The digital age is rewriting the rules of executive compensation. As industries undergo rapid transformation, traditional reward structures are struggling to keep pace. A panel of HR experts at TechHRIN explored the challenges and opportunities in this evolving landscape.
Mukta Nakra of Marks & Spencer Reliance India, Bhanu Sharma of Tega Industries, Ira Gupta of LSC Group, and Pritish Gandhi of Khaitan & Co. delved into the complexities of aligning executive rewards with long-term business goals.
Trends in executive rewards
Executive rewards have significantly evolved, with performance-based compensation becoming common. However, challenges remain. Mukta Nakra of Marks & Spencer Reliance India notes, “While performance-based rewards are valuable, defining metrics and balancing short- and long-term goals is complex.” Standardising rewards for equity often fails to recognise top talent.
Personalisation is another emerging trend. Nakra highlights the difficulty in offering flexible rewards for top executives, noting, “Expanding benefits to include tailored perks and financial goals for key leaders is challenging, even during negotiations.”
Rewards personalisation
The rise of the startup ecosystem has influenced executive compensation strategies. Bhanu Sharma of Tega Industries highlights the effectiveness of anchor-based compensation, tailoring rewards to different life stages. Larger corporations have adopted similar approaches, aligning rewards with employee milestones. However, the misuse of long-term incentives has weakened their impact. Startups often leveraged project-based incentives due to resource constraints, a strategy that has been partially adopted by larger companies. Unfortunately, the dilution of stock options has diminished the effectiveness of these incentives as retention tools.
Areas of improvement
Executive compensation has evolved from a sole focus on financials to encompass a broader spectrum of performance indicators. While long-term incentives are gaining traction, excessive short-term bonuses can jeopardize long-term strategic thinking. Transparency and simplicity remain paramount in fostering trust. As Ira Gupta notes, “Modern executive compensation should balance shareholder returns with broader stakeholder interests, including sustainability and employee engagement. Overemphasis on short-term gains can hinder long-term success.”
Digital transformation, ESG & compensation
The integration of ESG and digital transformation into executive compensation is a growing trend. As Pritish Gandhi inquired about linking these long-term priorities to executive pay, Mukta Nakra emphasised the need to expand the scope of long-term incentives beyond traditional financial metrics. At Marks & Spencer Reliance India, key projects in digitalisation and ESG are being incorporated into the reward structure.
Mukta Nakra emphasised the distinct approaches required for digitalisation and ESG. While both areas demand immediate attention, digital transformation is particularly urgent. She cautioned against solely relying on long-term incentives for digital initiatives, arguing that cultural embedding is essential for successful implementation.
So, while digitalisation is more of an immediate, ongoing focus, ESG requires a strategic roadmap and the board’s commitment to invest in the right technologies to achieve these long-term objectives. It’s a complex balance, but necessary to drive both immediate and future success.”
Approach to long-term incentive plans
Bhanu Sharma outlined the complexities of aligning incentives with digital transformation. While phased incentive structures can kickstart digital initiatives, sustaining momentum requires a cultural shift beyond financial rewards. Leadership’s role in modelling desired behaviours is key.
In contrast, ESG integration often stems from regulatory imperatives and industry expectations. Unlike digital transformation, where financial incentives can play a role, ESG is more deeply embedded in operational practices. However, both areas demand a long-term perspective and strategic alignment with overall business objectives.
Effective reward systems: Lessons from tech startups
Pritish asked about insights traditional industries can gain from tech startups on effective reward systems, particularly stock incentives.
Ira noted that tech firms excel with stock options that align with long-term goals, keeping employees committed. Agility is another key lesson; tech companies adapt swiftly to changes, which is crucial for success. Transparency within these firms builds trust and supports a positive culture, as seen in Microsoft’s efforts toward diversity.
Bhanu added that startups use stock options to compensate for lower immediate payouts, while larger companies offer Long-Term Incentives (LTIs) alongside variable pay. LTIs should be substantial and complementary to variable pay to effectively motivate and retain talent.
Role of HR
Mukta explained that HR and rewards must evolve with business transformations. Drawing from startups, she highlighted that Long-Term Incentive Plans (LTIPs) are valuable even for entry-level positions. At M&S, the omni-channel shift was akin to launching a mini-startup, necessitating a cultural and strategic overhaul. Aligning HR strategies with transformation goals was key, ensuring the business plan was well-defined and integrated. By differentiating rewards and focusing on specialised talent, M&S successfully adapted to its new omni-channel model, demonstrating the importance of aligning people strategies with business transformation.
Internal equity
To balance internal equity with executive remuneration, Ira highlighted, “Equity isn’t just about a defined set of industry-specific skills. Given the rapid pace of change, I question if traditional benchmarking within the same industry still holds true.” She noted that companies across various sectors, such as manufacturing and airlines, often recruit leaders from outside their industries, suggesting a need for a broader view on executive compensation.
She added, “While some organisations are ready for more equitable pay, gaps remain, especially in executive remuneration.” Ira emphasized that “pay should reflect the trajectory of the role and the importance of key personnel,” and transparency can help justify differences. Nonetheless, she advised that “these changes need to be approached carefully, considering cultural nuances and the organisation’s readiness.”