As the taxman toughens up, fat-but-honest pay cheques rather than lifestyle frills are the norm in a West-style salary culture
MEET Mr K. Narayanmurthy or was it James F. Viviera? As the CEO of a multi-product, multinational company, the house he lived in, the car he drove, the knives and forks he dined with—were provided by the company. So what if his garden comprised 20-odd planters on his 8x6 ft balcony, he still employed a gardener, again paid for by the company. His driver's salary and uniform, carwash charges and parking slips were reimbursed by the company.
Move over Mr Narayanmurthy or was it James F. Viviera? You may soon be relegated to being a social artifact in the annals of corporate history. The taxman is hounding the private sector on remuneration nitty-gritties. The prospect that all allowances and reimbursements will soon be made taxable looms menacingly. Result: companies are under pressure to make compensation packages simpler, cleaner and more transparent. "There is a clear shift from the camouflaged, person-dependent compensation system that was the trademark of family-owned enterprises, or the rigid, hierarchy-driven system that characterised public sector companies, to a more market-driven, performance-based system that is easy to administer while being on the right side of the law," says Ravi Virmani, CEO of HRD consultancy Noble & Hewitt.
What everyone knows is that salaries are moving up, up and up. But the real paradigm shift has been little noticed. Salaries are being structured differently, in tune with global concepts and trends. "Liberalisation and market forces are reshaping pay packages not just in content but in form," says management consultant Anil Aneja.
A look at what's fueling the change. First, the tax factor. Our tax system has moved from a high-rate ambiguity-ridden structure that left a lot of room for interpretation and manipulation, to a more moderate and standardised one. In the previous tax regime, the energy of personnel managers was diverted more towards innovative ways to slip through tax loopholes than motivating people. Usually, companies split the remuneration package into the maximum possible number of heads for reimbursement to avoid coming under the tax net.
A top-level marketing executive in the '80s would typically get 70 per cent of his pay in the form of business promotion and conveyance expenses, and allowances under a dozen heads. Payments were made on furnishing of vouchers. "Companies were happy to cut tax liabilities, employees were happy to get tax-free benefits and the exchequer lost crores in the bargain," says Hemant Kumar, director, Core Consultants.
Manmohan Singh's thrust has been towards making the system more compliance-oriented. Tax rates were brought down, and more items brought under the tax net. The grey area of reimbursement has thus come under tremendous pressure.
A case in point is the Income Tax circular dated December 16, 1994, to all large firms warning them against incorrectly evaluating perks, allowances or other profits in lieu of or in addition to salary or wages and threatening penal action in case of defaults.
An earlier circular had asked companies to pay up on specifics like allowances and perks paid abroad to employees for services rendered in India. The message: pay clean or pay a penalty. Many progressive firms have taken the hint. Employees now negotiate take-home or after-tax salaries rather than gross packets, and firms are willing to take the tax element into account. "They are working towards a neat wage concept that means less reimbursements and perks and a more transparent structure," says Sumer Datta of Nobel and Hewitt.
The entry of transnationals (TNCs) has been a catalyst. Says Sangita Bhavnani, vice-president, personnel, at Pepsi: "As a high-profile newcomer in virgin territory, we wanted to be on the right side of the law and so even though a lot of consultants advised us on tax-free or partially exempt reimbursements, we preferred to take the cautious approach of reimbursing only actuals on which stringent ceilings were worked out depending on the levels." Proof of there being no voucher payments and cash transactions to employees at Pepsi, says Bhavnani, is that there is no position of a cashier in the company and the petty cash limit is Rs 5,000.
The fact is also that transnationals have the wherewithal (accentuated by the rising dollar-rupee exchange rate) to take the high-cost 'ethical route'.
"TNCs like Pepsi, Coke, Kellogg, IBM have essentially brought with them the concept of cost-to-company that is the universal lingua franca for compensation the world over," says Debashish Mitra, group vice-president, human resources at Ballarpur Industries (BILT). The trend in India, especially with larger TNCs like Hindustan Lever or ITC, was to provide a lot of 'invisible' benefits like fully-furnished accommodation, hard furnishings ranging from air-conditioners to cutlery to soft furnishings and club memberships. The actual cost of these was difficult to quantify.
There is also a growing consciousness of the flip side of invisible payouts and asset providing schemes. First, these require fleets of administrative staff to procure, deliver and maintain the assets. With downsizing the ruling mantra, it no longer makes sense to keep or add administrative flab. Secondly, employees prefer acquiring assets themselves according to their needs, tastes and lifestyles. A young working cou-ple living with their parents would much rather have two cars than leased accommodation. Similarly, a bachelor would prefer a music system before a cooking range. Companies are moving from asset-providing schemes to schemes where the employee could acquire the assets themselves.
PREDICTABLY, leading the pack are new entrants like Motorola, AT&T, joint venture spinoffs like DCM-Daewoo and Shriram Honda, and infotech firms like NIIT and HCL-HP (who do not carry the legacy of a huge administrative dowry or asset inventory). The overall trend is to move towards a broadly defined three-tier structure modelled on the US pattern that classifies compensation in terms of base salary with a very big component of performance pay, medical payouts and retirals.
In the US, as much as 80 per cent of the cost-to-company would be salary payout (including performance pay), and the remainder would be medical, conveyance (at very senior levels), leave and retirals. In India, the trend today is to have at least 50-60 per cent of the cost-to-company as the salary component. "This is a big change from the 25-30 per cent of two years back," says Virmani. Even old TNCs like Reckitt & Colman (RCIL) are simplifying processes by clubbing payouts under two to three heads. Says Gurveen Singh, general manager, human resources, RCIL: "More variables are administratively difficult to control when the employee base is as large as 1,800."
The performance-oriented, variable pay concept, too, has arrived. At BILT, for the top three levels, up to six months’ basic in a year can vary based on the performance of the firm, the business and the individual. At Pepsi, the ratio of guaranteed pay to performance pay is a more conservative 90:10.
"There is more science going into computing compensation packages than ever before," says Mitra. "As market economics dictate that companies move from graded structures to a differential pay structure wherein some red circle jobs like marketing and finance are more equal than others, companies are resorting to more scientific and reliable tools to arrive at salary packages," says Singh. The Hay's method that accords points on the basis of job description and responsibilities in the pay-for-performance system is becoming quite a hit with personnel managers. While BILT has adopted the methodology and Pepsi in India has inherited it, RCIL plans to start implementing it next year.
The other new trend is benchmarking. "Earlier, salary comparisons with other companies in the same industry would be done maybe once in three years. Now it's every six months. Some companies even insist on a quarterly update," says Virmani.
Often, where the country's laws do not allow certain forms of payment in vogue in the West, companies are developing innovative detours. For instance, the RBI does not permit an Indian executive stock options in a foreign company. So several firms are giving top executives "phantom shares", which are not really equity, but which the executive can sell back to the company within a specified timeframe.
Of course, the white envelope with cash inside still remains in vogue in many companies. But for the first time in the Indian corporate scenario, companies are realising that paying clean is important if they don't want to end up paying a price.