Increase in Cost of Hiring Vs Increase in Efficiency Rate

 

We are undergoing at the moment a twin phenomenon of tremendous growth rate in the economy and acute mismatch of demand-supply of skilled talent/manpower. Owing to this twin phenomenon there has been tremendous salary increments for the last 3 years in a row.

 

In the last 3 years India has had the highest rate of increment in Asia, constantly clocking an average of close to 14-15%. This translates to almost 20-25% increment in highest performing organizations in their respective sectors. While due to inflation and other global factors have attributed to certain slow down in growth by 0.5-1.0%. We are now looking at close to 8% growth in short to medium term. However that itself is almost a tremendous rate by any global standard. Given such rate and ofcourse inflation itself we are likely to witness double digit average salary increments in the next 2-3 years as well.

 

The key question now is are these tremendous increments proportionate to increase in efficiency levels of these people; hence do they actually deserve this. Honestly my view on efficiency is these increments are hugely disproportionate to improvement in efficiency. This is driven very strongly by demand and supply situation in the economy today.

 

Some interesting aspects of this situation today are:

 

·         Demand supply relation and would take time to settle down. IT industry for example is already signs of slowing down, rather must I say settling down. We are hearing of single digit salary increments in the industry this year. This is driven as much by slow down from US, as on the fact IT industry over the past few years has invested heavily in creating skilled talent and hence increasing the pool size available (which by the way is ONLY ultimate answer to this madness anyways)

 

·         Whilst organizations might not be necessarily able to control increments completely, they are looking at alternate actions like reducing administration cost of hiring, cost of hiring, internal referrals, eliminating non value adding roles, re-looking at skill set required for doing a certain role etc.

 

·         Some organizations would yet grow at higher rate than industry average and so would the employees grow at disproportionate rate

 

·         Key safeguard for most organizations is however the fact revenue per employee in most of these organizations is growing, even though not attributable to efficiency. It’s in all probability just an outcome of current business environment and bigger business opportunity than before. In such environment if organizations would benefit with higher growth than previous years, so would its employees.

 

In summary I think increments for the next few years would continue to outrun delta improvement in employee efficiency. As organization would invest in creating larger talent pool and various industries would reach stage of consolidation, this phenomenon will settle down. We are likely to continue our leading position in Asia as highest salary increments J

 

Hence we will continue to see increments in proportion to growth in business but not necessarily similar increase in efficiency.

 

Have you seen similar trends? Have you come across interesting ways of managing this situation?

 

~~Rohit~~

Compensation Strategy and Business Models

Almost every compensation consultant you come across talks off how it’s linked to business strategy. As much as there is merit in the statement, far too many compensation consultants are not very clear about how to establish this linkage. Not too many of them have clear answers of how will compensation strategy with a Business Strategy A be different from the one with a Business Strategy B.

 

Anyways while that is a whole topic of discussion in itself over the years I have found interesting learning’s with respect to compensation increases. Irrespective of how overall industry is moving you can move at a much faster rate by constant relook at the business model. In my experience whoever has understood the concept of how to manage aggressive rate of compensation increases, automatically picks up a lot of business perspectives as well and infact becomes a better business manager.

 

The basic premise is very simple and very powerful. High compensation increases boil down to increasing Revenue Per Employee (RPE). End of the day business must make more money to distribute more money…a stable state business or a stable RPE will only be able to afford industry driven compensation increases. For anything more you have to constantly increase the worth of every employee.

 

Some of the strategies that help in managing aggressive compensation rates are:

·     Increase RPE

·     Constantly increase product/service price and its value add

·     Push less experienced (and hence cheaper) resources to manage bigger tasks

·     Create process efficiencies at every milestone to manage same volume of business with lesser people

·     Look for standardization, technology and other tools for freeing up resource bandwidth for more business

 

Till the day a business can keep creating more per person funds in the business there is no time limit to when you can manage aggressive compensation increases. I have witnessed in industries where average increments are to the tune of 8-10%, organizations who understand this connect better manage 30-50% for long durations.

 

Ofcourse at some point they will come to s stage of consolidation….but what the hell this is just one way of doing this. If this can survive you for a cycle of 3-4 years, by that time you would have created significant upside for the business and individuals. Post that there are other interesting strategies to deploy.

 

As much as this may sound easy to do in first read, mind you carrying this out is not so easy. Good part is most of the difficulties are in the mindset and our usual business sense. Usual mindset infact works almost opposite where one looks at decisions like higher number of people (to have more power, represented in this case by number of reportees), more senior people (which makes it easier to manage business).

 

This strategy is a complete opposite of the traditional way of managing business J

 

~~Rohit~~

 

 

Un-Complicate Reward Strategies

 

I had spent years designing the most interesting, state of the art, thought leading (atleast so I thoughtJ) incentive schemes for some of the leading corporate houses across Asia. Here I was working with the promoter of a mid cap company in back and beyond of South East Asia. The promoter must have been in his late 50s and his young and so unenergetic son in early 30s (damm he looked much younger though).

 

We had a series of some very interesting board room discussions with the promoter and his top management team. Like a good consultant I had managed those workshops debating the concept with the team, articulating what will work well and what will not work well, ensuring participation from all members. We had some very interesting conversations to say the least. I was very amused with the uncle promoter during the discussions. He had a interesting way of constantly shaking his head whenever talking….his head movement would almost give his comments first followed by verbal explanation. The theatrical expressions were both good and bad….good because atleast I knew he was listening and involved….bad because I had no idea how much was he understanding. The discussions anyways went on and we finished the design successfully as we say in consulting.

 

Just when I was beginning to start feeling good about the successful design the promoter asked for me in his room. What followed was the most educating 60 minutes for me. The promoter came down straight to the point and asked me how much money he will need to shell out in the scheme and how much money will the business make. He articulated in what I call as “Lalaji’s business book” how much money he would be willing to pay if business achieved XYZ million. He even articulated if business did not meet the target how much will he be willing to pay, however with a strong message that “he is sad”, or if business exceeded then the message “I am very happy”.

 

In simple yet very effective language we almost redid the entire scheme in those 60 minutes of discussion. We managed to get around a healthy negotiation on almost all aspects of the scheme in that time. This discussion taught me some invaluable lessons:

 

• The greatest impact of the scheme design is not in how strategic it looks but how simple it looks
• Whatever can be done on 2 pages of paper is best kept that way…..creating 100 pages to explain the same concept in detail will almost guarantee itself to a disaster
• Instead of putting effort in getting others to understand your style and language, its best to understand and talk their language
• As much time one spends on working out a different and interesting model pf reward and payout, one must spent in detailing how will life be different for employer and employee…else another formulae is all it is
• It does not matter if your books tell you there are 10 different reward strategies….if you understand the desired financial impacts of all parties involved well you can almost draw infinite number of strategies

 

So much so for that 60 minutes fame….

 

Rohit