COVID-19 impact? Companies move to cap fixed salary costs

Just two weeks ago, financial services executive Mayur Satpathy received an e-mail from his company’s human resource team that the salary for the month of April 2020 had been tweaked. Satpathy’s performance-based (or variable) pay had been increased to almost 40 percent compared to 28 percent previously.

“Since I am at a senior vice president position, this change would mean that in my in-hand salary would drop by almost Rs 2.8 lakh every year. It is a fact that companies never give out 100 percent of the variable pay even if both the employer and employee have had a good year. Considering the world is hit by a Coronavirus (COVID-19) outbreak, it is likely that I would only get a negligible amount of the variable pay,” he added.

While Satpathy’s company has made this arrangement for the next seven months, it is anybody’s guess that this structure would continue.

COVID-19 has led to a lockdown in India from March 25 to May 3 in India. This has impacted not only production activities but has also impacted sales across the country. To save costs, changes in the salary structure are being made.

Sources said that companies are increasing the variable pay share in the annual salary package by 10-15 percent in a bid to save costs since there is uncertainty over resuming operations due to Coronavirus.

Over the last few weeks, industry sources said that 30 companies operating primarily in e-commerce, financial services and banking, retail and consumer electronics have made variable pay tweaks.

The annual compensation of employees consists of a fixed component and a variable pay component. Here, the variable component is linked to the performance of the organisation and individuals in the company. This is paid out at the end of the financial year post the appraisals.

Sunil Goel, MD, GlobalHunt said that the changes could be temporary as it could take companies a minimum of one to two quarters to get back to business-as-usual.

“Companies are trying to save costs since they don’t know how the demand will move. But this is a better proposition than losing resources (employees) because hiring and training costs are much higher,” he added.

Moneycontrol had reported in December 2019 that variable pay would be made a higher proportion of the annual pay to restrict fixed costs. Employee costs are a large portion of services sector firms’ total overheads.

A few HR experts are also of the view that while COVID-19 might have triggered a further shift towards variable pay, this structure could continue.

Rituparna Chakraborty, co-founder and Executive Vice-President, TeamLease Services said that even post COVID-19, companies would want to have a higher proportion of salary being moved to variable pay.

“Companies have realised that traditional form of compensation is outdated and variable pay could offer more flexibility. While COVID-19 may have triggered a deeper shift, this would continue,” she added.

This could mean the variable pay will be raised to 50-55 percent of the CTC in FY21. At present, performance-linked pay constitutes 40-45 percent of the CTC for top management while it is between 25-30 percent for the junior staff.