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Monday, February 26, 2007

INCENTIVE BASED COMPENSATION

In my last post, I mentioned about this system of compensation which the MBA people so lovingly call “Incentive Based Compensation” system. Not that this system was not prevalent earlier, but the respect for this system has increased since the last three or four years. And, as this system is picking up more and more respect, the pay packages of the MBA grads are soaring skies. A package of 10 L p.a. is considered peanuts today in the top MBA campuses of the country. The salary occasionally crossed the 10L margin just a few years back.

So what has changed over the last couple of years? One reason is that Indian economy is booming, but this cannot account for the whole picture. Over the last few years, Indian industry has undergone substantial changes in their management structures to keep in trend with the latest global practices. One of these changes was the implementation of the “Incentive Based Compensation” system. An important topic during our case studies and strategic performance management lectures, this concept rules the management pay structure today. Some of the basic features under such an compensation scheme are-

1. The compensation is divided in two parts – fixed and variable. The ratio of fixed and variable can change from company to company and from role to role. For instance it can be as large as 10 where most of your compensation is fixed, or it can be as small as 1/5 where you receive only a fifth of your stated package as fixed.

2. The variable part suggests the maximum package you can get depending on how much value you add to the organization, which is measured by your performance. In other words, this acts as an incentive to you to compete and excel to get the best out of you.

3. Now the question comes is how the variable part is treated. Again it varies from one company to other. In some companies your variable pay is directly proportional to your performance. For example, if you can manage the best possible results you get the maximum possible variable pay. If you manage to get half of the best possible results your receive half of that. And if don’t manage to do anything special you lose your variable pay. Some other companies follow a yes/no policy. If you manage to cross the target you get the variable pay else you don’t.

Now let me explain the above concepts using a pay pack of 20 L which is not very uncommon these days. Let’s say the fixed component is 12 L and the variable component is 8 L. This means the person will receive the 12L part as his regular pack. The rest 8 L depends on how good the individual is. Thus, such a system makes the compensations rise like anything, at the same time it provides incentives to the MBAs to get the best. This also acts well to discover the leaders within an organization. Thus next time you hear of those sky rocketing packages, the first question you got to ask is what the variable component is. It will give you an idea of how hard you need to work within the organization and how much of your compensation you will really carry home.

4 comments:

Anonymous said...

Dear Sabya,

I am a regular reader of your blogs. Balanced thinking and well written. Your blogs amply reflect your maturity as an individual and professional. Keep going. Congrats for satisfactory placement and best wishes to excel in new assignment, post-ISB.

Mohanan

Anonymous said...

very well written post

AD said...

Hi Sabya,
Nice post. Would just like to add to your point #3.

In some organizations variable pay is also governed by factors other than the employee's performance. For example, these factors can include the particular Strategic Business Unit's (SBU's) and/or the whole company's performance too. And, in this case performace would be measured in terms of the % acheivement of the projected growth/sales targets.

btw...nice to know that you have hit a double ton on your blog. keep going!

~Abhinav

SABYASACHI said...

Dear Mohanan and anon...many thanks.

Abhi...the SBU performance also decides the variable pay. In fact the variable thing is quite complex.