Short-term incentives here to stay post-pandemic to retain talent: Mercer

Respondents in survey say it imperative the HR team structures short- and long-term incentive plans to ensure the incentives are aspirational, sizeable, fair and simple, while also being achievable

Indian organisations have taken progressive incentive-based measures to attract and retain talent during the pandemic with 97 per cent organizations having an active short-term incentive plan for in-year performance recognition, reveals a recent Mercer India study.

The study, conducted earlier in the current financial year and titled ‘Leveraging Incentives for Competitive Advantage’, covered 41 organisations (representing over 300,000 employees) pan-India and included corporates spanning the consumer, chemicals, life sciences, IT services and Internet-based/e-commerce industries.

The objective of this maiden study by Mercer India was to understand structural nuances of the incentive structure of organisations and gauge how they are designing their incentive plans, especially post-pandemic.

With changing work dynamics and employee expectations, the respondents pronounced it imperative that the human resources team structure the short-term and long-term incentive plans to ensure that the incentives were aspirational, sizeable, and fair and simple, while also being achievable.

Mansee Singhal, Sr Principal, Rewards Consulting Leader India, said, “What is clearly observable from the study, as well as our extensive conversations with our clients across industries, is that there is a distinct correlation of the pay structure with the evolution of the organisation. In its initial years, the focus of the organisation is on base pay and long-term incentives to cater to short-term realities around talent attraction  as well as build on long-term growth expectations of the organization”.

Mansee added: “Ultimately, incentives should be based on the back of a clear, transparent process of individual and organizational performance assessment – failing this, even the most creative plan design will not yield the appropriate outcomes.”

As the 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).

Among performance-based short term-incentives, while the Variable Pay is largely determined by both the company’s and individual employee’s performance (88 per cent and 82 per cent respectively), the employee’s performance primarily defined the sales incentive payout to the tune of 71 per cent. As is prevalent in most cases, revenue and profits were performance metrics determining variable payout, while commission-based and quota-based payouts were the most sought after sales incentives.

Increasingly Team performance is being seen as a key parameter in assessing performance though caution should be exercised in defining what a “team” is.

Employee retention and enabling wealth creation for employees were the most prevalent objectives of long-term incentives as per the study. However, it was observed that organizations were progressively moving away from hierarchy for eligibility. New-age organizations and startups 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.

Box:

97% organisations have developed a short-term incentive programme to retain talent

71% organisations emphasise employee performance has the primary determinant of sales incentives

90% organisations determine long term incentive eligibility on the basis of seniority

60% organisations have employees participating in variable pay programs

28% organisations preferred stock-options as the mode for long term incentives

Internet and E-commerce organisations favour ESOPs, with few organisations providing long term benefits across the entire work-force

IT and Life sciences sector provided wider coverage than consumer sector