Short-term incentives are still the most prevalent employee incentive model as 97 per cent of the organisations surveyed by talent consulting firm Mercer India said they have it in place in the form of variable and sales incentive payouts, while only 34 per cent of the firms offer long-term incentives (LTI) such as stock options and restricted shares.
As many as 60 per cent of the participating organisations have all full-time employees participating in a variable pay plan, according to the survey of 3,00,000 employees across 41 large organisations carried out to understand how firms are designing their incentive plans, especially post-pandemic.
The main objective for short-term incentives is to drive pay for performance and promote employee ownership, according to the survey respondents. But when it comes to employee retention and wealth creation, organisations turn to LTI plans which 90 per cent of the surveyed companies said they decide based on the employee's position level.
LTI is more prevalent in IT and internet/e-commerce companies and less so in consumer companies or life sciences, showed the Mercer India study. These are mostly in the form of Restricted Stock Units or Employee Stock Option Plans (ESOPs). New-age organisations and start-ups seem to be following differentiated practices, such as discretionary grants, ESOPs, appraisal-based grants, etc., primarily for ring-fencing critical talent and providing liquidity to employees, the study noted.
Most of the organisations offering LTIs do so from the top level to the mid-level, while IT and e-commerce industries offer wider coverage of LTIs, with a few organisations providing it across levels.
"As an organisation grows, matures -- both in terms of business models, cash flow consistency as well as people practices, the pay structure becomes more well-rounded with base pay serving as the anchor for driving competitiveness and based on the position, along with short-term incentives recognising in-year performance differentiations and long-term incentives enabling multiple mid-term objectives (e.g. retention, core performance goals achievement, etc.)," said Mansee Singhal, senior principal rewards consulting leader, Mercer India.
Meanwhile, several recruiting and HR services firms told Business Today that Indian companies are introducing deferred incentives, a type of LTI, into the salary structure of key senior talent across several industries to retain them for at least 2-3 years amid high attrition in a buzzing job market.
In this model, the company pays those on its payrolls a certain percentage of their salary as an incentive over 1-2-3 years. Many companies offer a bonus plus LTI such as stock plans. Some companies just defer a part of the cash bonus over a few years to retain people. ESOPs and Employee Stock Purchase Plan (ESPPs) are also long-term incentives.
"ESOPs are already prevalent in listed companies across industries, but they are limited to the management or leadership team. So, that's a small number. But ESPPs are being introduced across levels. Around 25-30 per cent of the MNCs operating in India have this option," recruitment firm Randstad India's MD & CEO PS Viswanath had told Business Today earlier.
The IPO frenzy among Indian start-ups has also fueled this trend, the experts had said. With record levels of PE/VC funding flowing into Indian startups and several of them turning into unicorns, the new-age firms have been hiring aggressively to grow their ventures.
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