Talent Management & Compensation Practices A Report on the Indian Power Sector

May 2012 www.deloitte.com\in

Contents

Abstract Introduction - Overview of the Power Sector in India Human Capital challenges in the Indian Power sector Prevailing Compensation & Benefits Practices Salary Structures and Definitions Compensation Hike Conclusion Bibliography Contacts

5 6 9 10 11 12 13 14 15

Talent Management & Compensation Practices A Report on the Indian Power Sector

Abstract

The Human Capital Advisory Services (HCAS) practice of Deloitte Touche Tohmatsu India Private Limited (a member of Deloitte Touche Tohmatsu Limited) conducted a cross-industry Compensation Trends survey, covering 122 organizations in August 2011. This report examines the talent management and compensation practices in the Infrastructure industry in India, with specific focus on the Power sector, which is poised

for growth given the 100% percent Foreign Direct Investment in all segments of this sector. This report highlights the human capital related challenges and analyzes some of the talent retention measures that companies may consider in a sector that is witnessing overall growth.

Talent Management & Compensation Practices A Report on the Indian Power Sector

Introduction - Overview of the Power Sector in India

The rapid growth of the Indian economy in recent years has placed undue stress on physical infrastructure such as electricity, railways, roads, ports, airports, irrigation, and urban and rural water supply and sanitation. Most of these services are already strained, suffering from a substantial deficit in capacities as well as efficiencies in the delivery of critical infrastructure services. The pattern of inclusive growth of the economy can be achieved only if this infrastructure deficit can be surmounted with adequate investment to support higher growth and an improved quality of life for both urban and rural communities. The Indian government has allocated US$4.2 billion for Infrastructure in the financial year 2011-12, which amounts to 48.5% of the total planned allocation. The government is also actively encouraging the Public Private Partnership (PPP) model to fill existing investment gaps in the infrastructure arena, with an anticipated contribution of at least 50% from the private sector. Although recent government pronouncements have increasingly emphasized the need to secure investment in major infrastructure projects, most of the progress has been so far limited to the telecommunications sector and, more recently, to road construction. Recent developments in the Indian Power sector: The present installed power generation capacity in the country as on 31 March 2012 is 199627 MW. Thermal power projects of 78545 MW and hydro power projects of 15707 MW are under construction for likely 2008-09 (April-March) 907.66 2009-10 (April-March) 1271.79 The National Electricity Policy 2005, and the Tariff Policy 2006, has paved the way for a renewed interest in the sector among developers and investors alike. Bidding documents have been standardized and a competitive bidding route is slowly becoming the norm. As of January 2011, all power to be procured is mandated through the competitive bidding route. Hundred percent Foreign Direct Investment (FDI) has been allowed for some time now in all segments of the Power sector including power trading. Investor confidence has returned to the sector, which is amply borne out by the fact that all projects of the 11th Plan and 78,000 MW for the 12th Plan have achieved financial closure. During the current fiscal year, 16 ultra-mega power projects (UMPPs) and 14 interstate transmission schemes have been identified for development by the private sector through the competitive bidding route. According to the Ministry of Power, the bidding of 4 UMPPs and 6 transmission projects have been completed; bidding of more than 5 UMPPs is in the pipeline, which offers unique opportunities for investment. Each UMPP is of 4000 MW capacity and requires US$4.5 billion investment. FDI in the Indian Power sector: To attract foreign investments in the power sector, FDI up to 100% is permitted under the automatic route for projects of electricity generation (except atomic energy), transmission, distribution and power trading. The FDI equity inflows from April 2008 to September 2011 in the power sector are as under: 2010-11 (April-March) 1271.77 2011-12 (April-Sep) 1253.66

Year Power

Total 4704.87

**FDI in US$ millions

commissioning during the 11th and 12th Five Year Plan. The highest ever capacity of 15795 MW was added to the Power sector in 2010-11. Prominent companies that helped augment this capacity include NTPC, Adani Power, Reliance Power and Tata Power. The 12th Plan aims at a capacity addition of nearly 1, 00,000 MW. During the 11th Plan period from 2007 to 2012, the funding requirement in the Indian Power sector was estimated at US$230 billion, and similar investments are anticipated for the 12th Plan.

Major contributing countries to the FDI equity inflows during this period are France, Mauritius, Singapore, UAE, the United Kingdom, the United States and Morocco. US$330.99 million of FDI equity has been received from the USA in the power sector during April 2008 to September 2011. Power plant equipment manufacturers: Capacity at Bharat Heavy Electricals Limited (BHEL), the largest state- owned domestic power equipment manufacturer

in the country, is far short of demand at 15,000 MW a year. The state-owned giant intends to augment this by a third, but hasnt given a timeline for it. With most joint venture facilities (for power equipment manufacturing) not yet functional, private power producers have been actively placing orders with various Chinese firms. Since October last year, Chinese majors have won US$15 billion worth of power equipment contracts from Indian firms. Earlier this year, Larsen & Toubro (L&T) commissioned its new thermal power-equipment facility in technical collaboration with Mitsubishi Heavy Industries of Japan. As many as 16,000 concrete piles were driven down the 500-acre facility on the backwaters of the Tapti River in Hazira, Gujarat, to build the superstructure. L&T aims to drive sales eightfold to US$3 billion in four years from US$400 million now. This new facility is one of the countrys largest integrated power facilities (with an annual capacity to make equipment that can produce up to 5,000 MW). The company has already spent US$600 million on the plant and will be spending another US$200 million in the next 6-8 months on a

steel castings unit. L&T currently has orders for 10,000 MW of equipment worth nearly US$6.4 billion. Many other global firms, including Japans Hitachi, US-listed companies SPX Corp., Babcock & Wilcox Power Generation Group and Frances Alstom are partnering with companies such as BGR Energy (BGR), Thermax and Bharat Forge, respectively. What drew in private and global players was the governments announcement to add 100,000 MW during 2012-17 to its current installed capacity of 166,366 MW. BGR, the Chennai-based power sector company, has two ventures with Hitachi to make boilers and turbines. BGR and Hitachi are investing US$600 million to make turbines. The Japanese major has a 26% in the venture called BGR Turbines. They will invest another US$280 million to make boilers. Hitachi Power Europe GmbH has a 30% stake in this venture called BGR Boilers. The company had an order book of US$2.1 billion at the end of September 2011. Another joint venture between Bharat Forge and Alstom is investing US$480 million to set up a plant at Mundra in Gujarat; the plant will become operational in 2013.

Talent Management & Compensation Practices A Report on the Indian Power Sector

Human Capital challenges in the Indian Power sector

With the Planning Commission estimates for the targeted capacity addition pegged at around 1,00,000 MW, nearly 7.4 lakh additional personnel will be required for construction, operations and maintenance (O&M) of generation projects, as well as for transmission and distribution facilities during the 12th Plan. The table provides the manpower requirement norms for this targeted capacity. For construction of new plants Unit Thermal Hydro Nuclear Persons/MW 10 8 8 For O&M of generation projects Persons/MW 1.9 1.1 1.9 rate, especially among staff deployed on-site. This coupled with the entry of new players in the power equipment manufacturing and project execution space has further aggravated the problem as companies are finding it difficult to retain critical talent (involved in design and execution of power projects) and offer equitable salaries. Moreover, the fact that power projects are executed in remote locations is also a serious impediment to attracting and retaining talent in this sector. Most young professionals today, lured by the comforts of an urban lifestyle, prefer to work in the Services sector in cities. This trend has resulted in a dearth of project execution professionals in the power sector. In the wake of massive capacity expansion plans, the existing training infrastructure as well as the knowledge and skills imparted in academic and technical institutions fall short of expectations to facilitate direct employability in the industry. This demand and supply imbalance thus underpins the need to devise ways to attract and retain talent in this crucial sector of the economy.

Source: Report of the working group on power for 11th Plan (2007-12)

Talent scouting and retention challenges In spite of a high demand for trained personnel comprising skilled engineers and workers, supervisors and managers in every sphere, the Power sector in the recent past has witnessed a high employee turnover

Talent Management & Compensation Practices A Report on the Indian Power Sector

Prevailing Compensation & Benefits Practices

Compensation practices in the Power sector comprise fixed components and project-related allowances, as well as the standard non-performance linked allowances and benefits (for details, refer to Section, Salary Structures and Definitions). Besides, emphasis is on the following performance-linked allowances. Individual performance linked Linked to the Performance Management System, workforce deployed on project sites (project managers, site engineers, etc.) are offered comparatively better hikes over corporate staff (off-site employees) due to the close linkages of site personnel with project completion and contractual obligations, reflecting the organizations reputation/ brand. In fact, the maximum workforce (over 60%) is deployed on project sites, and it is in this category that firms face the maximum attrition (15-20%). The survey findings revealed that there is usually a cap on the percentage of CTC awarded as the variable pay component based on individual performance ratings. Employees who fall in the band Meets Expectations can receive up to 80% of the variable pay portion. However, no payouts are awarded to employees falling below the Meets Expectations category while Project Managers ratings and increments follow no percentage norms as it is linked to project completion. Team/Project performance linked Linked to the overall business performance, companies award a special discretionary bonus termed Project Completion Bonus as a variable pay component. Staff category/ junior management (where the basic pay is less) receive 3 times monthly gross for on-time completion of projects, managers receive 2 times, and the category above managers receive 1 time of the monthly gross. Project performance linked compensation also factors in employees who have been transferred from one project to another. As these are matrix organizations, pro-rata calculation of monthly gross for the contribution period is taken into consideration. Besides this variable pay component, the Middle-level managers (the critical workforce segment), ranging from engineers to senior engineers (workforce category where companies face the maximum attrition) are offered higher increments. This is usually linked to project completion. The survey findings noted that project completion bonus is aligned to either service-line profitability / verticals (business activities such as transportation projects roads, railways; aviation, solar projects, etc.) or zonal profitability (critical geographies where strategic projects are being executed). Based on our observations, two critical compensation practices are applicable only for employees posted at project sites: Hardship allowance to encourage and motivate employees to work at project sites situated in remote and disturbed locations. Project family accommodation to provide accommodation to employees and their families at project sites.

10

Salary Structures and Definitions

The salary structure consists of fixed pay and benefits. The fixed pay is the cash component of an employees compensation paid monthly while benefits are additional perquisites provided to employees. The fixed pay components are: Basic Salary House Rent Allowance Childrens Education Allowance Conveyance Allowance Annual Components Apart from these, there may be components that vary depending on the level of the employee and the annual compensation payable as agreed by the management at the time of appointment. Basic Salary: Basic salary is determined as 40% of the CTC. House Rent Allowance: HRA is given to provide relief to employees staying in rented accommodation. The amount of HRA exempted from tax is as per the prevailing Income Tax rules (40% or 50% as the case may be). Employees claiming tax exemption under HRA need to give proof of rental payments by submitting rental receipts. Conveyance Allowance: All employees receive conveyance allowance to meet the expenditure incurred in commuting between residence and office and back in the course of performing their duties. They are entitled to receive a minimum amount as Conveyance Allowance per month irrespective of the type of vehicle used/mode of travel undertaken. Annual Components LTA: Leave and Travel Allowance (LTA) is provided to all confirmed employees and their dependents* only on completion of the probationary service period

*dependents include spouse, children and dependent parents, dependent children (legitimate or legally adopted children) who are unemployed and below 18 years of age Medical Reimbursement: Medical reimbursement is applicable to eligible employees under the compensation package. It is granted by the employer for treatment of the employee and his family members (dependents). It is also Tax exempted subject to a maximum of Rs 15,000 per annum. Medical expenses are paid twice in a year against producing bills. It is the responsibility of the employee to submit the supporting bills towards medical expenses as per the official communication from the Taxation department to avail tax benefits. If an employee does not submit the medical bills, necessary tax is deducted and the remaining amount is paid to the employee at the year end. Benefits: Employee Provident Fund (EPF): A statutory contribution from the employee and employer to the EPF (12% of basic). Group Medical Insurance: A 24-hour Insurance cover ranging between INR. 2,00,000 and INR 15,00,000 provided to all employees across all levels. Group Gratuity Insurance Scheme: A lump sum that the employer pays to an employee when he or she retires from the organization in accordance with the Payment of Gratuity Act, 1972. EDLI Policy (Employee Deposit Linked Insurance): A statutory liability to provide EDLI to all employees as per the Employees Provident Fund and Miscellaneous Provisions Act, 1952.

Talent Management & Compensation Practices A Report on the Indian Power Sector

11

Compensation Hike

Our Human Capital Advisory Services (HCAS), in August 2011 observed that Indias economic growth in the last year had a positive impact on the overall increments, which have been 12.97%. For a majority of companies, increments ranged between 10 and 19% across all levels owing to a much awaited market correction (click here to access a summary of the survey).

It is observed that compensation hikes in the Power sector in the last year have been to the tune of 12-15%. While the overall budgets hovered around 13%, the individual increases awarded to employees were from 8% to a maximum of 40%. Our survey findings showed that Companies A & B (diversified infrastructure companies with interests in Power Sector projects) in 2010-2011, offered 12% and 15% raise, respectively. According to the survey participants, the suggestive increment percentage for the current year is around 12-13%, attributed to various project delays. Company C (a JV in power equipment manufacturing) is planning to offer a 13-15% hike this year. The organization is facing challenges in attracting trained manpower from a major public sector power equipment manufacturer, especially in the wake of the sixth pay commission and its implications on the compensation and benefits. The company is also facing increased attrition (15-16%) among its design and execution talent, attributed largely to the entry of new players in power equipment manufacturing and project execution space, a remarkable increase from 6% attrition as observed during the previous two financial years. Company D (a large multinational conglomerate with interests in power generation) foresees a salary hike of not more than 15% this year. The average individual increase awarded to high performers over the last year have been to the tune of 10% for junior management, 8-12% for middle management and 12-17% for senior management. Financial Year 2008-2009 2009-2010 2010-2011 Average Industry Salary Hike 15 - 17 12 - 15 12 15

create a captive talent pool to hire graduate engineers. Upon successful completion of the programme, these graduates are directly hired into the organization. Companies have increasingly started to source talent from tier 2 and 3 cities to meet their growing talent demands which have proved successful in building a workforce aimed at long-term retention. International mobility and long-term assignments Companies have increasingly started to offer 68 months of training, coupled with on-site deployment (including foreign project locations) to hone specialized skills (tendering, transmission, etc., to name a few) Employment Bond- To mitigate voluntary employee turnover, companies are now actively deploying their employees on various short-term (less than one month) and medium-term (3-6 months) engagements that are aimed at offering learning and development opportunities. A contractual commitment is sought from employees to recover the investments made in training, in cases of exits within the stipulated period. Total Rewards Companies have started emphasizing on performance-linked allowances aimed at recognizing individual and team performances coupled with spot employee recognition awards and cash awards to recognize team performance. Competency-based Talent Management Practices Companies have started focusing on developing and rewarding competencies that contribute to exceptional business performance given the urgency in retaining talent. Competency-based talent acquisition practices to career management have gained significant emphasis over the past two years. Companies now offer Average Industry Attrition Rate 34 68 12 15

Source Deloitte HCAS Cross Industry Compensation Trends Survey and Deloitte Knowledge Repository

Retention Strategies observed in the Industry

Campus Adoption Companies have increasingly started to adopt engineering campuses and institute customized programmes as part of the syllabus to

customized career paths aimed at encouraging domain specialization amongst high performers (such as R&D) to further create a leadership pipeline.

12

Conclusion

Following the governments decision to augment the current installed power capacity by 60% in the 12th Plan period, the Power sector has witnessed renewed interest among developers and investors alike, including global players. However, the path to growth is fraught with several challenges with talent acquisition and retention

surfacing to the top, as an unfavorable balance exists in the demand and supply of skilled resources in the sector. However, the upward trend in economic growth has led to firms revising their compensation packages and introducing innovative retention strategies aimed towards overall growth in this key infrastructure sector.

Bibliography

1. Deloitte Touche Tohmatsu India Private Limited (a member of Deloitte Touche Tohmatsu Limited) crossindustry Compensation Trends survey, August 2011http://www.deloitte.com/view/en_IN/in/press-room/ 90c7c6ece6f62310VgnVCM1000001a56f00aRCRD. htm 2. Report of the working group on power for 11th Plan (2007-12) Volume II Ministry of Power 3. Key features of budget 2011 2012 - http://indiabudget.nic.in 4. Press Information Bureau Government of India http://pib.nic.in/newsite/AdvSearch.aspx-Release id - 81240 5. Press Information Bureau Government of India Release id - 82238 6. Intellinet- Emerging Markets Information Service (EMIS) Electric Power Generation, Transmission and Distribution - India Power Report Q4 2011 7. Economist Intelligence Unit Industry Analysis Energy Briefing-India 8. Energy & Resources Predictions 2012 www.deloitte. com

14

Contacts

P. Thiruvengadam Senior Director Deloitte Touche Tohmatsu India Private Limited Tel: +91 (80) 6627 6000 Fax: +91 (80) 6627 6408 E-mail: pthiruvengadam@deloitte.com Address: Deloitte Touche Tohmatsu India Pvt. Ltd. Deloitte Center, Anchorage II, #100/2 Richmond Road, Bangalore-560025, Karnataka

Shivram Sethuraman Director Deloitte Touche Tohmatsu India Private Limited Tel: +91 (44) 6688 5420 Fax: +91 (44) 6688 5050 E-mail: shsethuraman@deloitte.com Arvind Raghavan Senior Consultant Deloitte Touche Tohmatsu India Private Limited Tel: +91 (44) 6688 5474 E-mail: arraghavan@deloitte.com Address: Deloitte Touche Tohmatsu India Pvt. Ltd. ASV N Ramana Tower, 52, Venkatnarayana Road, T. Nagar, Chennai 600 017, Tamil Nadu

Talent Management & Compensation Practices A Report on the Indian Power Sector

15

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private Limited (DTTIPL) is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). None of DTTIPL, Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte Network) is, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this material. 2012 Deloitte Touche Tohmatsu India Private Limited. Member of Deloitte Touche Tohmatsu Limited