Attracting top talent is critical to growing a business. The natural instinct of an entrepreneur is to hire top talent quickly and not let paucity of talent result in a loss of business opportunity. This leads to high salaries and benefits being offered — especially for niche technical skills.
In the last few years, ecommerce startups in India have offered high compensation, including equity compensation, to attract top engineering and data sciences talent. Earlier, during the high growth phase of India’s IT industry (1990s/2000s), relatively high salaries were offered by the IT services companies, and also by the multinational software product companies who wanted to leverage Indian engineering talent.
So, what factors should small businesses consider while finalizing their compensation and benefits strategy? What should be the level and structure of compensation for maximum impact? Is paying high, always necessary to attract top talent? How can one pay as per the market, and still maintain internal parity? When is equity compensation impactful?
Compensation and benefits are to a large extent, hygiene factors. Hence, if the level of compensation is perceived as below a threshold, it would have an adverse impact on both talent attraction and retention.
However, a very high compensation level is not necessarily beneficial in either talent attraction or retention. In fact, several ecommerce companies in India which were top paymasters, had significant problems attracting talent, and also kept losing people in large numbers as they were not regarded as a great place to work. Hence, buying talent at a high price is not necessarily a sound strategy. Also, paying high salaries may not be sustainable in the long run.
To decide the right level of compensation (with respect to the market for comparable jobs) one must look at what kind of talent the business needs. Where the skills and ability of the employees have a direct and disproportionate impact on the revenue and the success of the business -a high compensation level makes sense.
In a software product company or an ecommerce startup, a brilliant engineer can come up with a new product/feature that can bring in millions. The compensation level needs to be above the threshold to attract such high calibre engineers. Product software companies typically position the compensation in the fourth quartile of the market for this reason. Typically such companies also have high margins driven by product innovation, which makes such a compensation positioning sustainable.
For businesses focused on the axes of customer intimacy or operational excellence, a high compensation level may neither be affordable nor required. Here also employees are critical, but the impact they make is typically through process excellence, teamwork, service orientation and discipline -rather than through individual innovation.
In the long term, no business can pay its employees more than the value added to the business. The high rates of salary increase in the Indian IT sector have tapered off long time back. The high salaries in the ecommerce Industry are being questioned, and in some instances cut, as most companies are not profitable.
Businesses need to have a clear picture of the attributes of the employee they want to attract, and the nature of the business, to decide on the compensation positioning. Blindly, following the herd in the talent market would lead to waste and is not sustainable.
Having decided the level of compensation, it is important to design the most optimum compensation structure. The compensation structure refers to the proportion of guaranteed pay, and variable (performance) pay. It also includes other benefits and perquisites that are given to the employee or her family) that have a monetary value.
As most companies go with a total cost approach, it is important to customize the structure to give the maximum perceived value to the employee. The intent is to make the structure tax friendly – have the right mix of fixed pay and variable (performance) pay, to encourage a high-performance culture and also give benefits (retirals, medical insurance, accident insurance, term life insurance) to the employee, that have highest perceived value for her. If the organization understands the demographic profile of its employees (age, skill level, and gender mix), it can offer a flexible structure with the right level of customization.
A key challenge for rapidly growing organizations is in maintaining internal parity in the compensation levels. Due to lack of transparency, incomplete knowledge and a muddled approach on the organization’s part, a perception gains ground that the organization is unfair, and pays higher salaries to some employees for similar jobs.
It is important to have a transparent and thought through approach on this. There may be valid grounds for paying employees at different levels. The extent of differentiation needs to be thought through and a conscious call needs to be taken. Differentiation could be due to (i) different levels of performance (ii) different tenures in the job and for other valid reasons. It is the responsibility of the organization to communicate this clearly.
Organizations must also know when to use equity compensation as an effective compensation component. Giving Stock Options to employees is an acknowledgment that employees are co-owners and should get a share of the long term value created by them in the organization. It is important to give Stock Options to select employees who have entrepreneurial ability and a deep sense of ownership with the organization. They must be in critical roles so that they can add value. Giving a small number of stock options to a large number of employees is not effective and is not recommended.
An effective compensation and benefits strategy will enhance the possibility that the right talent would come on-board. It would also encourage high performance, and lead to higher retention of talent.
Source: The Economic Times
