Abstract
This article provides a brief overview of the trends in bonus payment to executives in India. Using data from the voluntary web based survey of Paycheck India, which is a part of WageIndicator Foundation, this article analyzes the trends in five types of bonuses, viz., performance, end-of-year, festival, profit-share and others, from 2008 to 2016, across public and private sectors and four types of industries, viz., manufacturing and construction; trade, transport and hospitality; commercial services; and public sector, health care and education. The results suggest that performance bonus is the most popular type of bonus, while profit-share is the least popular. However, from 2008 to 2016, the shares of all types of bonuses in both sectors (Public and Private) and all industries have been declining, and in most of the large industries and firms, bonuses in terms of cash payments are now restricted to fewer executives.
Introduction and Overview
The expansion of the world economy has offered plenty of opportunities for the growing workforce and, at the same time, has led to creating a very competitive environment for the organizations to survive in the market. 1 The sustainability of any organization in the market largely depends on performance of its human capital. 2 Therefore, it is the need of the hour to develop, nurture and retain the best human capital through effective human resource management practices.3,4
Employee compensation practices (ECPs) are considered central to effective human resource management. ECPs are not uniform in all the organizations, and they differ in various aspects.5-7 The central arguments in most of the literature related to ECP8-14 are as follows:
ECPs are basically the outcome of conflict between the employer and the employee, as it is a natural tendency for an employer to extract the maximum out of an employee.
ECPs include retention contracts, bonuses, commission and so on, which play an important role in motivating employees to improve their performance, especially executives (top- and middle-level managers) who are responsible for taking important decisions for the organization.
Organizations are now adopting innovative practices to redesign their ECPs and make them more strategic, employment-friendly and structured according to the Country regulations. This is because these practices are now considered to be “essential” tools to motivate employees and to ensure their engagement, productivity and loyalty to the organization. Besides the high pay packages and substantial benefits, organizations also offer a variety of performance-incentive programs, profit-sharing schemes and various other opportunities that contribute to the overall development and growth of the employees within the organization. 15 Financial rewards linked to performance or incentives are one of the most prevalent incentives offered as a part of a remuneration package, and these are usually given to employees whose performance is over and above a predetermined standard set by the employer (or mutually decided) and offered to employees in the form of a “bonus.”
Bonus is, thus, a monetary payment made to the employees in addition to their regular salary. The concept of bonus has evolved as an incentive, profit-share or a symbol of distributive justice. Currently, in common parlance, it is considered to be a monetary payment made to the employees in addition to their salaries. Generally, bonuses are paid once a year as a lump sum to leave a positive psychological impact on employees because bonuses contribute significantly to employees’ income and also motivate them to improve their contribution to the firm in future. Bonus has received attention as an issue that needs to be regulated and understood by every organization. 16 Bonus payments are justifiable on the grounds that workers should have a share in the prosperity of the firm they are associated with and for whose cause they are contributing to. 17
Literature has deliberated that the performance of the firm is directly proportional to the bonuses and other performance-related incentives offered by it to its employees.18,19 Bonus and other performance-related incentives have played a major role in human resource management practices resulting in better firm performance, especially in developed countries. 20
“Performance” is one of the criteria for the organizations to reward employees, specifically its executives. The concept of performance covers the ability, opportunity and motivation to perform for the organization. Ability refers to the use of skills, qualification, training and experience by the employees to contribute positively to the growth of their respective organizations. Opportunity is the essential infrastructure for performing professional duties, whereas motivation is a desire to accomplish a specific task and readiness to put in the maximum efforts to achieve it. Organizations require motivated employees for effective and efficient functioning; therefore, it is necessary for them to ensure that their employees remain highly motivated—especially the executive-level employees. 21
According to the conventional approach to executive compensation, the executives should be rewarded based on their long-term and short-term performance. An incentive, such as promotion, is used to reward the long-term achievement, whereas bonus-based incentive schemes are for rewarding the short-term success. 22 Thus, bonus- and career-related decisions are the essential components of ECP of the organizations. 23
Rewards are technically classified into monetary and nonmonetary groups. 24 Organiza-tions associate monetary rewards with short-term performance or success to satisfy employees, whereas nonmonetary rewards work as “recognition” for them. While the former acknowledges the contribution, the latter motivates employees to put in more efforts and also enhance their career prospects. Nonmonetary rewards do not include cash-based incentives such as bonuses, commission, but include advanced learning opportunities, flexibility in working hours, employee stock ownership plans (ESOPs), participation in the decision-making process, improved work conditions and letter of appreciation. 25
Sometimes, bonus may also have a negative effect on employees’ behavior, for example, they may adopt unethical means to exaggerate their performance. This is especially prevalent among those employees who are unable to complete the assigned targets or fall short of their goals. Employees tend to develop a pessimistic outlook for their work and organization when there is a variation in the compensation for performing the same job. This pay inequality leads to disappointment and discontent among the employees. Therefore, organizations are reconsidering their incentive programs to remove the focus from money as a prime motivation and shift to factors that incentivize employees to build interpersonal connections and raise their intrinsic motivation.26,27 Some of the earlier empirical studies28-30 conducted in the developed countries of the West also support this view.
Few studies have analyzed the impact of monetary and nonmonetary rewards on employees’ performance.31-33 Whereas others have comprehensively deliberated and researched on related themes such as the relation between salary and the level of the emotional well-being of employees, 34 and the relationship between job satisfaction and rewards. 35 Overall, these studies show that organizations are now shifting focus from monetary incentives to nonmonetary incentives for increasing employee productivity.
However, there is a vast gap in the existing literature about the executive bonus payment scene in India. Majority of the studies have focused on the nature and the basis of bonus payment, 36 performance-related pay in public sector enterprises 37 and bonus and labor market reforms in India. 38 However, these studies have not been able to throw light on the empirical and conceptual shift in the current scenario of executive bonus payment and its changing pattern in India. The above gap presents an opportunity to empirically study executive bonus system in India and build theoretical reasoning of executive bonus payment patterns and its shifts with time.
The contribution of this study will be significant for the Indian firms to redesign their ECP and motivation strategies, keeping in mind the following three perspectives. First, our study dwells on what kind of incentives are admissible to the executive-level employees in the Indian organized sector. Second, we highlight the changing trends in the reward system adopted by the Indian firms. Third, we expect that the study will help organizations understand changing trends and preferences of incentives for executives and also help organizations design suitable ECP, particularly bonus payment.
In the subsequent sections, we briefly describe the circumstances that led to the evolution of the Bonus Law in India—though the law in its current form is not applicable to executive-level employees. The rest of the article is organized into seven sections. The second section deals with the selective review of related literature; the third section gives a brief idea about the research problem; the fourth section discusses the survey design, data collection and data analysis methods; the fifth section presents the main analysis of the trends regarding the extent of bonus payments in India across industries and sectors; the sixth section compares the growth of Indian economy with the bonus trends; the seventh section compares the ECPs in India with the United States; and the last section concludes with the interpretation of the trends along with a discussion on the possible reasons for the change in the trends of bonus payment in India.
Evolution of the Payment of Bonus Act, 1965
The promulgation of the Bonus Act was a result of series of events that took place between July 1917 and December 1965 (see Table 1). The issue of “bonus” began to gain momentum during World War I, when the prices of food materials increased and the industries (especially cotton and textile) began to earn more profits. This led the mill workers to demand for an increase in their wages. Considering this demand, an increase of 10% in wages was granted as war bonus to the cotton textile workers of Bombay (now Mumbai) by their employers. In 1918, this bonus was increased to 15%. This system could not be continued further, as the textile trade was affected heavily by the financial crises plaguing the country. The workers responded with a strike, which continued till January 1924. Subsequently, a bonus dispute committee was appointed by the government, under the Chief Justice of Bombay, to look into the nature and basis of the prevalent bonus payment structure. The committee observed that the decision of the employers to discontinue the bonus was justified as bonus was the payment made out of extra profits. Though the issue of bonus became dormant for some time, it again came to light during World War II. As a result of the strike in 1940 by cotton textile workers, the bonus was increased by 12.5%. The bonus was again discontinued when World War II ended, leading to further disputes.
Timeline of Evolution of Payment of Bonus Act.
Source : Prepared by authors
In 1948, a new industrial policy resolution (of independent India) was adopted by the government, and, subsequently in 1949, workers were awarded one sixth of basic wage as bonus by the industrial courts in Bombay and Ahmedabad. This led to discontent, and the government adopted a more focused approach to resolve the issue by setting up a committee on profit sharing. The committee observed that incentives such as bonus would motivate the workers and would eventually lead to an atmosphere of peace and harmony.
The practice of bonus payment by then was widespread; however, it still remained an ad hoc issue with various tribunal decisions. Therefore, it was decided by the standing labor committee in March 1960 to have an exclusive commission to recommend and resolve the disputes arising out of bonus payments. Thus, the Bonus Commission was formed in 1961, which, after considering several issues, recommended a regular system of payment of bonus. This led to the passing of an ordinance on May 29, 1965, followed by the promulgation of Payment of Bonus Act.39,40
Hence, we can say that labor legislations, such as Payment of Bonus Act, have positive implications on the well-being of the workers; for example, in 2015, the central government decided to double the bonus ceiling for 25 million factory workers, especially during festivals such as Diwali. The employees earning INR 21,000 a month would be eligible for a bonus compared with the earlier cutoff of INR 10,000 a month. 41
Bonus Systems in India: Literature Review
Bonus has been used as a generic term in most studies, and, in a broader sense, it can imply any payment, in cash or kind, given to employees above their basic salary. Bonus is a form of reward system that is established by organizations to motivate the employees. There are different conceptualizations and terminologies used in literature.
Bonus According to the Payment of Bonus Act, 1965
Though many forms of bonuses prevailed in India, there was no official law for bonus payment for blue-collar workers. And it led to government instituting a law—the Payment of Bonus Act, 1965, which established the criteria for statutory bonus entitlements for blue-collar workers. 42 The act primarily provides for “the payment of bonus to persons employed in certain establishments on the basis of profits or on the basis of production or productivity and for matters connected therewith.” 43 Bonuses are not paid out of an employer’s generosity, but they are often paid to maintain industrial peace. 44 However, the legislation does not cover the executive category employees. Hence, in common vocabulary and practice, bonus is considered to be applicable to workers (nonexecutive category).
However, notwithstanding the lack of empirical research into the subject, payment of bonus or its equivalent to executive category employees is a prevalent practice in India. There are different types of bonuses admissible.
Performance Bonus
The most common type of bonus in India for executives is the “performance pay” or reward for the efforts and/or contribution of the employee. We found substantial literature on performance bonus and its link to employee performance. We also found literature similar to our study themes, from other country contexts.
A study by Limaye et al. 45 suggests that rewarding employees promotes desirable actions and behaviors, making them more effective. They concluded that organizations that paid high bonus for performance had greater effectiveness, with an average employee referral rate of 36%, compared with 30% in other organizations, and a voluntary separation rate of 12%, compared with 20% in other organizations. The study also found that performance bonus is not paid by all organizations to all employees. Some organizations pay performance bonus to top executives and other “executives” only, while other organizations have broader coverage and include nonexecutive staff. Also, there has been anecdotal evidence regarding performance bonus in a study by Hasnain et al., 46 which shows how performance-related bonus reduces the quality of work.
Performance bonus has been making news, nationally and internationally. High level of bonus payment to executives has been cited as a reason for the global financial sector meltdown, with regulators and governments calling for capping bonuses and more accountability.47-50 According to published news sources, owing to the slow growth trajectory, the CEOs of giant IT firms in India (both Indian and MNC [multinational corporation]) witnessed a decrease in their performance bonus for the financial year 2016-2017, as they were unable to achieve their financial and strategic targets. For example, the performance bonus of the CEO of Genpact was decreased by 48% ($2.05 million in 2016 to $1.41 million in 2015). Similarly, Cognizant CEO’s performance bonus was reduced by one third ($12 million in 2015 to $8.26 million in 2016). 51 The decrement in the performance bonus of the top management executives and CEOs is also evident in the case of ICICI bank (an Indian commercial bank), where bonus cut was effected to top executives because of disastrous fourth-quarter growth. At the same time, senior- and middle-level executives were not affected by the decision, as the bonus cut was only for the top officials and the CEO. 52
The importance of performance bonus or performance-linked pay is now recognized even by the government of India. The Sixth Central Pay Commission 53 had proposed a performance incentive scheme for central government employees. The Seventh Central Pay Commission in its report has recommended that there is a strong need to create accountability towards performance in government employees, which is only possible by establishing standards of measuring the performance and promoting the employees based on their performance. Therefore, performance-related pay and the bonus payment should be linked with the productivity of the employees. At present, the performance-linked bonus is implemented in certain ministries such as Ministry of Railways, Ministry of Communications, Department of Space and so on. 54 Since 2006, the government of India has also announced a performance bonus scheme for top-level managers of public sector undertaking (PSU) banks; however, in recent times; many top bankers were not eligible for the same since they missed their performance targets. 55
Estimation of the effect of bonus payment on performance has been a continuous issue. Most of the research studies56-58 show how performance pay has a positive effect on the output of employees, whereas a study by Hasnain et al. 59 suggests otherwise. They found that performance pay increases the quantity of output, at the cost of the quality of the output. From the studies conducted on Organisation for Economic Co-operation and Development countries and some developing countries, it was found that performance-related pay has led to a positive increment of simpler tasks, but also a reduced intrinsic motivation of employees performing complex tasks. However, a job with pay associated with performance attracts workers with superior ability and motivates them to work harder. This has been found to be true especially for “craft jobs” such as health care services, teaching and revenue administration. The study also found that while larger bonuses drastically improved performance, smaller bonuses reduced the performance below the level where no monetary reward was offered. Hence, before deciding on bonus schemes, organizations need to sort the employees based on skill and the complexity of work, and focus on the design of the bonus schemes, rather than on the amount. For developing countries, this study found that there is an overall positive relation between bonus schemes and performance and effectiveness, but the common issue that leads to a negative impact is the design of the bonus schemes.
Other Types of Bonus or Equivalent Payments
A popular form of bonus in India is the one that is paid in kind. When employers pay bonus in kind, such as a luxury car, fully paid holiday or a mobile phone, these are often paid “net of taxes.” The Indian diamond cutting and polishing industry has been in the news for such awards, given in the form of vehicles, houses and so on. 60 Bonus, whether in cash or kind, is taxable from employees as salary income; however, perks, such as car or holiday, attracts a perquisite tax, or additional perks tax. Due to this, many organizations attempt to cover these expenses as “business expenses” that are not taxable. Recently, the tax authorities have tightened their hold on such schemes to ensure that firms adhere to more transparent compensation practices. Also, any gift, token or voucher given, as a part of festival bonus, such as Diwali, is not taxable if it is below INR 5,000. 61
In practice, many organizations pay bonuses at different levels of the occupational hierarchy (including those outside the coverage of law), starting from workers to executives, including top management. Occasionally, for those covered by the act, more than the prescribed bonus limit (upper) is paid in the form of ex-gratia payments, and often these are either out of employer generosity or negotiated by strong trade unions. Outside of those who are covered by the act, only the members of the top management of public limited companies are legally entitled for additional payment through a provision in The Companies Act 2013.
62
This too has limitations since the act states as follows: The total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year. (The Companies Act, 2013, Section, 197, Clause (1))
As a practice, Indian organizations reward executives also with bonus payment, sometimes often titled differently. These titles reflect the purpose of payment, and the national or regional culture requirements. It is speculated that the categories or modes of payments to executives may have changed over time, but any prior research or evidence about it is absent.
Indian firms are also deploying different financial reward systems to executives. Variable pay, handed out annually or at regular intervals (monthly, quarterly, etc.) based on single criterion (e.g., individual performance) or split award (individual and organization) are common modes. Rewarding with retention in mind is also a practice followed. ESOPs are also quite popular in India, cutting across sectors. The trend of offering ESOPs to attract or retain the talented employees is popular even with the e-commerce and start-up companies, such as Amazon India, Flipkart, Snapdeal, Jabong, Paytm, Ola and Myntra. 63 According to law, foreign companies operating in India are allowed to issue ESOPs to employees based in India.
Designing the Executive Bonus Plans
Today, most of the big companies have their own executive bonus plans linked with performance. The basic purpose of having a performance incentive–based bonus plan for executives is to motivate them to perform their best, and in turn, help the firm increase profits and achieve sustained growth. To achieve this goal, it is necessary that the bonus plans should be properly designed so that the executives are able to enjoy their benefits.
A study by Murphy and Jensen 64 shows that benefits for CEOs and executives are seriously affected because of the imperfections in the design of the bonus plans. Thus, “such poorly designed executive bonus plans destroy value by providing incentives to manipulate the timing of earnings, mislead the board about organizational capabilities, take on excessive (or insufficient) risk, forgo profitable projects, and ignore the cost of capital.” The study also highlights quite a few problems related to traditional design of executive bonus plans, which are mainly associated with performance measures, performance thresholds and the structure of the pay–performance relation. To resolve the problem, the following recommendations are offered by Murphy and Jensen: first, use only performance measures that involve operating income, net income and economic profit; second, announce direct or indirect “negative bonus” possibilities by using cumulative performance, bonus banks or salary reductions along with augmented bonus chances; last, reserve a right to make ex-post alterations to bonus payments (i.e., recuperation of bonus that are paid already).
Nonmonetary Incentives
A study by Sharma 65 emphasizes that in case of Indian firms, employees choose their ego needs over psychological and safety needs to be motivated and to deliver better results. Therefore, it can be said that ego needs are more likely to be satisfied by nonmonetary incentives. Sharma, 66 in yet another study, analyzes the responses from the supervisors of 51 Indian firms and maintains that monetary benefits among the employees rank low in comparison with other factors such as participation in the decision-making process, recognition and appreciation from the higher authorities for good work and opportunities given by organization to develop skills.
The above-mentioned studies imply that monetary incentives do not motivate the employees as much as nonmonetary incentives. A study conducted by Lang 67 on a Lufthansa subsidiary found that the employees gave more importance to career and status than to higher wages or money. According to the study that surveyed 10% of the company’s employees, developmental issues, such as professional training, and benefits, such as travel allowance and health insurance, were more important to the employees than bonus packages.
The Research Problem
However, it is interesting to note that the respondents of these studies were executive-level employees (which is also the case with our current study). However, the importance of monetary payment (salary) and incentives cannot be fully ruled out. Given the lack of understanding of bonus payments for executives in Indian organizations, it becomes important to empirically examine how Indian organizations design their ECP, including the mode of bonus payment (in different forms and labels). Our current study is an early-stage effort to examine the bonus payment pattern for the executive category in India, using data from the continuous and voluntary web survey by Paycheck India (www.paycheck.in), part of the WageIndicator Foundation (www.wageindicator.org). This article extends the earlier study of Bonus trends in India between 2008-2014. 68
Data and Methodology
Survey Design
This article uses data of individual salary earners from India collected from the continuous and voluntary web survey by Paycheck India (www.paycheck.in), which is posted online in English and Hindi. The questionnaire is uploaded on the website, and the survey is answered through a process of noncontrolled self-selection, whereby some individuals complete the questionnaire and some don’t. 69 The survey has detailed questions about earnings, benefits, working conditions and employment contracts, as well as questions about education, occupation, industry and household characteristics. 70 More important, the survey includes questions about respondents receiving bonus from their organization and also about the types of bonus they have received.71,72
In 2000, the WageIndicator project (www.wageindicator.org) started as a paper-and-pencil survey for establishing a website with salary information on women’s occupation in the Netherlands. By 2016, it developed into an online data collection tool hosted in more than 80 national websites with job-related content, labor law and minimum wage information, collective bargaining agreements, public sector wages and a free and crowd-pulling salary checker presenting average wages for occupations. World-renowned universities, trade unions and employer’s organizations assist the WageIndicator project. 73 The data set has been used for other studies, such as minimum wages in India 74 and gender pay gap in the formal sector: 2006-2013. 75
Data Collection 76
A total of 41,742 respondents (males and females) from across India participated by completing the online questionnaire spread across 8 years, 2008 to 2016. The respondents were from different age groups, industries and hierarchical positions.
The executives in the study held roles such as entry-level professionals, managers, senior managers and supervisors. Given their salary range, the respondents were out of the coverage of the Payment of Bonus Act, 1965. In our study, executive bonus is defined as the form of financial compensation made to the executives, over and above fixed/agreed salary, in exchange for their expertise, commitment and contribution toward the organization. It includes short-term payments (annual, performance-based, etc.) as well as long-term payments (loyalty, stock options and shares).
Findings
Trends of Bonus Payments for Executives in India: 2008 to 2016
Bonus is an integral part of the executive or “nonworker” compensation mix in India, though in practice, the word “bonus” is not used much. We are using the term bonus to be consistent with global literature. In this article, we have considered the following five types of bonuses paid to the respondents and have analyzed their trends between 2008 and 2016:
Performance bonus: Paid according to employee’s performance (individual) in the job, and varies according to experience, seniority and level
End-of-year bonus: Lump sum amount paid to employees for their contribution to the organization, and mostly linked with the company/firm performance
Festival bonus: Paid to employees during different festive seasons, often irrespective of performance
Profit-share bonus: Employees receive bonuses tied directly to the company’s overall profitability
Other annual bonuses (OABs): Any other types of bonus (paid to employee) have been included in this category
Some of these bonuses have been in existence in Indian organizations for many years even before the enactment of the Payment of Bonus Act, 1965. For example, profit-share bonus can be considered to be closely related to closing bonus, which was given to employees at the end of the trading year. The closing bonus was paid on the previous year’s profit. There were also equivalents of festival bonuses, specific to religions such as Puja bonus in West Bengal, Diwali bonus in most parts of the country and Onam bonus in Kerala. Such a bonus 77 was payable as a customary payment—compulsorily given to employees irrespective of the trading results. Performance-linked bonus was a more recent type of bonus payment to be introduced in India. 78
Analyzing the Paycheck India data for bonus trends reveals interesting patterns present in the Indian labor market for executives. The shares of different types of bonuses have been continuously shifting, between 2008 and 2016. The data trends show that in 2008, end-of-year bonus and performance bonus were the most popular forms of bonus payments. In effect, 38% and 53% of respondents receiving bonus respectively, received these bonuses. The share of other bonuses was festival bonus (16%), profit-share bonus (10%) and OAB (10%) (see Figure 1).
Bonus payments trends in India: 2008 to 2016.
Comparison of the movement pattern of different bonus types over time shows that the share of respondents receiving bonus payments has been constantly decreasing except for end-of-year bonus and other bonus categories. Thus, in 2016, 23% of the respondents received end-of-year bonus, while 25% received OAB. The yearwise movement pattern can be seen in Figure 1. While end-of-year bonus and other bonus continue as the most popular forms of bonus payment for executives, the profit-share bonus has always been the least popular form of bonus types in India. This trend points to the level of maturity of Indian firms, that is, in terms of linking directly with profit and involving executives in profit-sharing, Indian firms (dominated by family-controlled firms in private sector and public sector) have to travel a long way. However, as we see later, positive signals have started to emerge.
Comparison of Public and Private Sector Bonus Payments
Paycheck data reveal that the percentage of respondents receiving bonus payments in the public sector has been usually higher compared with the private sector, for all types of bonus payments except for performance bonus. But the general trend of decreasing share of bonus payments in overall compensation structure can be seen in both the public and the private sectors.
The percentage of respondents receiving end-of-year bonus, festival bonus, performance bonus, profit-share bonus and OAB in the public sector was 40%, 25%, 51%, 21% and 13%, respectively, in 2008. But in 2016, the percentage of respondents receiving end-of-year bonus, festival bonus, performance bonus and profit-share bonus dropped to 26%, 12%, 17% and 5%, respectively, except for OAB. It can be noted that there is an increase in the percentage of respondents from 13% in 2008 to 25% in 2016 in case of other bonus payments.
In the Private sector the percentage of respondents receiving end-of-year bonus, festival bonus, performance bonus, profit-share bonus and OAB in the private sector was 38%, 14%, 54%, 9% and 10%, respectively, in 2008, which dropped to 24%, 11%, 78 21% and 6%, respectively, in 2016 except for OAB, as the percentage of respondents increased from 10% in 2008 to 26% in 2016. This might be reflective of the economic situation in India, which saw turbulence for most part of the same period. Thus, the companies that suffer losses may choose not to pay or reduce bonus to their executive employees (instances of cuts for top and senior executives have been in the news), even though they might be following a tradition of paying bonus, for instance, festival bonus. 80
In 2008, performance bonus was the most prevalent type of bonus for both the private and the public sectors. But the data reveal that by 2016, end-of-year bonus and performance bonus evolved to be the most important forms of bonuses for the public as well as the private sectors. Payment of bonus is also dependent on ideology governing the ECP. Public sector possibly concentrates more on rewarding for corporate performance and less on individual performance to distribute bonus payment, and, thus, all the employees or a large number of employees in PSU receive bonus (but there have also been recorded cases where the public sector companies have performed well, yet employees were not paid equivalent bonus 81 ). In contrast, the private sector focuses more on individual performance, or other indicators (share value, department performance, etc.). We also see that private sector may be selectively breaking the established trend; even when corporate performance is poor and bonus is cut back, by administering alternate forms of bonus payment to select employees, it seems to send different signals to executives. The trend for bonus payments for public and private sectors from 2008 to 2016 is depicted in Figure 2.
Trend of sectorwise bonus payment in India: 2008 to 2016.
Industry-Wise Comparison of Trends
End-of-Year Bonus
The percentage of respondents receiving end-of-year bonus was the highest in the commercial services (43%) in 2008, followed by manufacturing and construction (39%); 82 trade, transport and hospitality (37%); and public health (36%). From 2008 to 2016, the overall percentage of respondents receiving end-of-year bonus increased to 86%, 73%, 58% and 52%, respectively. In 2016, the percentage of respondents receiving end-of-year bonus in commercial services (86%) was the highest followed by manufacturing and construction (73%); trade, transport and hospitality (58%); and public sector, health care and education (52%).
Festival Bonus
The percentage of respondents receiving festival bonus was the highest in manufacturing and construction (26%) in 2008, followed by public sector, health care and education (22%); commercial services (15%); and trade, transport and hospitality (10%). Festival bonus payments have shown a decreasing trend over the same time frame with a slight rise in 2014 and 2015 in all sectors. In 2015, the percentage of respondents receiving festival bonus was the highest for manufacturing and construction and trade, transport and hospitality (14%), followed by public sector, health care and education (7%) and commercial services (8%).
Performance Bonus
The percentage of respondents receiving performance bonus was the highest in trade, transport and hospitality (58%) in 2008, followed by commercial services (53%), manufacturing and construction (47%) and public sector, health care and education (46%). The share of performance bonus has also decreased between 2008 and 2015, with rise in two sectors. Considerable rise was seen in trade, transport and hospitality from 9% in 2013 to 17% in 2014; and in commercial services from 15% in 2013 to 22% in 2014. In 2015, percentage of employees receiving performance bonus was the highest in commercial services (21%), followed by manufacturing and construction (19%); trade, transport and hospitality (16%); and public sector, health care and education (11%).
Profit-Share Bonus
The percentage of respondents receiving profit-share bonus was the highest in manufacturing and construction (12%) in 2008, followed by trade, transport and hospitality (11%); public sector, health care and education (9%); and commercial services (5%). Overall profit-share bonus seems to be a very popular instrument used in India as the share of respondents receiving it increased in 2016. In 2016, the industry that showed relatively high profit-share bonus was manufacturing and construction (73%), followed by public sector, health care and education (71%); commercial services (49%); and trade, transport and hospitality (35%).
Other Annual Bonus
The shares of employees receiving OAB payment have also reduced over time, while the mode is showing a rising trend in 2016. The percentage of respondents receiving OAB was the highest in manufacturing and construction (15%) in 2008, followed by trade, transport and hospitality (10%); public sector, health care and education (7%); and commercial services (6%). In 2016, the percentage of respondents receiving OAB was the highest for public sector, health care and education (92%), followed by commercial services (51%); trade, transport and hospitality (48%); and manufacturing and construction (43%).
Overall Trend for Industry Groups
Though the percentage of respondents who have reported receiving bonus payments decreased over the time period of the study, another pattern could also be observed. During 2008, across industries, performance bonus dominated. But by 2016, the trend had shifted to profit-share bonus and end-of-year bonus across all the industries. As we had seen earlier, at the aggregate level, profit-share bonus is not still at the top. All sectors show an indication to a move to profit-share bonus for executives. It points to the changes affecting industry performance and the realization that human capital is critical to firm’s success. Also, share of bonus is observed to be the highest for trade, transport and hospitality sector. Table 2 shows the trend of bonus payments for all four industries.
Industry-Wise Bonus Payments (2008-2016).
The data for festival bonus and performance bonus are available till 2015 only.
Ownership Matters
We found that the bonus payments are reported to be the highest for executives working in those firms that are wholly owned (either wholly domestic or wholly foreign-owned) than those that are partially owned (i.e., joint ventures). The data also show that wholly domestic-owned firms pay the highest amount of bonus, followed by wholly foreign-owned firms (see Figure 3).
Relationship between firm ownership and average bonus payment: 2008 to 2016.
Indian Economy and Bonus Payment Trends: A Comparison
As we compare the trends of executive bonus payment with the economy, we consider the annual GDP 83 (gross domestic product) growth as a yardstick for the comparison. Similar to global economic conditions, the Indian economy also witnessed a decline in the GDP growth rate in 2008. Two major factors were responsible for the decline: (1) capital outflow and (b) impact on stock and forex market. 84 Since the period of study is from 2008 to 2016, the trends of different bonuses in different industries is compared with GDP growth from 2008 to 2016. Table 3 presents year-to-year GDP growth rate and respective industry-wise bonus trends.
Yearwise GDP Growth and Bonus Payment.
Note. The GDP growth estimates are based on World Bank data (https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=IN).
The data for festival bonus and performance bonus are available till 2015 only.
Following a global economic meltdown in the financial year 2008, the GDP growth rate of the Indian economy dropped to 3.9% from an average growth rate of 7%, resulting in a sharp fall in the profit levels of the sectors largely dependent on the international market. This naturally had an impact on bonus payment, particularly for executives.
All the four industrial sectors (manufacturing and construction; trade, transport and hospitality; commercial services; and public sector, health care and education) covered in this study are, by and large, dependent on the international market. The corresponding fall in the number of respondents receiving bonuses bears the fact that bonuses and wages indeed depend on the microeconomic conditions. We have analyzed the effect of GDP on industry-wise bonus, by taking each of these industries separately (see Table 3).
Manufacturing and Construction
On screening the data, we observed that, after the global economic crisis in 2008, with the increase in GDP growth rate in 2009 the percentage of respondents receiving various types of bonuses also increased. From 2010 to 2015, with minor fluctuations in the GDP growth, there was a marginal increase or decrease in the percentage of respondents receiving various types of bonuses. In 2016, when the GDP was above 7%, a sharp increase in percentage of respondents receiving various types of bonuses was observed in the case of end-of-year bonus followed by profit-share bonus and OAB. The yearwise pattern of bonuses and comparison are given in Table 3.
Trade, Transport and Hospitality
In case of the trade, transport and hospitality industry, it can be observed from the trends that in 2009, with an increase in GDP growth, the percentage of respondents receiving bonuses also increased. However, from 2010 to 2012, with the fluctuations in the GDP growth, the percentage of respondents receiving bonuses also declined, especially in case of OAB, performance bonus and profit-share bonus. Subsequently, when the GDP growth rate was above 7% from 2014 to 2016, a gradual increase was also witnessed in the percentage of respondents receiving various types of bonuses. The most notable increase in percentage of respondents was observed in case of end-of-year bonus (from 36.88% in 2008 to 58.19% in 2016) followed by OAB and profit-share bonus (from 9.62% in 2008 to 48.2% in 2016 and 10.65% in 2008 to 34.86% in 2016). For yearwise pattern of bonuses and comparison, see Table 3.
Commercial Services
The commercial service sector is one of the most significant contributors to India’s GDP. Factors such as foreign investment and significant contribution in exports make commercial service sector a major contributor to India’s GDP. The GDP growth after 2008 was favorable for employees as can be observed from the trends, with a significant increase in percentage of respondents receiving end-of-year, festival bonus, OAB and profit-share bonus. However, in spite of a decent GDP growth in 2010, the percentage of respondents receiving bonuses declined, especially in case of festival bonus (from 53.71% in 2009 to 3.63% in 2010) followed by performance bonuses (from 58.46% in 2009 to 12.34% in 2010), end-of-year bonus (from 53.71% in 2009 to 9.4% in 2010), OAB (from 14.84% in 2009 to 3.26% in 2010), profit-share bonus (from 10.98% in 2009 to 1.71% in 2010). The GDP growth rate continued to fluctuate with a marginal increase or decrease of 1% from 2011 to 2015. Its relative effect was also witnessed in the percentage of respondents receiving bonuses. In 2016, with a 7.1% of GDP growth, there was a sharp increase in the percentage of respondents receiving end-of-year bonus followed by OAB and profit-share bonus. For yearwise pattern of bonuses and comparison, see Table 3.
Public Sector, Health Care and Education
Public sector, health care and education are important sectors not only from the perspective of the economic conditions prevailing in the country but also from the human development index perspective. The fluctuations in the economic growth in terms of GDP have created investment gaps in these sectors. It can be observed that the bonus trends in public sector, health care and education are similar to bonus trends in the trade, transport and hospitality industry. A marginal increase in percentage of respondents receiving bonuses was observed in 2009, along with the increase in GDP from 3.9% in 2008 to 8.5% in 2009. Furthermore, the trends shows that irrespective of the increased GDP growth in 2010 (from 8.5% in 2009 to 10.3% in 2010), a massive decline was witnessed in case of performance bonus, followed by end-of-year bonus, festival bonus, OAB and profit-share bonus. This trend continued further from 2011 to 2015, with a marginal increase or decrease in the percentage of respondents receiving bonuses corresponding to the GDP growth. However, in 2016, when the GDP growth was above 7%, a sharp rise in percentage of respondents receiving bonuses was observed in case of OAB, followed by profit-share bonus and end-of-year bonus. The yearwise pattern of bonuses and comparison can be seen in Table 3.
Executive Compensation Practices: Comparison Between India and the United States
The nature of compensation and benefits trends has changed since the last decade as companies are managing more diverse workforces and complex reward expectations. To survive in the global market, it is necessary for the companies to design pay systems that can attract, retain and motivate employees. The pay preferences of every employee are different from those of the employees a decade ago. 85 It appears from the trends that there have been important changes in the level and the structure of executive compensation practices globally. In this section, we compare the Indian executive compensation practices with those of the United States.
The Indian executive compensation system approach for top executives is largely dependent on firm performance, which is evaluated on financial as well as market-based measures, and there is a positive association between executive compensation and past and current firm performance. Even firm-specific characteristics such as corporate governance have an influence on executive compensation.86-88 In a nutshell, it can be argued that the pay-for-performance approach is adopted by most of the Indian firms (MNCs) that are operating on a large scale, whereas this is not the case with the business group–affiliated firms and family-owned firms. 89 In India, along with other monetary and nonmonetary incentives, bonus payment is considered to be an important part of the Indian executive compensation system. Many firms have adopted evaluation tools to classify executives as high or low performers, and the most popular evaluation tools are the bell curve and forced ranking. Thus, annual bonuses or other related bonuses such as the performance bonus are dependent on the relative position of the employee in performance ranking.90-92
Recent research by Gupta and Otwani, 93 analyzed the information disclosed by 100 companies in India, excluding the public sector enterprises, and showed that on an average, the CEO’s pay has increased by about 10.18%; in case of professional CEOs, the remuneration increased at about 11.03% compared with promoter CEOs, which increased by about 9.19% in 2015-2016. Furthermore, the research points out that because of the mandatory disclosures under the Companies Act, 2013, firms are compelled to design a more structured approach for CEO compensation. An analysis of remuneration disclosures by the Securities and Exchange Board of India (SEBI) reveals that Indian CEOs earn 1,200 times more than the average employee. Also, pay packages of executives continue to remain high, and they have further increased, especially in the private sector firms during 2016-2017. In case of public sector firms, the executive compensation is just three to four times more than the remuneration of the average employee.94,95
Executive compensation in the United States has four main components: base salary, performance-based annual bonus, stock options such as ESOPs and long-term incentive plans. The bonus plans for executives are heterogeneous in nature (every company offers different bonus plans to its executives), but three major components of bonus plans are considered important by any company while designing the bonus plans. They are (a) accounting profits earned by the company, for example, EBIT (earnings before interest and taxes), EVA (economic value added) and sales by the company; (b) CEO’s vision regarding budget goals, yearwise progress of the company and survival strategies in the competitive market and (c) individual performance. 96 The executive compensation system in the United States has also been criticized for its highly incentivized and lucrative compensation arrangements, including huge bonuses. A nationwide public perception survey of 1,202 individuals in 2016 revealed that almost 74% of respondents felt that the American CEOs are overpaid, and only 16% believed that they are paid the correct compensation. The overall perception regarding CEO pay is negative. 97
The criticisms and debates about the excessive compensation received by executives have paved the way for instituting compensation practices such as say-on-pay rules (right of the shareholder where shareholder can vote on executive compensation). A recent research by Tonello et al. 98 on the companies that are registered with the U.S. Security and Exchange Commission and included in the Russell 3000 index shows that companies are optimistic in case of say-on-pay vote, but on the contrary, the trend of shareholder proposal in executive compensation has declined because it is no longer considered as a feasible option by the companies. Furthermore, the research points out that the top 200 U.S. companies prefer performance-based LTI (long-term incentives). Thus, because of this trend, appreciation awards and time-based restricted stocks are no more preferred by the companies. This shift in the trend shows that rewards, which are linked to long-term performance, are increasingly becoming a popular option for executives of mid-market companies.
Conclusion
Paycheck India data analysis on the bonus payment trends in India for executive category reveals that there has been a gradual decline in bonus payments, as share of overall compensation. Bucking the trend, in 2016, there was a significant rise in the number of respondents reported as receiving the OAB in private sector. This overall decline can be attributed to the private sector also laying more emphasis on performance of a group or a department in achieving a company’s goal or targets, instead of on individual performance. The Indian public sector has linked bonuses/incentives for executives to overall company performance rather than to individuals. However, the wider acceptance of practice to selectively rewarding the chosen few, with motivation or retention as objectives can possibly explain the upward shift in OAB category. However, we realize that generalizing based on one year’s trend may be too premature, and hence calls for further research in the coming years to substantiate our assertion.
In 2014-2015, we could observe a slight upward movement of most types of bonuses in the two sectors (public and private) and for all industries, though it was not as high as that recorded in 2008-2009. This shift may be an effect of the changed political equation following the elections of 2014-2015, which led to the National Democratic Alliance coming to power. 99 The positive anticipation in business sentiment may have prompted remuneration committees and employers to loosen the purse strings.
However, from the data trends it seems that the Indian industry is not moving forcefully in the direction of rewarding performance bonuses as dominant tool. This could be due to existing taxation policies, or the growing awareness about the negative reputational effect of awarding huge bonus payouts, and the realization that strongly emphasizing relative performance could trigger short termism. Following the global trend in performance rating (i.e., abolishing relative grading), Indian firms have also shifted to a more egalitarian pattern of compensating executives. 100
Besides, it has also been noticed that profit-share bonus is not a very popular form of bonus payment for executives, though a positive trend could be noticed. We believe that it is an indicator of Indian companies aligning with global pattern of executive compensation, linking payouts with company-level performance and long-term indicators.
Additionally, we believe that the pattern is an early indication that Indian industries have realized the fallacies of short-term-oriented incentives, and are now shifting focus on long-term, career-oriented training programs as incentives instead of bonus pay packages.101,102
However, the trend in lesser proportion of executives reporting that they received bonus over time needs to be probed. It can be generalized that there is a shift in approach where bonus payments, in terms of cash or monetary payout, are reducing and are becoming restricted to fewer executives. From other evidences, we find that industries and sectors are coming up with alternative forms of rewarding and motivating employees, for example, ESOP and nonmonetary, career-focused schemes. There has also been an increasing trend in high-performance acknowledgment schemes and trainings that focus on career development and growth. Hence, we can conclude that that most industries and firms in India, particularly the larger ones, are exploring alternate ways to reward employees, mostly through nonmonetary routes.
Indian labor market is also seeing that start-ups are attracting their workforce by giving higher assured pay for the risk taking, rather than promising high variable pay. Some, like e-commerce firms, have offered ESOPs to executives, in addition to assured pay packets. We should also acknowledge that the attractiveness of start-ups or other emerging Indian firms is not just due to the pay packages. Start-ups, as opposed to MNCs and large Indian firms, are more successful in creating a sense of belonging and ownership due to the small number of employees and design of work content itself. This, along with a supportive culture, encourages the employees to expand their talents and enhance their entrepreneurial behavior. 103
Another trend observed in Indian firms is gifting instant/spot rewards such as mugs and T-shirts, gift vouchers and sometimes iPods, cruises to exotic destinations and other holiday packages to employees for their exceptional performance. 104 In our opinion, Indian firms are becoming more innovative in designing their executive compensation practices.
The change in trend observed during the end of the study period, in our view, is also likely due to the change in economy’s performance and positive political sentiment, which significantly influences any discretionary payment to employees. Despite this mild upward shift in 2016, we feel that the industry is still watching and waiting for the economy to take off. Hence, we would like to believe that the future of executive bonuses depends equally on the policy changes and the political events also.
The empirical evidences presented in this study are not for challenging the validity of monetary incentives when it comes to work motivation. We strongly believe that we should neglect monetary incentives and rely exclusively on nonmonetary incentives. We argue that monetary incentives do play an important role, but sometimes excessive dependence on them may lead to circumstances that may harm the organizations in the long run. This argument is further supported by Cappelli et al., 105 who in their book, The India Way, observe that most of the Indian firms are successful in motivating their employees by associating them with a sense of purpose and mission.
Footnotes
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
Notes
Author Biographies
), and has also executed projects for International Labour Organization, International Organization for Migration, and United Nations Development Programme.
), which is a part of WageIndicator Foundation, Amsterdam (www.wageindicator.org). Her research interests include gender issues and labor market dynamics, on which she has co-authored, presented, and published various scholarly papers.