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Home > Business > Special


How best to negotiate your salary

Archana Rai, OutlookMoney.com | May 26, 2006

All-expenses paid holidays abroad, annual company picnics, free iPods... Today's employee leads a charmed life by all accounts. But it's a HR nightmare for employers - high growth rates and zooming investments have led to manpower shortages across sectors and hierarchies.

Attrition rates, even in old economy companies, have gone up, and companies are desperately offering the moon to woo or retain talent. And employees know that, and are more than happy to drive a hard bargain and get a couple of stars thrown in as well. The Indian job scene has never been better.

Global HR firms estimate pay increases of 14-16 per cent in India in 2006, the highest in the Asia-Pacific region. A Mercer Human Resource Consulting's survey of 70 countries predicted an average global pay rise of 2.4 per cent, with India topping the chart with a 7.3 per cent raise (over and above the inflation rate).

And according to a Hewitt Associates' study, the attrition rate in India crossed the 13 per cent mark last year. "In the last two years, salaries have increased by 50 per cent in cities like Chennai, even at the mid-level, in the software and the manufacturing sectors," says Satish Rao, director, Reach Global, HR and staffing consultants.

"Attracting and retaining talent is by far the greatest challenge that employers are facing. While this holds true at all levels, the impact - particularly in the service sector - is most at middle and senior profiles as employees at these levels are critical for ramp up and growth," says Padmaja Alaganandan, principal consultant, Mercer Consulting. Clearly, the race to woo skilled people is getting frenzied.

Companies are forced to out-bid competitors, offer attractive salaries and extras, and throw in freebies as well, if they want to retain existing talent and attract fresh ones. Which is why ESOPs (employee stock option plans), sign-on and retention bonuses, cash rewards, and softer advancement incentives are making a comeback. We take a look at what's available and how you can use this to your advantage when you negotiate with your present or prospective employers.

ESOPs

No longer are stock options mere fables of the dotcom era, when employees made (and lost) huge fortunes thanks to ESOPs. Today, it's not just tech companies that have rediscovered ESOPs; old economy has adopted the idea, and today, it's companies like Punj Lloyd, Godrej and Balrampur Chini that are taking the idea of stock options ahead.

Says Tarun Gulati, CEO, ESOP Direct: "The current rise of ESOPs is not a superficial knee-jerk reaction. Promoters believe that a company's value is created by employees and should therefore be shared with them."

And that's great news for employees, particularly since the stock market has seen a bull run that's lasted three years now. Loyalty has never paid so well.

Ask Shampa Chowdhury, who has been with Punj Lloyd for 16 years. In November 2005, she was granted options at a price of Rs 630 per share against the issue price of Rs 700, with 10 per cent of her allotment available for conversion into shares a year later.

For the next three years, the balance can be converted in blocks of 20 per cent, 30 per cent and 40 per cent, respectively. Says Chowdhury: "I am bullish about the company's prospects and this gives me a chance to increase my wealth along with that of the company." Adds P K Gandhi, president-HR, Punj Lloyd: "When the market is rising, the value benefit for an ESOP holder is tremendous."

How they work

Typically, when you get stock options, you are given the option to buy the company's shares in the future at a pre-determined price. If the stock price goes up in the interim period, your options gain in value, but in case they dip, you have the choice to reject it.

For example, if you have the option to buy 4,000 shares at Rs 50 each a year later, you can choose not to buy the shares if they are quoting at a lower price. Says Gaurav Mashruwala, certified financial planner: "ESOPs with (such) lock-in periods will also be treated as long term capital gains and, hence, be tax-free."

Experience shows that stock options work the best when the stock market is in a bullish phase. When markets tank, as they did in the post-2001 dotcom debacle, option prices can fall much below the traded ones, leaving employees with negative assets. In their present avatar, therefore, ESOPs are sporting distinctively newer features.

Says Mercer's Alaganandan: "As they become widely prevalent in sectors such as IT, there is a need to bring in differentiation-either in plan design or in quantum of options or grants made." Adds Jagdeep Khandpur, MD, Prerna Management Consulting: "ESOP allocations are based on performance and the quantum is much larger, and they now figure on an employee's CTC figures."

Long-term investment

Today, companies are moving away from the earlier broad-based ESOP plans for all employees to performance-driven plans targeted at higher management cadres and critical function employees. In his nine-year-stint at Sasken Communication Technologies, Suresh K, a program manager, has benefited several times from ESOPs.

"In the last five years," he says, "I have been granted additional options based on performance parameters on three occasions." Suresh adds that he plans to liquidate a portion of his stock options in August, when he can cash in on his ESOPs. But, given that analysts see Sasken as a growth story, he plans to retain the balance as a long-term investment.

Sops and Baits

Some of the incentives now in vogue to retain and attract talent

Esops: Stock options are back with even traditional sectors joining in. HR honchos have developed many variants of the basic model.

Sign-on and retention bonuses: While recruitment lumpsums have touched an unbelievable Rs 1 crore, retention sops are being doled out in 2-year cycles.

Variable Pay: Employees can now choose the optimum mix: the variable component in some cases are as high as 40 per cent.

Soft sops: From Swiss holidays worth Rs 3 crore to training programmes, firms have come up with largesse to suit every taste.

Apart from the traditional ESOP, there's also an employee stock purchase plan variant offered by some companies. Under this plan, the employee allows the employer to withhold a certain portion of her monthly salary. The amount accumulated is then used to acquire shares at a discounted value at a future date.

The problem with such a plan is that it can be detrimental to the employee's financial prospects because she is committing to the purchase without being aware of the exact price of the shares at the time when she will possess them. But, says Mashruwala: "It is a form of forced saving that can work for some and not for others."

While ESOPs definitely mean good financial news, financial planners caution against employees placing all their eggs in one basket by linking both professional growth and personal finance to the fortunes of one company. Explains Mashruwala: "An employee invests his human capital in his company and with ESOPs, his financial capital also gets allocated there. With this comes the danger of over-exposure." So, as with all equity investments, it pays to ensure that your portfolio is diversified adequately when you are an ESOP holder.

Cash Incentives

For many employees, retention and sign-up bonuses have become routine. Atul Vohra, managing partner, Transearch India, says: "Retention bonuses are the order of the day since they imply ready cash for the employees." He adds that companies are coughing up retention bonuses on a two-year cycle since it loses its charm on an annual basis. Max NY Life and Grasim hand out such bonuses every two-three years, while Apollo Tyres' scheme of Rs 10-20 lakh runs across the board and is paid every five years.

A sign-on bonus is paid once the employee signs up with the organisation. If the employee quits within a stipulated time, he has to refund it. "It acts as a deterrent for employees to leave," says Vohra. And the amount? For top management, the sign-on bonus can be anywhere between Rs 15 lakh and Rs 1 crore. Nishchae Suri, Head Analytics Consulting, Asia Pacific, Hewitt Associates, says that sign-on or hiring bonuses are becoming popular since they give employees cash upfront, and it is an easy hand out for the employer as the cost is not built into the employees' fixed CTC.

Dos and Don'ts of ESOP

Treat ESOPs like any other stock: go by the fundamentals of the company.

Be wary of over-exposure: do not restrict your equity portfolio to ESOPs alone.

Do not allow ESOPs to restrict your professional growth and tie you down to a job with fewer future prospects.

Align your ESOP moves with your overall financial portfolio, plan ahead when you exercise your options and cash-in your shares.

Guard against buying additional ESOPs when it restricts the diversity in your portfolio.

Deferred benefit

This type of bonus helps employees clear past dues or loans with their previous employer, and these are now being tweaked to accommodate annuity-based awards. For instance, if you're eligible for a pension after 20 years in your present company, but you get a mind-blowing job offer after having completed 18 years. You can ask your prospective employer to compute the value of the pension benefit that you could have got and include it in your salary package as an additional payment. This is called the 'deferred benefit plan'.


Suresh K. Program Manager, Sasken Tech
In the last five years with the firm Suresh has been given ESOPs three times. "I got additional stock options based on my performance. Now I plan to liquidate a portion of these in August."

In many companies, the variable pay component has been upped. S Y Siddiqui, director-HR, Maruti Udyog, claims that this ranges from 10-35 per cent of the total income across ranks. He says that after working with Mercer to restructure compensation within Maruti, the variable component has risen significantly over the last two years.

In Escorts, the senior management receives variable pay of 25-40 per cent of the overall CTC. In Apollo Tyres, it stretches from 10-30 per cent across levels.

Lately, the HR policies allow for variable pay to factor in the performance of the respective business units, the fruits of which are shared with employees in a pre-determined proportion.


Cash rewards

There are also other forms of cash rewards that are finding acceptance. Suri of Hewitt Associates says: "Employees are rewarded with lump-sum payments on the completion of a critical duration and this is common in the case of support functions such as IT or finance where, although attrition rates are high, it is difficult to build in a significant variable pay output based on the success of the firm." He adds that an FMCG company with a large outsourced IT support function out of Mumbai has used this approach to retain key talent.


Mukesh Singh 33
Brokering Division, India Infoline

Has done practically everything under the India Infoline sun–from research to risk management. "The functional mobility has given me a perspective and my input has become richer."


In other cases, companies write-off loans outright or significantly lower the interest burden on their employees. Vohra says: "Writing-off of loans helps employees build assets without hassles." On a more conservative note, Ravi Kapoor, practice head, compensation & benefits, Ma Foi Consulting, says that companies are increasingly subsidising loans for their employees owing to their links with banks and other financial institutions.

"Corporates, especially in the IT space, are now setting aside funds like the venture capital funds, which are used to fund deserving employees to kick-start business enterprises on their own," says K. Pandiarajan, managing director, Ma Foi. This is projected even in campus recruitment presentations to rope in fresh talent.

But it's not all good news

Some companies include a penalty clause to help overcome the "pull factor", thereby preventing other companies from luring employees away with higher salaries. This usually takes the form of a bank guarantee that is linked to the employee's salary. If the employee puts in his papers prior to the agreed tenure, the guarantee is invoked and the equivalent amount deducted from his salary.

Soft SOPS

Tapan Mitra, chief of human resource, Apollo Tyres, says: "Giving financial sops may not be the only tool to retain people, since you need to create the right working environment." Thus, soft advancement benefits figure as a formidable retention tool. Bharti Airtel, for instance, sponsors senior personnel for programmes at Harvard and other Ivy League institutions. Then, there's the One Family scheme at Apollo Tyres, where close to 70 families from the senior and top levels travel overseas every year. Last year, they made a sojourn to alpine Switzerland and Mitra pegs the cost at Rs 2-3 crore (Rs 20-30 million).

Learning programmes

An interesting case is that of ICICI Prudential Life Insurance. Its HR head, Judhajit Das, says: "Learning and growth is the value proposition that we offer to employees at all levels. For our frontline employees, we have developed robust career acceleration and capability development programmes.

"We have taken a holistic approach in designing these programmes, as we believe that employees look for a whole host of factors such as learning, growth, rewards, and recognition in determining their career choices. We have developed programmes such as Fast Trax, Champions League, and Advantage, for different functions."

Under this system, he says, a frontline employee is able to see growth either in terms of learning, role change, designation change or a grade change every six months, depending on their fundamental skills and capabilities for the task assigned. They have key parameter indicators to work on to know what they need to do to go to the next level. In addition, the company has created Talent Councils, which comprise members of the senior management team.

"Through this process, we also identify our highly valued and critical resources who provide the foundation for our success," says Das. Those who do qualify are then put on fast track career paths and form an internal pool of future leaders. Those on the list are offered higher compensation, higher ESOP, faster growth and visibility. Many are given key roles and put on new projects to keep them focused.

It's clear that employers are ready to give present and prospective employees anything to retain or woo them. After all, as K Panduranga Rao, group head, HR and administration, IVRCL, says: "We believe that without human resources, we cannot think of growth at all."

Which is why, he adds, IVRCL is among the best paymasters in the construction industry. The good news is that this attitude is reflected by most managements. Which is excellent news for employees, who can now negotiate their way to not-so-small fortunes.

Inputs from Moinak Mitra and Narayan Krishnamurthy in New Delhi, and Vatsala Kamat in Chennai.

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Sub: comment on the salary negotiation

Probable maost of the articles consider IT sector as a reference. There are several other MNC's, which are into other type of business & the ...


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Sub: Text should be relevant to the title

I think it would have been better had the ways as to how to nogotiate the salary at the time of interviews been included. Here ...


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