Compensation and Benefits Program a Mediating Variable for Talent Retention

Introduction

Well-managed organizations develop their specific talent retention strategies and implement the policies and practices from the date of hire for new employees. For example, when career development opportunities are used as a tool for talent retention, new hires are briefed on this during their onboarding, so that they can prepare their mind-set for career aspirations.

The loss of talent or turnover across the globe has been attributed to a number of reasons. At the macro level, talent attrition problems are attributed to poor talent management practices. Poor practices are evident when data show low employee engagement levels, the absence of a people-centric work environment, less competitive compensation and benefits and so on. But again such problems are difficult to identify, and even if identified, problems cannot be easily solved.

Hindustan Unilever, known as one of the top 25 companies in talent management in India, has experienced retention problems among the more capable middle-level managers despite their well-known “future leadership program” and their commitment to talent development. Among the reasons those who have resigned cite for leaving the company is something astonishing—“our company has already reached the level of saturation in growth, hence our job is less challenging.” Despite the attrition, this Indian company, an arm of the international FMCG group, is adjudged as the best performer in the group, even surpassing their international counterparts. ¹

Every organization tries to retain talent else they get defeated in competition, because a loss of talent not only creates immediate performance problems but also increases the costs to replace talent. Therefore, it is the responsibility of HR managers as well as the top management of the organization to focus on appropriate talent management activities, so that talented people continue feeling satisfied with their job along with the culture of the organization as a whole.

At times organizations also fail in promoting a culture that emphasizes talent retention that is supported by managerial practices. A talented employee may, for example, be perceived as a threat to his/her immediate boss. When that happens, a boss may create problems for the talented employee and persuade him/her to leave. In most situations, the organization will take the side of the boss, as they are assumed to be prudent in managing the employees.

But there may be exceptions too. Some organizations are powered by robust exit management systems, with exit interviews conducted by senior level managers, other than the boss. In such cases, when the true reasons for leaving the company are identified, organizations concerned with talent retention may try to identify alternatives to accommodate the individuals. Highly performance-driven organizations, if necessary, will even replace the boss to accommodate the talented employees.

An employer’s compensation and benefits program, as a mediating variable for talent retention (although there is poor empirical support), can be understood in terms of talent management practices of two century-old Indian organizations. Interestingly, these two companies’ compensation and benefits programs are contextually different. While one organization emphasizes consistent pay equity in keeping with procedural justice, the other company focuses on merit-based pay. Since merit-based pay increases are aligned with performance in this organization, the salaries of high-performing employees increase faster and reach higher levels. Despite the differences in pay in the second organization, employees can understand the rationale of the differential compensation practices. Significantly both organizations are successful in talent retention.

However, before we examine the mediating role of the compensation and benefits programs of these two organizations in talent retention, let us briefly examine the importance of talent retention.

Why Talent Retention Is Important

Talent retention is important, as talent is a major driver for business success. In addition to reasons such as performance failure and rising cost of replacing talent, it is also important for number of other reasons:

The list of costly talent retention issues is not exhaustive. Investing the time to develop talent often spans over several years and involves huge sum of money. For extended coaching and mentoring programs, it can involve their senior managers and executives. At times the cost extends for years and is difficult to measure. The costs of retention through proactive talent management programs are far less than that the cost of turnover. Therefore, organizations need to have effective talent retention strategies to avoid losing valued employees.

Talent Retention: Some Theoretical Connotations

Talented employees leave organizations for a number of reasons, which we have covered while explaining the strategies of talent retention. Here we are trying to examine the theoretical connotations of talent attrition. Griffeth and Hom ² have classified employee turnover along three dimensions: voluntary–involuntary, functional–dysfunctional and avoidable–unavoidable. We can extend such theoretical arguments for talent attrition as well. The organizational intent is to retain talents, when such attrition is voluntary, avoidable and dysfunctional in nature. In most cases attrition is initiated by employees, for one reason or the other.

Another important issue of talent attrition is the need to think beyond the economic costs of talent loss. The loss of talent affects organizational performance as a whole. It can adversely affect sales, employees’ morale, market image of the organization and so on. To avoid the negative impact, Batt ³ and Huselid ⁴ recommended immediate interventions to reduce the rate of talent attrition. Shaw and colleagues^5,6 came out with another interesting observation that with the loss of job knowledge, companies also lose social capital, as talented people maintain networks of social relationships that facilitate cooperative efforts. The loss of social networks has a negative performance impact. Therefore, it is important to have some well-formulated strategies for talent retention.

Compensation and Benefits Practices for Talent Retention

Ensure the compensation and benefits program emphasizes pay equity. The variables that drive payouts must be based on measurable performance, and traceable, as per the preannounced plans and goals of the organization. It is important to understand in the Indian culture pay equity is valued higher that pay inequity, that is, differential pay on extreme merit basis. ⁷ But it does not mean Indian organizations do not believe in performance-related pay (PRP); we have PRP, but it represents a small fraction of total compensation. Designing compensation and benefits strategies in discussions with the employees of the organization significantly motivates them and in the process helps in talent retention.

Many research studies confirm there are no universal talent retention strategies. Each organization has to frame its own strategy, based on an understanding of the nature of their talent retention problems. While exit interviews are the final check point, periodic organizational diagnoses can help understand the problems of talent retention, and accordingly help us come out with effective changes in our systems, practices and policies, so that such problems can be resolved. Only with competitive compensation and benefits it may not be possible to retain the talent. Streamlining the internal system would be necessary, so that talented employees have “feel-good” experiences. Meaningful work, flexi-timing, diversity neutrality and excellent onboarding experiences are some of the important practices that contribute to talent retention.

Thus talent retention necessitates that organizations adopt multipronged strategies, depending on the nature of talent and the level of the jobs. Top management should assume the lead role in framing and promoting talent retention strategies and also in monitoring the retention data. As required, policies, systems and strategies focused on talent retention are changed to align with the changing business situation and the changing pattern of talent management.

Retaining Talent With the Compensation and Benefits Program

Murugappa Group and ITC are two different companies that rely on compensation strategies that are characteristically very different. Murugappa Group is a family managed business entity with business turnover (or revenues) of US$3.85 billion. ITC, on the other hand, is a corporation with a business turnover of US$7 billion. Both companies have been in business for more than 100 years. ITC started in 1910 and currently has a workforce of 31,000 employees, while the Murugappa Group, which started in 1900, has an employee strength of 32,000. One thing in common is that both companies have a diversified business portfolio and impressive track records of growth.

Murugappa Group’s compensation strategies are based on a multifacted performance-related pay philosophy linked to a quantified/objective assessment process. The company relies on a typical five-level performance rating scale:

Additionally, incentives, as an integral part of the compensation package, linked to Balanced Scorecard scores, has helped the company to initiate the process of

Murugappa’s compensation strategy is further powered by several reward and recognition practices:

The managing director’s compensation includes a fixed salary and a performance incentive based on preagreed parameters. Compensation levels are determined based on level of responsibility and market levels prevailing in the industry. The managing director is not paid for attending any board or committee meetings.

Murugappa’s nonexecutive directors are compensated with a commission based on profits. Shareholders have approved the payment of commissions up to 1% of the company’s net profits; however, the calculation is made as per the provisions of the Companies Act (i.e., the actual commission paid to the directors is restricted to a fixed sum). This sum is reviewed periodically taking into consideration various factors such as performance of the company, time spent by the directors for attending to the affairs and business of the company and the extent of responsibilities cast on directors under general law and other relevant factors. Furthermore, the aggregate commission paid to all nonexecutive directors is within the limit of 1% of the net profits as approved by the shareholders. The nonexecutive directors are also paid sitting fees within the limits set by the government regulations for every Board/Committee meeting attended by them. Employee stock options are limited to managerial employees whose jobs are critical for the company.

Murugappa’s compensation and benefits program heavily leans toward a more fixed component, keeping a limited buffer for outstanding performers and talented employees to marginally earn more in terms of incentives. But the company’s other employee development practices to a great extent reinforce the talent retention strategies. The company’s structured human resource management systems place more and more emphasize on procedural justice in maintaining pay equity.

In contrast, ITC’s compensation strategy is anchored in three basic principles: market-led, performance leveraged and the capacity to pay. Compensation is benchmarked with comparator organizations, based on survey data, and reviewed periodically.

In addition to direct compensation, including salary and allowances, managers are provided with quality housing, medical assistance for self and family, leave travel assistance and so on. At middle and senior levels, managers are also provided with company-maintained cars and the use of a club membership for business purposes.

All managers are participants in ITC’s Retirement Funds, the pension plan being one of the most attractive in the country. Other benefits include the use of holiday homes, assistance for further education/self-development and so on.

The cornerstone of ITC’s performance management system is the appraisal system. Each individual agrees to performance objectives at the beginning of the year with his/her superiors. These objectives naturally flow from the objectives of the unit/business. At the end of the year the individual’s performance is assessed against the objectives set. The appraisal attaches as much importance to “how” results were achieved as to the results themselves. The rating is determined by the manager’s boss and endorsed by the next level of management. Therefore, both individuals are involved in assessing a manager’s performance.

The appraisal process also gives the individual an opportunity to share in a formal manner his/her own career aspirations and what the individual needs from the organization to enhance his/her own development. Based on an assessment of development needs, a development plan is drawn up for each manager.

Adjustments in compensation and benefits are made once each year based on the performance rating of the individual along with market-related trends. The entire process is transparent and objective.

Some of the specific elements of ITC’s compensation strategies are based on the following principles:

Domain expertise is measured based on the job position analysis. Proven capabilities account for global delivery capabilities, world class technical strengths, infrastructure and solutions that address customers’ “pain” areas. Best-of-breed talent considers agility and adaptability, leadership qualities and capability to embrace the empowered job roles. “Small enough to care and big enough to dare” is measured on relationship flexibility beyond strategic relationship, ability to invest in building long-term and fast-scaling strategic partnerships, stability and strength and strong corporate governance. Commitment beyond market counts on triple bottom line reporting on economic, ecological and social dimensions and green partnership. Employee stock options are also an important part of ITC’s compensation strategy.

ITC’s compensation and benefits program emphasizes a mix of variable and fixed pay, with a significant portion of pay at risk. Employees understand their earnings are subject to their performance. This system is so transparent, and market driven, employees can appreciate its importance for their organizational success in a globally competitive world.

ITC has had zero turnover at senior management level for 15 years. Half of ITC’s managers have worked with the company for more than 25 years. In some divisions, the attrition rate is 5% to 6%, which is very low compared to the industry average. For Murugappa, the general attrition rate is 4% to 5%, which again is much lower than the industry average. For senior managers, the company’s rate is less than 1%. Both ITC and Murugappa focus on exclusive talent management practices, that is, limiting the scope of talent development and retention only to those top performers who perform at the “exceeds expectations” level. This is perhaps the explanation for their low level of attrition among nonmanagerial employees.

Even though contextually these two century-old companies have developed very different compensation strategies, the programs are well suited to their management philosophies and enable them to successfully retain talent. In both the cases, the companies feel their compensation and benefits programs play the major role in talent retention, apart from their proactive talent management practices.

Summing Up

A talent retention strategy is intended to convince talented employees to continue with their organization. There are a number of specific talent management practices, such as employee engagement, empowerment, career development opportunities, competitive compensation and benefits and maintaining a high brand value of the organization. Well-managed organizations develop their specific talent retention strategies and carry out the strategy from an employee’s first day on the job.

In framing their talent retention strategy, employers emphasize proactive talent development. The compensation and benefits program as a specific element of the strategy does not have research support; however, this article could establish its linkage with talent retention in two century-old Indian organizations. These two organizations, even though each relies on a different procedural justice philosophy in managing compensation and benefits, have found their practices continue to motivate talented employees to continue with them. This article, however, could not test the significance of the compensation and benefits program as a variable influencing talent retention since company-specific longitudinal data are not available.