Prepare for pay cuts amid poor results

If you are waiting for your performance-linked bonus at the end of the year, you might be in for a rude shock. You will probably get less than what you got last year. Some unlucky ones may not even get their much-awaited bonus.

Indian companies have had a dismal last quarter, as is evident from their September quarter results. The slowdown seems to have alarmed companies enough to begin cutting corners.

A few broking firms have cut salaries and some IT companies have given lower quarterly bonuses. If things remain the same for the next two-three months, companies will start reducing the employee’s variable pay component. The variable or performance-linked pay would depend on both the individual’s performance and the revenues and gross profit of the company one works for. Companies following the calendar year pay the variable component in January or February. Others following the financial year will pay it after March.

“With the slowdown, many companies have seen a fall in their revenues, leading to reduced gross profits. Tweaks in variable pay will help companies safeguard margins during such rough patches. Sectors like automobiles, financial services, real estate and business process outsourcing are likely to feel the pinch,” says Y V Verma, COO, LG Electronics.

On an average, the variable pay component accounts for 15-35 per cent of an employee's total pay packet or cost-to-company (CTC).

Typically, variable pay at a junior level is split into three parts, comprising company performance-linked incentive (CPI), variable company performance incentive (VCPI) and individual performance incentive (IPI). Companies avoid tinkering with the CPI component, as it is paid on a monthly basis and could dent the employee’s morale and productivity. It is usually the VCPI and IPI that are reduced.

E Balaji, CEO & MD, Ma Foi Randstad, says some companies may even do away with the variable pay component completely. “One needs to be ready for such an eventuality and start budgeting for it immediately, by reducing one’s discretionary expenses like expensive outings and exotic vacations and so on,” he says.

Salaried employees need to have a head start even before the actual reduction takes place. One needs to take a closer look at salary structure to know what part constitutes the variable pay. If it is just an addition to the fixed component it will not impact the pay significantly. But, if it accounts for a higher portion of one’s salary, especially those with a lower CTC, it is a cause for concern.

You might want to renegotiate the interest rates on your loans with your lenders to take care of the equated monthly instalment payments. Besides, one could also dip into the emergency cash you should have kept aside during the good times.

Typically, most people not only cut their expenses, but may also stop making investments. But, Sangeeta Lala, vice-president, TeamLease Services, says, “If there is a reduction in one’s variable pay, one should look at whether your investments will give guaranteed returns in the short run and that there is not much volatility in the instrument that you are investing in.”

She advises against getting locked in for too long, as one may need the money from the investments to meet one’s household budget needs. Individuals also need to identify and continue necessary investments like a mutual fund SIP or insurance premiums.