Jun 26, 2008

Reality Check on Salary

Shyamal Majumdar: BS Column
At a time when salaries continue to rise, ICICI Bank says it's important to keep economic realities in mind.
When ICICI Bank announced in April that it would skip annual rituals like promotions or large-scale bonus payouts this year, there was a general sense of disbelief.
After all, India's largest private sector bank was going against the conventional wisdom that the Great Indian Salary Boom will continue despite the slowdown signals. The general consensus was that ICICI Bank was being foolish as the talent shortage and emergence of new job opportunities will ensure an exodus from the bank.
The bank's move also went against the projections of all leading global consultancies that Indian employees will bag the biggest global salary increase this year, at an average of 15 per cent.
ICICI Bank, however, went ahead and gave a moderate 8 per cent increase in salaries (11 per cent last year), skipped promotions and slashed bonus payouts. Three months later, Ram Kumar, ICICI's group head of human resources, says the bank's attrition rate hasn't gone up — even marginally.
Many also feel that ICICI's salary increases this year actually mean a huge erosion in real wages due to the high inflation rate. But Ram Kumar trashes that logic. People have got enough salary and bonus increases in the last four to five years and they have been cushioned to that extent. The bank believes the economic volatility will be short term and things will be back on track soon.
ICICI Bank, Ram Kumar says, doesn't want to get swayed by what the consultants say ("most of their reports are anyway based on opinion surveys and no real economic reasoning") and prefers to depend on sound economic logic. For a bank with a large retail portfolio, the thumb rule is simple: operating expenses can't exceed 45 per cent of total revenues if it has to deliver on profitability. And one-third of that — 15 per cent — should be the wage cost.
Ram Kumar has a word of advice for those who think higher wage increases can solve the attrition problem: divert some money — however marginal it is in terms of percentages — from your planned wage increases to your training budget.
Say, a company has a total manpower budget of Rs 2,000 crore, of which Rs 80 crore is for training and development. If the company has budgeted a 10 per cent salary hike, that works out to Rs 200 crore. If the company decides to reduce the amount allocated for increments to 9 per cent, which is a marginal cut, and won't make much of a difference, and reallocate this money to training, the training budget goes by as much as 25 per cent to Rs 100 crore.
The additional money for training can work wonders, which no amount of salary increases can ensure. "There is no job which reasonably intelligent people cannot learn in 60 days," Ram Kumar says.
In short, the Great Indian Salary Boom story will have to take a pause for at least some time to come. The economic boom in the last four to five years meant companies had to go in for premium pricing of manpower and sometimes "overskill" themselves, as no one wanted to miss out on the opportunity the economic growth could provide. ICICI Bank also did just that.
But at a time when growth is plateauing due to the oil and commodity shocks, no one can predict when the volatility will end. The only thing that is certain is that consumer demand and sentiment will take a hard knock. If a company has to still maintain a cost structure that will enable it to meet the market expectations of its profitability, capital and cost prudence is the key.
"An HR manager is no different from a finance manager; he can't be swayed by emotions and have some vague notions about employee welfare. Wages are a fixed cost but wage increases are optional costs, which have to be kept in check in turbulent times. After all, you can't give chocolates to your diabetic child just because he is crying," Ram Kumar says.
Some manpower consultants, however, still refuse to buy that argument. "Look at your own industry — media. With almost every media organisation planning new launches, journalists are graduating from Santros to Pajeros in double-quick time," a consultant says, referring to journalists in a leading media house.
The consultant says he doesn't need opinion surveys to arrive at this conclusion as it's plain economic logic. The salary boom may be restricted in some sectors this year, but will continue in sectors where new players are coming in and talent is in short supply.

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