Salaries over the last decade - growing yet greying

Salaries over the last decade - growing yet greying

It's been a decade since the world (and India) weathered and won over its most recent and impactful economic crisis. Salary increments in India Inc. have always been linked to myriad economic parameters like GDP growth rates, inflation and most importantly the talent demand skill mismatch.

It's been a decade since the world (and India) weathered and won over its most recent and impactful economic crisis. Salary increments in India Inc. have always been linked to myriad economic parameters like GDP growth rates, inflation and most importantly the talent demand skill mismatch. However, a trend that has quietly but clearly emerged is the coming of age of India's corporates, when it comes to managing compensation budgets. If personified along the lines of a 10-year life line, the stages of youth, stability and maturity are very clearly visible for India Inc. in this trend line!

The three phases of salary increase

The major era of India's salary increase budgets can be clustered into 3 distinct phases. The first ran from 2007 to 2011 which was the unabashed age of high double digit growth. The second one ranged from 2012 to 2016, where the numbers were more muted and hovered around the low double digit mark. And the third era that started in 2017 where numbers were for the first time (barring the forgettable year of 2009) in single digits, and most likely will continue so going forward. Time for gloom? Not really. There is a method to the madness that plays out and it is worth appreciating the reasons behind the trend.

With the robust economic growth in the 2000s and the relative low base of Indian salaries, it wasn't surprising to see salary increment numbers as high as 15.1% in 2007 and even 13.3% in 2008. And in spite of the sizable blip in 2009 when numbers dipped to 6.6% due to the financial crisis, by 2011 India Inc. was riding along at 12.6%. But the downward trend had naturally begun. With rising costs, subsiding momentum and profitability pains, India Inc. had settled down into an early double digit increment budget by 2012 of 10.7%, that slowly yet surely came down to 10.2% by 2016. This was in spite of a stable government coming to power by 2014 and a reasonable amount of resurgence that was promised and was beginning to take shape in the economy with a slew of reforms and policy measures. When numbers fell below the 10% mark in the next year and 2017 saw a 9.3% salary increment number, demonetization was declared the villain. However, a deeper analysis of the numbers clearly indicated a 'gradual and expected' graying of the salary budgets even after isolating the demonetization impact, and a natural maturity with which Indian companies were beginning to manage their compensation decisions. This was expected to be the new norm that would emerge given the rising wage costs, P&L pressures and pay for performance equations that were confronting and challenging most business leaders. And which then clearly explain the salary projections remaining at 9.4% for 2018 as per Aon's latest Salary Increase Survey despite the significant improvement in macroeconomic forecasts.

Reduced push and pull forces across sectors

There are sectors within both manufacturing and services that have contributed to the subtle change within the last decade. In the manufacturing stable, sectors like automotive, FMCG (the most stable of the lot) and life sciences have clearly come down from 14-15% salary budgets to early double digit numbers over this 10 year timeframe. Within the services bracket, financial institutions has dropped the most from its hey days in 2007-08 followed closely by telecom and retail, and to a lesser extent by technology and ITES. And the business reasons for each of the sectors play out a complementary story. Not surprisingly, attrition has fallen as well in this time period (from 18.7% in 2008 to 15.9% in 2017) indicating the reduced movement of people across sectors and blunting the edge of the 'push' forces at work. At the same time, the 'pull' forces have abated as well with fewer industries sucking out talent from within - a case in point being e-commerce that rode in high double digit numbers from 2013 to 2015 and caused a flutter in the talent dynamics of corporate India, but has since lost its sheen and has fallen in line with the pack when it comes to salary increments.
Cost competitiveness remains critical

It can be argued that while India could afford steep increases in the past few years and remain ahead of the APAC pack, over the last few years it has become amply clear that India cannot operate in isolation. Over the years, with increasing pressure on compensation costs, there is an emerging focus on rationalization of budgets. In addition, the wage base is not so low anymore (aided by almost 15 years of double digit increase). Finally, the demographic dividend that India has to offer (skilled workforce at a competitive price) has become a challenge and is starting to dent the overall story. With critical skills like digital, automation and analytics in high demand, the cost dynamics will play an important role going forward as businesses evolve.

So while the numbers (and their steady decline) are beginning to make sense, should we expect the salary increment story to not look rosy anymore? Perhaps it's more a matter of perspective than anything else, and it's just about taking off the rose tinted glasses and encountering reality in its totality. The focus on performance rightfully is getting sharper year on year. Over the last 10 years, the pay for top performers has increased by 86% more than the average performer which clearly shows that it "Pays to Perform" in India. We expect this differentiation to get even sharper as we enter the next phase of growth, as the salary numbers will continue to reflect the cost consciousness and prudence of companies in the next decade. We are already seeing the best in class employers focus more on non-monetary rewards and other HR practices to attract and retain people, and we believe that more and more companies will use these levers effectively to engage their employees. And that is a clear indication of a more settled, seasoned and sensible India Inc. in the next few years.

The author is Associate Partner at Aon Consulting