Pay at risk component continues to rise for executive level but is still not linked to a robust performance metric

The Indian market has reached a stage of maturity in some aspects of the executive rewards landscape, according to a recently launched PwC report ‘Navigating the path to maturity'. The PwC survey was conducted across 42 companies and saw representation from leaders across various industries with varied ownership patterns and listing status.

The report suggests that over the last two decades, Indian companies have strengthened the pay proportion at a relatively slower pace. At the executive level, pay risk comprises 40 per cent of the package at target, with an even split between short-term and long-term incentive plans. This increase is likely to continue in the near future.

Key findings:

• Resurgence of equity-linked long term Incentives in a lack-luster stock market reiterates the maturity of compensation practices and signals the breaking of the short-term linkage to stock market fluctuations. Another example is that companies are getting 'smarter' in their use of long-term incentives. Today, one can see a more judicious use of equity, both among early adopters as well as late starters as opposed to indiscriminate usage across the board earlier.
• India compares favourably with the West when it comes to top executive compensation levels. However, it fares poorly on executive pay governance on the board agenda.
• Pay at risk component continues to rise for executive level. At the executive level, pay at risk now comprises around 40 per cent of the package at target, with an even split between short-term and long-term incentive. However pay at risk is still not linked to a robust performance metric in majority of the companies surveyed.
• The 'hiring at any cost' paradigm has been significantly dampened post the economic crisis of 2008. The objectives before the meltdown for offering long term incentive plans focused on wealth creation and talent attraction. Today, the focus is on sustainability of compensation costs and maintaining internal parity.

According to the report, over 40 per cent of companies surveyed do not have a performance metric linked to their long-term incentive plan, indicating much scope for strengthening performance linkage. Also, compensation for top executives is fixed-pay heavy, with 50 to 75 per cent of the total package being guaranteed. Companies run the risk of incurring huge compensation costs without providing significant focus on driving desired behaviors and performance goals.

There are some areas where companies are building upon the learning from mature markets, such as claw-back provisions in incentive plans which allow companies to recover bonuses in case of fraud or restatement of accounts. Indian companies are also steering clear of the controversial ‘golden parachute' severance packages, though this may be by default rather than design.