KPMG experts on Payroll Restructuring in new normal

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Parizad Sirwalla, Partner and National Head of KPMG’s Tax – Global Mobility Services team
Parizad Sirwalla, Partner and National Head of KPMG’s Tax – Global Mobility Services team

Rendezvous with Parizad Sirwalla, Partner and National Head of KPMG’s Tax – Global Mobility Services team and Saptarshi Chatterjee, Director, People, and Change Advisory at KPMG

Parizad Sirwalla, Partner and National Head of KPMG’s Tax – Global Mobility Services team. Parizad has over 25 years of experience in tax and allied matters applicable to personal tax, in both advisory and compliance matters.

Parizad has lead tax and regulatory aspects of inbound and outbound assignee movements. She has also dealt with large corporates on foreign exchange issues relating to employee movements and has advised several companies on Indian social security and visa/immigration-related matters, along with planning for international secondments and availing treaty benefits, as relevant.

Saptarshi Chatterjee, Director of KPMG’s People and Change practice. He has more than 16 years of experience in the field of Human Capital Consulting and has led HR transformational and leadership projects across geographies.

Q- What are the changes you see in the domain of Total Rewards post COVID-19?

Most sectors, if not all have seen organizations become increasingly cost-conscious in the post-COVID-19 world.

In a recent survey conducted by KPMG India on Impact of Covid-19 on HR practices across sectors, where we surveyed over 300 organizations across 20 sectors, it was found that more than 50 per cent of the participants opted for deferral or temporary suspension of planned increment cycles. 

While there is a marked shift towards adopting a cautious approach towards recalibrating incentives and benefits, organizations are reviewing their Total Rewards portfolio to ensure optimal management of the overall Rewards spend per employee.  In many ways, this requires a complete re-haul of the total rewards strategy rather than small tweaking.  This could include short term measures like pay-cuts, furloughs, etc.  and also long term measures like linking rewards to role criticality as well (rather than only being dependent on individual/ business performance).

Organizations are increasingly looking at optimal ways to deliver a well-balanced set of rewards offerings while balancing cash compensation and non-cash alternatives such as equity, phantom stocks, attractive benefits, etc.   Overall the thrust/ focus is on immediate liquidity (rather than building a long term retirement corpus) and instant gratification.  Hence, many companies had already moved on from the idea of yearly performance incentives to quarterly/ half-yearly schemes.     

COIVD-19 pandemic, like any other disruption, brought to light many opportunities as well as completely new ways of working.  Concepts like “GIG” or Liquid” workforce seems to be increasingly gaining momentum.  Work from anywhere/ remote working is finding more and more acceptability.

These emerging workforce patterns necessitate companies to review their Total rewards strategy and suitably adjust/ tailor the same for the future.

Lastly, with increasingly higher number of millennials entering the workforce each passing day, even without COVID-19, HR managers had their hands full in designing a “future-ready” total rewards package.

Q- Companies are reworking on cost structures, and restructuring their payroll, what is that HR should follow while designing a new pay structure?

Even before COIVD impact, many organizations were anyways considering moving away from the traditional pay structures which have more fixed and retirement elements in the compensation items, to a more flexible approach.  Essentially employees were empowered to make suitable choices (within a broad framework) of components of the pay structure basis their personal needs.

Also, from an operational standpoint, employee self-service was the new buzz word. Employees want their payroll data available to them at the click of a button on their handphone.  Most companies would eventually need to offer this to employees and in the process figure out a secure way of delivering such information.

However, re-designing cost structures has always been a tricky exercise for any organization.

In the current scenario, compensation professionals are compelled to walk the thin line of maintaining the attractiveness of the pay package at the same time maintaining cost consciousness as they rework on cost structures.

Some of the time tested solutions of revisiting the pay-mix, rebalancing benefits portfolios are being augmented with innovative allowance structures, rewards mechanisms and deferred pay commitments to ensure the overall value proposition through rewards for the employee is impacted the least. HR professionals, as they redesign pay structures are advised to keep a close ear to the ground in understanding changing employee preferences and demands of a newer demographic a mix of the workforce are addressed in redesigning pay structures to ensure that they are able to deliver ‘more with less’.

Q- Work from home is new normal, now a debate has emerged on the benefits for remote workers. How to build an effective C&B strategy for remote workers?

Remote working is not a new concept per se and progressive organizations globally already have policies in place that enable working remotely in an effective manner.

Although many studies have indicated that “working from anywhere” could be the new normal to offer candidates to remain competitive in the talent acquisition/ retention space.  Hence, it becomes imperative for HR professionals to think and build an effective compensation and benefits strategy for employees working from anywhere.

To reiterate, the overall compensation policy has to be aligned to the business realities and the criticality of the role (both from an intrinsic value of the role as well as availability perspective).  Having said that, organizations that are newly adapting themselves to the remote working paradigm, are adopting innovative rewards interventions to not only ensure employees connecting remotely are compensated appropriately but also the redesigned allowances and incentive structures drive productivity and minimize the impact on business continuity. For e.g. – Organizations are leasing ergonomic furniture, upgrading personal IT assets such as displays, monitors and accessories, reimbursing high speed internet connections etc. which is not only enabling a comfortable remote working environment for the employee but also ensuring productivity is not compromised. Organizations are also looking at casting the net of insurance benefits wider for employees with remote and temporary working arrangements to ensure the overall Total Rewards offerings are catering to the actual needs of both employees as well as the organization.  One may debate that this would have been anyways provided to the employee it was a role that required to be working from the office.  However, increasingly organizations would need to evaluate these and similar benefits from a cost and overall administrative standpoint as well.

In summary, organizations would need to think hard and make a judicious decision in determining (if at all) their existing benefits model requires a substantial change for the so-called “remote workforce”.

Q- Currently, most companies are looking to raise the Variable Pay Component in pay structure, what is the right policy for this?

Almost every country, organization, region has suffered the medical, human, and economic impact of this pandemic.  In this testing economic time, organizations are facing severe liquidity/ cash crunch and sluggish growth due to truncated demand.

Naturally, as companies gear themselves to face this adverse situation and come out of the same, managing employee compensation cost is a key element of this response.  As companies wanting to conserve cash, it is very natural that companies look to defer compensation payments – including raise variable compensation probably in lieu of temporary stagnation/ blip in ongoing annual compensation.  Re-structuring the pay mix to incorporate a higher variable pay certainly enables greater control over inflation of the fixed pay cost while driving a higher focus on performance and productivity.

However there is no “one size fits all” especially when it comes to compensation.  Hence, organizations need to make a realistic assessment of how they see their businesses recover and accordingly map their compensation policy to the economic health (current and anticipated) of the organization.  Probably companies who perceive that there is significant uncertainty in their business going forward would prefer to load more compensation on the variable side and keep the annual component relatively lighter.

Also, when it comes to variable pay, the proportion of variable pay in the overall pay-mix is only one of the levers that can be adopted to balance attractiveness of the package, limiting the liability of overall projected cash outflow via incentives as well as driving motivation and engagement through the workforce.  The other four levers that can be adopted in a comprehensive variable pay program is revisiting the scope of coverage of the plan, recalibrating the weightages attached to individual, functional and organizational performance, revisiting the gradient of the payout curves, revisiting the plan gates and performance metrics that decide the payout.  Effective management of a combination of these levers decides the success of the variable pay program

Many organization, where liquidity continues to be a concern even in the foreseeable future, are exploring equity-linked compensation as a more lucrative tool of compensation framework.  Especially, start-ups/ unicorns more frequently adopt equity compensation as an integral part of their compensation structure.

Certain organizations by regulatory requirement are mandated to have a portion of compensation as flexible compensation especially for senior-level employees e.g. banking, insurance, etc.

Q- All employees look forward to a substantial pay hike and reduced tax liability. How can organizations balance it?

It is the same story every year around the annual performance evaluation cycle.  Employees, in general, look forward to pay-hikes and also reduced tax liability to have a double boost on their net take-home pay.  Pay hikes are largely dependent on organization performance and outlook (in addition to employee individual performance).  Hence, it is imperative that organizations have a robust performance development process and a clearly articulated total rewards strategy.  It would be in the interest of the organization to have external benchmarking done of the competitiveness of their compensation strategy periodically (say every 3-4 years).  Also, like in any HR-related aspect, communication (not just the content, but also the manner and frequency) makes a substantial impact on the perceived value of increments/ revised compensation.

From a tax perspective, the Indian tax structure from an employee benefits standpoint has remained largely stable for the past decade.  As mentioned earlier, Flexible benefit pay/ structure has been a very common method adopted by most large organizations to allow employees the choice of compensation elements as per their personal circumstances and also incidentally enjoy tax benefits.  However, as an organization one needs to bear in mind that any tax exemption/ deduction they provide to employees, it brings with it the obligation to maintain appropriate documentation to support such a claim.  Hence, it is a fine balancing act that the organization needs to perform in providing employees tax benefits and the cost/ effort of administrative procedures to manage the same.  Hence, companies choose to follow a graded approach – i.e. compensation items that require larger administration support to be provided to more senior-level employees.

Q- Any concluding remarks?

In this unprecedented time, it is critical for organizations to review their compensation philosophy on a real-time basis.  While the uncertainty will prevail for times to come it will be crucial that organizations through their policy design and communication keep a check on the anxiety level of employees especially in relation to a highly sensitive topic like compensation.

Thank you, Parizad and Saptarshi!

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