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India employers continue with 10% salary increase in 2014 lowest in a decade

New Delhi, February 26 2014 — Aon Hewitt, the global human resources solutions business of Aon plc (NYSE:AON), announced today the results of the 18th edition of Aon Hewitt’s Annual Salary Increase Survey in India. On the back of improving business confidence, positive expectations from the general elections, and moderating inflation, the survey results, represented by 565 firms, are projecting a 10% salary increase for 2014. This is marginally higher than the projections made in September 2013, but the lowest the country has seen in a decade (barring FY2009 when markets became extremely cautious post the global financial crisis).

Anandorup Ghose, Rewards Consulting Practice Leader at Aon Hewitt India, commented: “This period reflects the easing off of the unsustainable turbo-charged pre-crisis economic growth. Even though growth appears to be strengthening in both advanced and developing economies, it is expected to be muted and slower paced than in the pre-2008 era. This sentiment is reflected in India’s slightly higher salary increase projections for 2014.” 

Sectors largely reliant on the domestic economy such as Pharmaceuticals, Chemicals, Engineering Services and Consumer Goods, are projecting the highest salary increases, typically above 10% for 2013-14. In these industries, compensation costs represent a smaller percentage of the total cost structure. However, the cautious streak is evident as projections for 2014 have reduced by an average of 30 basis points from the actual increases provided in 2013 by these industries. 

Service industries like Retail, Financial Services, and Hospitality bring up the rear in salary increase projections, with these businesses impacted by the slowing down of the economy and consumer spending. In these industries, compensation costs are a significant portion of their total cost structure, thus managing salary costs has become an important element in their cost management strategy. 

It is important to note that the dispersion between the highest paying and the lowest paying industries has narrowed in 2014 to about 2--3%, as compared to the 5--7% dispersion observed in 2013.

Highest & Lowest Salary Increase Projections for 2014

Lead Industries

2014 Projections

Lag Industries

2014 Projections

Pharmaceutical

12.0%

Automotive

9.5%

Chemicals

11.2%

Energy (Oil/Gas/Power)

9.2%

Cement

10.8%

RE/Infrastructure

9.1%

Engineering Services

10.6%

Financial Institutions

9.1%

Consumer Products

10.3%

Retail

8.8%

 

Source: Aon Hewitt Salary Increase Survey 2013-14

Other Emerging Trends from the Study

With shrinking salary increase budgets, the one definitive change observed in the compensation philosophy of organizations in India is the increased reinforcement of the performance and rewards linkage. Top performers are projected to receive an average 15.3% increase in 2014, almost 1.5 times the average increment provided to employees meeting expectations. This gap has been widening over the last decade. Additionally, in just the last five years, the percentage of employees in the top performance rating has dropped by 30%, implying that organizations are not hesitating to differentiate sharply on the basis of performance and then allocate a disproportionate share of the total increase budget to top performers, thus encouraging a high performance culture. 

Mr. Ghose added, “Fundamentally, this is the most distinctive change in the approach towards pay management. With shrinking pay budgets, companies are more clearly differentiating talent and performance and providing better pay increase budgets to higher performers.”

Slow economic growth and limited opportunities in the market impacted attrition in 2013. It fell to 18.5%, almost 1% lower than previous years, with a reduction of almost 3% at the entry level. With a growing recognition that motivated, high-performing talent is a sustainable competitive advantage, organizations are reshaping their strategies to safeguard their key talent. This is reflected in the lower average attrition for critical talent of 4.5%, down from 5.7% a year ago.

On the back of increased cost prudence and rewarding true performance, spending on variable pay as part of total compensation has been steadily growing over the past few years. This indicates a shift in overall pay philosophy, as employers are tying a greater percentage of each employee’s pay to individual and overall company performance. Top/Senior Management see 23% of their total compensation as variable (up from 16% in 2001) and even the lowest rung entry management gets approximately 12% of their salary as variable compensation (up from 10% in 2001).

Mr. Ghose commented, “While having a successful performance-based incentive plan is important, it is critical to ensure that the right set of performance measures is used for the plan. We often find that companies focus on the wrong drivers of performance and value, or let legacy rules and metrics distort the current performance picture.”

Industry Outlook

The Pharmaceutical Industry, with a projected revenue CAGR* of 12% and backed by higher disposable income, the increased penetration of health insurance, focused medical infrastructure improvements, and increased consolidation within the sector, has projected the highest salary increase for 2014 at 12%.

Factors such as availability of qualified talent; cost effectiveness; capability to deliver high-value, complex services; and abundance of design opportunities in domestic sectors like power, infrastructure, mining, oil & gas, etc., make the long-term growth projection robust for the Engineering Services Industry. This reflects in the industry projecting a high salary increase of 10.6% in 2014. 

The Consumer Goods Sector has been among the top salary increase industries over the last five years, and remains so this year, though the growth has come down compared to earlier years. Factors such as the rise in competition; pressure on margins given the high input prices; high spend on advertisements & promotions to fight competition, amid limited scope for increasing prices; rising interest rates and import costs; and cuts in discretionary consumption expenditure took the sheen off the Consumer growth story in 2013. Accordingly, the projections for this year stand at a conservative 10.3%. 

The Automotive Sector in India continued to slow down in 2013 in terms of growth, in view of increasing fuel prices, rising interest rates, and the economic slowdowns impacting consumer spending. The industry projected a modest salary increase of 9.5% in 2014, down from 2013’s projection of 11%.

Unstable macroeconomic conditions in India for most of 2013; M&A deals drying up; low consumer spending impacting sectors like insurance, retail broking and retail banking; along with the volatile stock markets; made it a tough year for the Financial Services Industry. The projected salary increase for 2014 is 9.1%, a marginal increase from the actual percentage of 2013. The industry remains hopeful of a stronger performance in 2013, with the announcement of the new banking licenses and improving global cues. Non-Banking Financial Companies led with a projected 2014 increase of 10.1%, followed by Insurance at 9.4%, Asset Management at 9.3%, and Banks at 9.0%.

Driven by macroeconomic and sector-specific challenges such as delays in clearances, lack of funds, and projects getting postponed, the RE/Infrastructure Sector is projecting a relatively low salary increase of 9.1%. However, the sector is hopeful of resurgence in 2014, on account of upcoming general elections and government support for infrastructure projects across roads, railways, and airports. The Cabinet Committee on Investments has cleared the way for 296 projects with an estimated projected cost of 6.6 Lakh crore. 

The Hi-Tech Industry projected an average salary increase of 10.2% for 2014, with the semiconductor industry leading at 11.3%, closely followed by software products at 10.8%. The IT market is expected to grow by 13 to 15% during FY 2014--15, driven by factors such as greater offshoring by certain countries, and the offshore outsourcing model gaining acceptance in previously untapped economies. Growth is also expected from somewhat underpenetrated domestic markets, coupled with rising consumer awareness, and government initiatives. 

In the face of considerable global uncertainty, the Indian ITeS industry is projecting an average increase of 9.9% for 2014. Banking and other captives are projecting a salary increase of 10.3%, on the back of a stronger US dollar. Third-party service providers, on account of tougher global economic conditions and increased cost pressures, are projecting an average salary increase of 8.2%. The Knowledge Process Outsourcing firms are witnessing a resurgence and renewed investments, thus their salary increase projections for 2014 are up from earlier this year to 11.9%. 

Anandorup Ghose added, “Wage inflation will continue to be a high pressure point for sectors where wage cost is a significant part of operating expenses and revenues. This year will be a complex one for organizations, offering no clear signals as to how either inflation or business numbers will move in the next two quarters. It might be a good time to be conservative and focus on ensuring that key compensation and productivity metrics are actively tracked.”

Aon Hewitt surveyed over 500 organizations representing 20 primary and 30 secondary industry sectors. This is the most comprehensive research in the area of rewards and performance. The study measures actual and projected salary increases, and compensation practices for five specific job categories, namely top/senior management, middle management, junior manager/professional/ supervisor, staff and manual workforce. The data for the survey was collected over December 2013 - January 2014.

About Aon Hewitt

Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness.  Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide.  For more information on Aon Hewitt, please visit www.aonhewitt.com.

About Aon

Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon’s global partnership and shirt sponsorship with Manchester United

* Compounded Annual Growth Rate

 

Media Contact:

Sushil Bhasin
+91 9810068426
sushil.bhasin@aonhewitt.com 

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