Mumbai: Promotions handed out like candy may be a thing of the past, as companies that rushed to retain and motivate talent at a time of hiring frenzy take a closer look at the practice as attrition falls. Consultants and companies said that fintechs, BFSI firms and startups which had frequently used promotions as a retention tool are finding that it has hurt internal parity and raised employee costs.

In the last fiscal year, promotions were used to retain middle and senior level executives with institutional knowledge and client relationships, consulting and audit firm Deloitte said in a report. According to Prakhar Tripathi, partner at Deloitte, about 81% of the 350 companies included in Deloitte’s survey said they will offer promotions as a long-term tool for performance recognition rather than a quick fix.

“In FY24’s appraisals, the proportion of employees getting promoted will be lower compared to previous year—this is largely because companies are now transitioning back to conventional wisdom where promotion is a recognition of credible performance and demonstrated potential,” Tripathi said.

Promotions also raised compensation to a higher pay bracket, creating disparity within similar profiles. Tech companies would offer promotions to a larger-than-usual proportion of employees during the recruitment spree. But according to some companies, this model was not sustainable.

The percentage of employees expected to be promoted decreased from 12.3% in 2023 to 11.5% in 2024, the -Deloitte India Talent Outlook 2024-study found. Organizations are likely to maintain an average of 7.5% increment for promotions to retain key talent. Regarding performance bonuses, one of every two companies could pay at-target or above-target bonuses in 2024.

Ad-hoc promotions to retain staff are “in principle wrong,” said S. Venkatesh, group president of human resources (HR) at RPG Group. “People who are deserving but may not have needed to be retained at that time will get demotivated. By giving these promotions, you have not increased the capability of the firm,” he said.

According to Deloitte, attrition at Indian companies in 2023 was about 18.1% versus 20.2% in 2022 and is expected to fall further in 2024.

The co-founder of a leading Delhi-based fintech employing 3,000 people said that it has struggled with high staff costs and attrition over the last three years. However, after funding cooled across sectors, hiring has ebbed. This has “stemmed the attrition rate for us”, the co-founder said on condition of anonymity. With employee costs falling after a small cycle of layoffs last year, the company plans to announce “selective promotions” this year.

Many companies which hired senior executives from established organizations had not established proper reward structures, and ended up handing out a number of promotions.

“There will not be any out-of-cycle promotions,” the founder of a Bengaluru-based direct-to-consumer startup with 2500 employees said, adding the company will continue with the regular two cycles a year.

However, some sectors will continue to see promotions as a retention technique. “We and our rivals are expanding and opening hundreds of branches. We need to retain employees on a regular basis and if promotion helps us, then why not,” remarked the HR head of a leading private bank. Banks have used promotion as a retention tool since they started facing high attrition.

The Deloitte survey also predicted that companies may offer double-digit increments to junior management employees, but with a high focus on performance-based differentiation. Organizations may be stricter with their bell curves, making it harder to secure top ratings. However, top performers can still expect 1.8x the increments given to average-rated employees. Also, for employees rated below average, the increment is expected to be lower than last year — 0.6x in 2023 versus 0.4x in 2024.

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