Insurance.

For the company’s junior executives, about 85% of the variable pay is based on an individual’s own performance, while the rest 15% depends on the respective department’s performance.

However, there are some companies that are contemplating increasing the variable pay component to make performance more competitive.

“We will slowly increase our variable pay to focus more on business performance. The focus will not be on hikes for all, but on annual variable payouts that will be both individual and company specific,” said Praveen Purohit, deputy chief human resources officer at Vedanta Group.

He said 60-70% of a junior officer’s variable pay depends on individual performance and 30-40% on the company’s achievements. For senior executives, it is just the opposite, he added.

Business houses like RPG said attaching variable pay to overall company performance “builds a culture of outperformance”. “Our people do not shy away from taking stretched targets, because there is a reward attached to it. We have decided to continue with variable pay at all the levels. In our experience, everybody contributes to the growth of the organization, albeit in different ways,” said Supratik Bhattacharyya, chief talent officer at RPG Group.