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Come April-May, and the white-collar workforce readies itself for the appraisal season. They recount every client win, every penny saved and every new skill/efficiency achieved so that the appraisal gods (read managers) will dole out salary hikes and performance incentives. 

But the annual ritual had changed drastically since 2020 when the pandemic struck, with pay cuts, furloughs and layoffs dominating every boardroom conversation. The appraisal season last year was a damp squib but a handful of companies like Flipkart and Myntra that did well, found ways to retain and reward employees. Although the second Covid-19 wave is sweeping the country, there are fewer knee-jerk reactions across human resource departments as India Inc. and the startup ecosystem are trying to adapt better to uncertain times. The panic of the previous years seems to be well under control as business and HR leaders are in a better position to address the biggest challenges and decide upon the best way forward. To get a sense of how startup employers are managing employees, workload and motivation along with the appraisal cycle and the hunt for top technical talent, Inc42 has reached out to some of the top unicorns and soonicrons in the country.

Here is how the startup majors responded to our queries.

Only recently, the Tata Consultancy Services (TCS), India’s largest information technology (IT) company by revenue, said that it planned to roll out salary hikes for its entire workforce of 469,000+ April 2021, the second raise in six months. 

In October last year, the company had raised salaries in the range of 6-8%. With the forthcoming hike, TCS employees will get a cumulative increment of 12-14% in six months. Of course, big IT companies like TCS or Wipro cannot be compared with startups, but they do compete for the same talent pool. 

The good news is that 100% of the respondents to Inc42’s Back To Work Survey have said that they will be rolling out salary hikes for their employees. Although it is not quite clear whether it will be for the entire workforce or only for employees who have stayed on with the companies for the past 12 months, salary hikes are definitely on the cards. Some, like the furniture platform Pepperfry, are likely to offer a raise to those who have been in the system for more than six months. Most fintech companies are also offering hikes to employees who worked throughout FY2020-21.

According to Kaushik Banerjee, VP and head of business at HR firm Teamlease.com and its subsidiary Freshersworld.com, some of the top startups had managed to roll out up to 4% hike even in 2020, the minimum they could manage at the time. But the scenario has improved in 2021. Note that while the pandemic and the following lockdowns had earlier led to massive job cuts across the startup ecosystem, the subsequent funding boom has also seen a rise in demand for good talent. 

Incidentally, the companies that responded to the Inc42 survey in the first half of April were quite positive about the appraisal season and the hiring outlook. However, it is important to note that the Covid situation in India has rapidly deteriorated since then, with many regions going into partial-to-total lockdowns following a severe failure of the medical infrastructure across the country.  

In spite of the grim situation, Indian startups are not exactly down in the dumps. They recorded more than $11.5 Bn in funding in CY2020, which was just 10% lower than the previous year, although there was a drop in the average ticket size of investment. Last year, the average ticket size stood at $12.4 Mn, 21% lower than the previous year’s $15.7 Mn. 

But when it came to the number of funding deals, the year 2020 easily surpassed the previous year’s record. With 924 deals, the deal count was 14% higher than the 812 deals in 2019. It was, indeed, a positive sign as more startups managed to raise capital even in the middle of an unprecedented global crisis. But this also indicates that startups will increasingly seek to justify cost against output and scrutinise employee performance intensely, say HR experts. Which essentially means there will be high demand to retain and reward good talent.

Interestingly, around 66% of the unicorns and soonicorns that responded to Inc42, ascertained 11-20% salary hikes for their employees. And a little over 16% reported more than 20% salary increase. According to Banerjee of Teamlease.com, the hikes rolled out across the startup ecosystem range anywhere between 10 and 12% on average. “We also see a trend of 8-10% salary hikes across funded unicorns. Moreover, several companies that implemented pay cuts last year have now reversed those mandates. Finally, the demand for good techies is high, and they are commanding up to 30% hikes this year,” he adds.

Much like the IT giants mentioned before, some startups such as the fintech platform BharatPe have also rolled out hikes despite challenges during FY21 to compensate for the appraisals put on hold the previous year. 

One thing is certain, though. Unlike last year when companies were trying to lose some of the extra baggage and reduce their employee pool to control costs, startups are not holding back on increments this year in a bid to tap and retain the best industry talent. 

While funded startups are not holding back on salary hikes and hiring, the employee stock option plan, or ESOP, has also emerged as a widespread practice among big corporate houses and startups, especially during the Covid-19 pandemic. Essentially a kind of employee benefit/profit-sharing plan, ESOPs are often leveraged to retain or reward employees and further ensure tax benefits for companies and their owners.

ESOPs help reduce cash burn rates in bootstrapped or early-stage companies where capital is scarce. And the same goes for growth-stage or mid-stage venture capital-backed companies as ESOPs ensure both long- and short-term benefits for all stakeholders within the ecosystem if a big sale happens or a funding or an M&A deal goes through. 

ESOPs typically make up the bulk of a startup employee’s net worth. It can be 20-30% of an employee’s net worth if he/she has joined the company in the later stages. However, it can be as high as 40-50% for early-stage employees. But here is a catch. During layoffs, employees may find their ESOPs voided without recourse. Even then, when companies were struggling to pay employees last year, many turned to ESOPs as a measure to boost employee sentiments.

“ESOPs linked to performance continue to be attractive for startups. But for three years now, we have also seen a higher trend regarding performance-linked bonuses. More importantly, employers are focussing more on retention by accommodating work from home (WFH) requirements, more relaxation and family time,” says Banerjee.

Given these trends, it is not surprising that more than 90% of the respondents have told Inc42 that they are offering ESOPs to their employees. Bengaluru-based SaaS company Zetwerk says that the pandemic has not impacted its ESOP policy, and it will continue to offer ESOPs to new hires and also as a performance incentive. Companies like the online broking platform Zerodha are also using this option as an employee motivation tool for anyone who has been with the firm for more than 12 months. In fact, social commerce platform Meesho has reported higher ESOP allotments in FY21 compared to FY20. But ESOPs are not the only magic key that can guarantee talent retention.

Why Retention Is Crucial Right Now

Why is retention particularly important now? Because technical talent is in high demand across the startup and tech ecosystem and businesses are ready to pay a good price. In fact, technically skilled employees with two-five years of experience are in maximum demand, notes Banerjee.

“Hiring technical resources with three-seven years of experience is always a challenge irrespective of the current pandemic. It was also difficult to hire tech talent during the pandemic as most of them were expecting to apply to industries that were not heavily impacted by Covid-19,” says Babu Vittal, Head, HR, at Vedantu, a Bengaluru-based edtech startup.

Mohammad Saqib, senior director (people operations) at the San Francisco-based healthcare unicorn Innovaccer, says that although the ongoing pandemic has made traditional hiring difficult, it has enabled the company to recruit people from across the nation without having them leave their cities and hometowns. “Undeniably, this shift has made hiring the right talent slightly easier. On the flip side, retaining talent has become more complex. In fact, retaining less-experienced employees has been more challenging than retaining people with more than five years of experience,” he says. 

Talent In 2021

The previous year created an upheaval in the hiring ecosystem. Many experienced professionals suddenly found themselves jobless and almost an entire batch of freshers had nowhere to go as startups freezed hiring. At the same time, the availability of a lot of low-experience roles, due to layoffs after the first Covid wave and demand for fresh talent post funding, made it difficult to hold on to junior employees.

According to a TeamLease report titled Employment Outlook Report and covering the period of April-June, 2021, if further lockdown-related guidelines and workplace operating rules are not enforced, the intent to hire in the current quarter (April-June 2021) may rise by 7% over the previous quarter (Jan-March 2021). Out of the 21 sectors reviewed by TeamLease, more than eight sectors will witness a 9-11% rise in their intent to hire in the current quarter.

The report says that healthcare and pharmaceuticals, educational services, ecommerce and technology startups are the key sectors that are likely to ramp up their talent pool. Also, much like their IT peers, startups have realised that proper training and reskilling will reap benefits irrespective of whether the recruits come from premier colleges or institutions located in Tier 2 or Tier 3 cities. 

With better job opportunities available, there will also be higher requirements for performance, and employees must be prepared for that. But as the pandemic scenario changes rapidly, employers will be looking at more ways to care for their existing employee base before making new hiring decisions, caution experts. Stay tuned for our coverage on how startup employees are dealing with the impact of another round of work from home mandates and efforts that companies are taking to attract the next talent.