The performance pay paradox in PSUs

PSUs have a more aggressive performance-pay structure, compared with private sector peers, across most levels of management

Updated: Jul 4, 2016 08:01:48 AM UTC
compensation
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The classic belief is that managerial pay tends to be a big limiting factor for government-owned companies (PSUs) in India to become more productive and efficient. The argument essentially rests on the twin beliefs that since PSUs do not offer competitive compensation, their ability to attract the best talent from the market is limited and on top of that, since performance-based pay is missing in these companies, employees rarely feel motivated to drive for higher growth or performance.

The point that I want to highlight is that this entire argument on pay being a limitation does not stand the test of a data-based analysis. Firstly, PSU pay is very competitive compared with private-sector peers and, in some cases, even better, till the mid-management levels. Although above that level, compensation levels in the private sector starts climbing fairly steeply. Secondly, PSUs tend to have a significantly more aggressive performance-pay structure compared with private sector companies across most levels of management.

Here’s the data: Compensation levels for a white-collar executive, in the first 10-12 years of her career, is higher in PSUs compared with private sector companies. The gap ranges from as high as 150 percent in the first couple of years down to 10-12 percent in the later years. And hence the reality is that for the largest talent pool—and it is a fair assumption to make that the largest talent pool for organisations sit in junior and mid management jobs—pay is better in PSUs than in the private sector.

The data on performance orientation in pay is equally stark. Across almost all levels of management, save for the absolute top management jobs, the performance pay (PRP in government terminology) levels for PSUs are as high, if not higher than in the private sector. Here’s a comparison—the average variable pay across industries in the private sector is approximately 22-25 percent of fixed salary. The corresponding number, under the second PSE compensation guidelines is 23 percent of fixed salary. The amount of money that someone can earn through incentives in PSUs is more than in private sector.

In fact, the flaw lies elsewhere—two areas need a drastic relook when the third PSE Compensation board sits down to deliberate. First, the fact that PSU compensation flattens after a point creates a disincentive for good talent to join at mid-management levels. On the other hand, it provides an incentive for great internal talent at those levels to start looking at the private sector for better opportunities. The second flaw lies in the way the entire PRP process is run in PSUs. Most PSUs (usually outside of the ‘Navaratnas) do not have a structured approach towards setting annual MoUs (read annual targets) and end up setting goals that are quite unreachable for their levels of investments or market realities. PSU chiefs I have spoken to often complain about government satraps randomly adding another 10-15% to their targets. With targets not getting achieved, the incentives do not get paid out and given most of these companies have seen this happen for multiple years, the belief in the PRP system itself goes away. Downstream, employees and managers don’t set individual targets and goals seriously and randomness sets in to the entire process.

PSUs have tremendous potential in India—they sit on some of the best intellectual and physical capital—and if the Make in India aspiration has to fructify, these organisations need to be given a strong boost ground up. Reforming the managerial compensation system will have a large role to play. And as we see the numbers, its not even that expensive or mammoth a task.

-By Anandorup Ghose, Partner–Talent & Rewards, Aon Hewitt Consulting

The thoughts and opinions shared here are of the author.

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