India Inc salary hike projections: It doesn’t need a lot of math

Recently there has been a fair degree of interest over how “the math” for 10% salary hikes in India appears “wrong”. I wanted to thank everyone who has written or discussed the subject, because we keep hearing similar arguments from companies and the media but never had the argument structured into a note that we could discuss.

A caveat before we start: my perspectives are representative only of my experience at Aon over the past decade and a half. There are a lot of surveys that project salary increases and I have no way of representing their perspectives or experiences. Also, Aon has the unique advantage of being the only firm that actually collates data from more than a thousand organisations in India, which is the minimum representative number for an effective representation of market realities.

I wanted to structure my observations on two aspects. One, I wanted to respond to the questions that are raised on the survey process. Two, the issue of whether the numbers reported are at all true. First on the process: A salary increase survey collates and represents data from participating organisations, and in itself, therefore, is open to the age-old criticism of consulting firms, i.e., it looks at your watch and tells you the time. The survey results are not representative of the firm’s opinion on pay increase, but what it hears from its participating organisations.

Also, the process of collating data does not involve “speaking” to employees, but collecting data from HR departments of companies. Now, the form is filled in by an employee and, therefore, may well represent that person’s wishful thinking, but one would want to believe that when a company submits formal data, it does its own checks on what it sends out. We have, however, seen many cases of organisations submitting data that clearly have not been thought through—there are many ways to identify this—same responses to multiple questions, absence of any correlation of pay increases with business performance or past trends, numbers that are improbably large (e.g. 50% pay increase in a manufacturing company, if it were from an e-commerce company we could have still believed it!). And, when we see such data, before excluding it from the analysis, we call up the company to validate these numbers; very often these numbers then get changed. No survey process is absolutely accurate (think of opinion polls), but over the past 21 years that Aon has run this process, it has matured.

Therefore, our confidence on the values that are often questioned– we are asked by incredulous observers as to  how can India still be giving 10% hikes when, let’s say, telecom as an industry is not growing or there are reports of job losses in information and technology (IT)? Allow me to be a bit philosophical, the answer to that lies in the plurality of India! No 'one number' can represent the widely varied industry dynamics. For many years, we have been advising clients to look at figures for their specific segment and not a country's averages—because every year when one industry is not doing well there are a bunch of others that are growing rapidly. And averages, are therefore just that, averages!

And now some data—yes we are an economy where the inflation levels have supposedly flattened out over the past couple of years, but then what inflation are we referring to—CPI? Sure, which CPI? Rural? Urban? Industrial worker? Or should we refer to the Reserve Bank of India’s (RBI's) householders inflation number (which represents yet another survey of what householders feel as the real inflation)? The issue is that the classical definition of CPI (Consumer Price Index) is not representative of the cost of living experienced by urban white-collar employees—which is the segment that most salary increase surveys represent. Very often the salary increases actually mirror the RBI survey that I spoke about. A simple experiment that I run in any discussion on salary increases is to ask a room full of people what do they think their cost of living increase has been. The usual answer is 8% and that is almost exactly what RBI’s data broadly been showing for the past few years.

Second, let’s look at company financials – the past two years has shown an approximate 14% increase in wage costs across the BSE 500 companies, while the median salary increase across these companies, as quoted in their annual reports, is 9.6%.

And finally, we have empirically tested our data—Aon’s data shows that the difference between target pay increase by a company and actual delivered is an average variance of 15 basis points.

Also, just to ensure everyone is aware, India is not giving 10% pay increases over the past two years—we have seen a secular drop in pay hikes in the past half a decade and we are close to a 9% number than 10%. Surveys have warts, but the story they are projecting is broadly accurate. And let’s not bother questioning the survey, let’s focus on what we can do to make the numbers work!

The author is partner-talent and rewards consulting, Aon Hewitt India