If you are a top performer in the automotive sector, you don't have to worry about your salary hike

In the sector-wise coverage following the recent Aon-Hewitt Salary increase report for this year, next up is the automobile industry!

While speaking to Amit Kumar Otwani - Sr. Consultant, Rewards, Aon Hewitt - we tried to understand how this key industry is moving forward in terms of its competitiveness, salary increments to employees, pay differentiation and several other parameters in the past couple of years, and what these would look like in future.
Here’s an overall outlook of the automotive sector:

​Automotive sector continues to project a double-digit salary increase for 2017. However, it has taken a drop from 2016 actual spends. What is the reason for this?
In the auto industry, salary increases have gone down from 10.7 to 10.3. There are few things that have happened this year in addition to a few trends we have been seeing over the past few years. From a long term perspective, auto industry promises a long term growth. If you look at the Government's Automotive Mission Plan 2016-26, it says the automotive industry is expected to grow four-fold by the end of 2026 and it will grow at a CAGR of about 10% in terms of sales volumes. So, the long term story from an automotive perspective is intact and is growing well.

​However, if we look at what happened last year, the overall domestic sector growth was at 6.05% over the same period last year, and exports saw a decline. There was an impact from demonetisation as well. It impacted the two wheelers sales volumes, luxury car automakers and the tractor industry. This is the reason why the business situation is seeing a cautionary phase. The industry has not grown very well, at least from a demonetisation perspective last year.
​The way automotive employee costs have grown also needs to be taken into account. It has been growing at about 14.08%, while some of the other business metrics (revenue and other operating expenses) have grown in the range of about 8-10%. Average wage cost of this sector which was about 4-5% five years back has reached 6%. This is putting pressure on the employee cost item in the PNL accounts of organisations and therefore the overall increments have been coming down. It is expected that it may continue to hover around 10% or may be slightly less than 10%.
Also, in the last couple of years, salary increases in this sector has shown stability overall by hovering around 10.5 %. What is the reason for this figure sticking to a 10% range over a long period of time?
Why we will not see this figure going below 10% is because automotive industry has a long gestation period. Therefore, this industry always prepares talent from the next 5-year time frame for the simple reason that if a new product development needs to be done, talent needs to be intact. Moreover, since a lot of companies are building R&D centres in India, automotive companies want to stay competitive with respect to some of the other industries as well.

Tell us about attrition levels that Auto sector is facing?
Overall attrition has gone up from 9 to 10.2% over the past year. This increase is happening on account of two functions: Sales Marketing and R&D. Since a lot of other organisations are setting up their R&D centres, and talent is mobile across India and not restricted to a particular region, attrition is high in R&D. Moreover, Sales and Marketing is always in demand, so we see talent drifting to other lucrative sectors whenever they can.

How is this key industry moving forward in terms of its competitiveness talent-wise, salary increments to employees, pay differentiation?
If I compare auto to consumer/telecom sector, the base compensation in automotive is slightly lesser than them. But if I compare it to a Hi-tech sector or a engineering manufacturing sector, auto industry is better placed. That's the reason why salary increments still continue to remain stable at 10%. Since base cost is slightly lower, they have to remain competitive to other industries as well.

Pay for performance has been penetrating well in automotive sector. The multiple of salary increases which were provided to top performers at an all industry level was 1.5x in 2013, it has risen to 1.7x. Like other industries, automotive industry also realizes that pay for performance culture is needed and that is why it has been providing disproportionate salary increases to their top performers, though still they are at a below overall India level.

In terms of pay compensation (for entry, midlevel and senior management), where do you see the Indian automobile industry when you compare it globally?
If I were to compare the automotive salary at the entry level for Indians compared to counterparts in developed economies like Germany, US and Japan on purchasing power parity adjusted basis, the automotive industry pays approx. 40% at junior level compared to them. For senior management, automotive industry is moving closer to the global standards in terms of compensation. It is in the range of 70-80%, but it's inching upwards. From a cost arbitrage perspective, India remains to be a destination where automotive industry is investing here and developing their R&D centres and operational units.

One thing which automotive industry needs to think about is if we continue to increase salary at 10%, will the cost arbitrage remain sustainable in the long run.

​Taking from your last point, I’d like to ask - What are the challenges this sector is facing?
From a talent perspective, companies are in a fix on how to retain key talent and critical talent. There is a lot of training and development happening in the R&D and Sales and Marketing functions, and organisations have also built good talent in these functions. However, the new global players coming in are ready to hire this developed and trained lot at a much higher salary.

​Secondly, the employee costs have been growing has been rising at a much higher rate than some of the other business fundamentals. It has to grow in tandem with the revenue and profitability or be lesser than them.
​Another element is the way fixed and variable costs are structured. If you compare the fixed to variable ratio either to global levels or some other mature industries in India, automotive has higher fixed cost. That's where it sees increase in overall employee costs. What they should do is manage the fixed to variable in such a way that the fixed increase remains in check.