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Competitive compensation is fast becoming a strategic differentiator as organizations navigate talent scarcity, evolving workforce expectations and rapid technological change. In this episode of EY India Insights podcast, we explore how compensation models are evolving from role‑based structures to skill‑led, performance‑driven and data‑enabled rewards frameworks. Join us in conversation with Abhishek Sen, Partner, People Consulting, EY India as he shares insights on the forces reshaping compensation, the growing importance of transparency and equity, and how leaders can balance cost discipline with the need to attract, retain and motivate critical talent. The conversation also examines the role of AI, long‑term incentives and ESG metrics in building future‑ready compensation strategies.
Key takeaways
Compensation is shifting from role-based structures to skill-led, performance-driven and data-enabled models aligned to evolving business and talent realities.
Employee expectations have moved beyond increments toward fairness, transparency, career growth, flexibility and personalized total rewards.
AI is transforming compensation decision-making by enabling sharper differentiation, targeted skill premiums and defensible allocation of reward capital.
Long-term incentives, including ESOPs and RSUs, are becoming strategic tools for retention, performance alignment and employee wealth creation.
Future-ready compensation strategies will be built on skills, data, ESG integration and regulatory readiness as competitive advantages.
Organizations are building robust skill architectures to align rewards with outcomes, shifting compensation away from fixed pay toward measurable business impact.
Abhishek Sen
Partner, People Consulting, EY India
For your convenience, a full text transcript of this podcast is available on the link below:
Welcome to EY India Insights podcast. In this episode, we explore how competitive compensation is reshaping the future of pay and why it has become a strategic priority for organizations today.
Thank you so much Abhishek for joining us today, and a very warm welcome to you.
Abhishek
Thank you, Pallavi.
Pallavi
What are the key forces reshaping compensation today and how are organizations moving beyond the traditional pay models towards skill-based, performance-linked and data-driven compensation strategies?
Abhishek
Pay models, which worked for decades, are no longer fit for today's talent and business realities – that is the first thing that we need to accept. Compensation is being reshaped not by one force, but by a convergence of three forces. One is economic pressure, second is workforce transformation, and third is technological acceleration.
India's talent landscape in 2026 reflects a structural shift from role-based pay to skill-based pay – from uniform increments to more intentional differentiation, from annual cycles to continuous collaboration, and from policy-driven pay to strategic rewards.
What is happening today is more related to what I would call the five converging forces:
Globalization and remote work: Today, organizations are increasingly setting up their shops in India as Global Capability Centers (GCCs). 63% of GCCs hire for niche skills; cross-border hiring has significantly increased with above market pay premiums. India is at the center of this globalization wave. Also, new ways of working such as remote working is increasingly becoming prevalent.
Talent shortage: India has always had a demand and supply mismatch of good, employable, skilled talent in the market, because of which premiums have existed in the way compensation is managed. Take emerging tech roles, for example. They can command 40% to 50% skill-based premiums in some cases.
Gen Z and millennials: The Indian workforce is now predominantly Gen Z, millennials and soon Gen Alpha, where their expectations, their cultural alignment is more towards pay transparency, faster growth, flexibility, and continuous feedback. This generation evaluates organizations not just on how much they pay, but how fair, transparent, and meaningful those decisions are. So, pay transparency becomes an extremely powerful factor.
Inflation: Today, everybody looks at cost of living because the country is primarily centered around Tier 1 or Tier 2 cities where cost of living is constantly going up. Employees now view increments less as a reward and more as a protection against lifestyle erosion.
Use of AI: 50% or 60% of large firms are using state-of-the-art AI for compensation planning. So, pay equity, skill mapping, attrition dashboards are now becoming mainstream, and because of these data-driven decisions, organizations now have more flexibility to look at skill-based pay, to look at more customized total rewards across different genres of employees, to make it as impactful as possible.
Earlier, organizations had one budget, which was split based on performance, rating, and market demand. But today, they can set aside budgets by type of worker, type of skill, demand from various parts of the business and so on. This is happening from a decision framework standpoint, where the skill capital is what we need to create first. Most organizations are focusing on building the entire skill, taxonomy, skill infrastructure, job architecture and basis that they are aligning the rewards architecture of the organization. What I also see is a huge focus on outcome-linked rewards that tie compensation to measurable business results, instead of keeping it very generic and focusing more on fixed pay.
In the last three to four years, organizations have moved towards skill-based pay and performance-based pay, and that trend will continue. But there are new areas of rewards that are emerging in small pockets like lifecycle-based rewards, ESG-linked rewards frameworks, especially at the top management level, where you will start seeing rewards getting tailored to either career stages, life stages, or even ESG-linked parameters.
So, a lot is happening in the rewards space, which is following the entire talent evolution in the country. I believe keeping skill at the center of that is what organizations will need to look to.
Pallavi
With salary increments stabilizing, how are employee expectations around pay evolving, especially in terms of transparency, equity, flexibility, non-monetary benefits, and personalized rewards and how organizations should respond to the same?
Abhishek
Salary increments, as per our latest ‘Future of pay’ report, have stabilized around 9.1% projected for 2026, down from 9.6% in 2024. But what is critical is that while increments are moderated, employee expectations are not. The conversation has fundamentally shifted from how much more I will get to how fairly I am being treated; how transparent is the process of deciding someone's pay, and what is the total value I am receiving?
Because at the end of the day, when we look at 9.6% or 9.1% – these numbers are mostly alluding to total cash compensation or fixed compensation and not necessarily benefits or even long-term incentives that a lot of organizations have started adopting, like ESOPs and so on.
So, what is the total value that I am receiving from an organization from a total rewards standpoint is now becoming more prevalent. From transparency standpoint, because of the shift in the mix of employees in the workforce with more Gen Z and millennials coming in, they expect visibility into pay bands and progression criteria. Organizations are responding by increasing transparency around pay structures. The shift is – trust us, we pay fairly to – here is the data; decide for yourself how fair we are. That is slowly and steadily becoming prevalent in India.
Pay equity has shifted from internal equity being the number two driver of attrition to number five. But this is not because it matters less. It is because recent pay corrections have addressed the most glaring gaps. But the perceived fairness continues to influence retention decisions significantly. What is driving voluntary attrition now, the top five drivers that we have understood from our research have reshuffled significantly from the past.
Limited growth opportunities has become number one, up from number four. Career acceleration and role mobility now outweigh pay increases. External compensation inequity has shifted to number two from number one. And leadership effectiveness has emerged as a key driver, which essentially means poor managerial support, lack of development conversations are increasingly prompting more and more exits.
Work environment as a whole, be it flexibility, culture, leadership, wellbeing, expectations is now a critical lever in retention of critical talent. That is how the entire attrition narrative is changing. If we look at attrition statistics, for example, overall attrition moved from 17.5% in 2024 to 16.4% in 2025; voluntary attrition accounted for 80% of the total exits. If we look at the industry cut, financial services remains the highest at about 24%; GCCs demonstrate structural stability at about 14.1%. But the cost of attrition has doubled to approximately 2X annual salary for every person lost. It is becoming a very, very sensitive and a very competitive talent market.
It is important that we look at the factors, the five drivers I just spoke about, to maintain healthy attrition, but not to lose critical talent in the process because it becomes very expensive to retain and to replace such people.
The next point that I wanted to highlight in this area was the benefits personalization journey. It is no longer just about cash, but the data that we are seeing is compelling; 78% of employees across organizations we have surveyed have now started preferring personalized benefits. 92% of employers now offer mental health support – that number will soon touch 100.
Employers are offering flexible benefits, where they are ensuring much larger satisfaction by making sure that benefits are tailored for, specific life cycle, specific career stage, and that is becoming a lot more acceptable to this mixed workforce population that we have.
We are moving more towards a catalogue-style benefits model than the one-size-fits- all model that used to be. Just to give you an example, a 25-year-old may prioritize learning while a 40-year-old may prioritize childcare. So, how do you provide this balance; make sure that the 40-year-old and the 25-year-old get what they want needs a lot of flexibility in your benefits plans and that is slowly coming into the total rewards, workforce and rewards strategy.
The other element which I spoke about was hybrid work, which is now becoming a reality, Hybrid work has shifted from a pandemic response to a permanent operating model; 52% to 53% of organizations have already adopted hybrid models. More than 50% of employees are willing to leave roles without flexible options because the demand for good talent continues and 68% of employees are affected by return-to-office mandates are saying that they do not want to go back to office because of multiple reasons – it could be because of city commute, it could be the bulking population within office spaces or home responsibilities that some of these individuals have taken on.
Also, it is truly becoming a productivity question. With technological advancement, people are becoming more productive at home. So, how do you balance that? It is not just about attendance, but about your productivity impact and delivery that you can create in a hybrid environment, which is a very important total rewards concept and is very critical to hiring and retaining critical talent.
In a nutshell, transparency, how organizations look at attrition drivers, benefits personalization, and new ways of working, etc. – are going to drive the future, and that is how organizations are responding to employee expectations.
Pallavi
How can leaders balance cost discipline with the need to attract, retain and motivate high impact talent, including the growing use of long-term incentive incentives, variable pay and AI-enabled compensation decision making?
Abhishek
This is the most pressing question for CHROs and CEOs today. The answer lies in shifting from spending more to spending smarter. In 2026, organizations are holding salary budgets steady, whilst sharpening differentiation while the number remains around the 9% mark. The differentiation has become very stark; people with the right skills and the right performance become dear to the organization and hence get more focus from a rewards standpoint than others. Organizations are focusing on reskilling. Thus, employees who are reskilling themselves to become more relevant for the company's future are going to get disproportionate rewards compared to the others.
Therefore, organizations and their HR departments are deploying very targeted pay correction, skill premiums and performance-led rewards to balance competitiveness with cost discipline. Additionally, performance-based pay differentiation has been around for some time, but it is becoming more evident. Previously, when an outstanding performer used to receive anywhere between say 1 to 1.2 times compensation hike that of an average performer, it is now likely to be 1.6/1.7 or even double of the increment that an average performer gets.
So, there is stark differentiation in the way performance defines compensation hikes at the end of the year in merit cycles. On the other hand, average variable pay as a percentage of fixed pay used to be at about 14% in 2024 to now almost 16% in 2025, which signals a deliberate shift towards higher risk pay. If you look at our entire corporate population, 14.8% to 16.1% is a very stark movement, and with the billions that add up in terms of compensation cost across Indian corporates, this is a significant value set aside for variable pay.
Payout dispersion also widely vary; a top performer earns between 120% to 150% of target, while average performers earns 60% to 80% - the difference is almost double in terms of variable pay. So, performance-based differentiation is here to stay and is increasingly becoming sharper.
Long-term incentive has had a strategic evolution. From the days of Infosys when ESOP was a new thing to the startup revolution, which created many millionaires, what is here to stay is the construct of wealth creation among employees. Be it on the basis of retention or performance, long-term incentive design has now become more strategic. In 2024, plans were predominantly retention-led, but in 2025, we see a balanced focus on performance alignment, wealth creation and shareholder alignment, and in the way they design long-term incentive.
So, while ESOP continues to be a strong instrument in the way long term incentives are built and deployed in India, there is an increasing adoption of performance-based ESOPs or even Restricted Stock Units (RSUs) being brought in as equity-based instruments to create wealth and to reward employees.
Based on our survey, we realized that while ESOPs to be 78% prevalent in 2025, RSUs have maintained at about 15% to 16%. About 35% of organizations are deploying one-term retention or Sign-on-LTI grants, outside of regular award cycles to secure critical talent or in M&A or leadership transition situations. So, equity-based pay is becoming more prevalent year on year.
In the executive compensation space,we noticed a substantial year-on-year increase from 12% to 15%. The structure reveals that there is a compression on fixed compensation; it is moving from the ratio of or the pay mix. The fixed compensation for CEOs and CXOs is dropping from 30% to 25%, short-term incentives are moving to 30- 35%, and the remaining is under long-term incentives, which is 50%, so they have more skin in the game. Pay at risk, if I look at long and short-term incentives is 70% plus for CXOs and that is moving in the right direction from a governance standpoint. This is a fresh look at executive pay in this country.
Finally, on the point of AI-enabled competition decision making, there are a few myths that need to be busted. AI is not reducing rewards pain; it is forcing organizations to be more selective, dynamic and defensible in how reward capital is allocated. So, for every rupee spent on rewards, AI is able to compute the ROI on it in a much more efficient manner. It has moved from just being a pilot on analytics to an everyday use.
Today, a large part of AI in compensation is becoming more prevalent around decision making. This includes areas such as budget allocation, compensation structures, impact of Labour Codes, 2025 on rewards, compensation structures, cash-in-hand for employees, and various other regulatory elements.
AI helps build working models, which are optimal around Labour Codes much faster – this is another big trend we see emerging in the market. But having said that, the challenge is that reward systems are today lagging AI-enabled work models because there is still a lot of static, and a lot of lag indicator-based reward strategies in play in the market. This may change but is still fairly prevalent.
For example, annual cycles is still a prevalent market trend. But skill-based pay, looking forward into the future with respect to what skills are going to replace current jobs, and hence how should I draft at my rewards strategy – these are still restricted to a few industries such as the technology industry. The true use of AI in defining how we should pay for skills that are going to replace our current skills is still distant, at this point in time.
In a nutshell, leaders are looking at balancing cost discipline and new-age thinking.
Pallavi
What does a future ready compensation strategy looks like, particularly as AI and digital skills command premiums, analytics shape career progression and ESG and performance metrics influence executive and workforce pay?
Abhishek
In 2026 and beyond, future ready compensation strategy will be built on four broad pillars:
Skills as the new currency: I spoke about it and I cannot speak enough on the importance of building a skill-based architecture and skill becoming the new currency.
Data as the decision engine: As organizations mature and start building better data structures and use that data and good AI models to take better decisions using the data, that is what the future holds for us, even in terms of total rewards.
ESG: ESG is becoming a governance imperative. If compensation and total rewards do not have the flavor of ESG, it is not future proof. So, ESG as a governance imperative is certainly a big feature in a future ready compensation strategy.
Regulatory readiness as a competitive advantage: As we know, regulators are changing laws and codes, which can impact compensation, total rewards in various facets. There are a variety of regulatory inputs that can impact the strategy. Anybody who is regulatory-ready as a compensation strategy will gain competitive advantage over the others.
I will elaborate on each of them. Take skill-based pay, for example. Organizations are operationalizing skill-based pay in a few ways - skill taxonomies are being embedded into the job architecture; there is frequent recalibration, which means that skill premiums are now reviewed fairly regularly to assess if the skill is still relevant or deserves a premium. Also, there is strong governance and transparency with clear eligibility criteria, sunset clauses and audit mechanisms. So, skilling does not mean that we identify skills one off; it is also about refreshing the skill and enabling people to fill the gaps using the right learning and also get incentive with the right kind of premium. It is a powerful flywheel that will provide the organization with the power of skills to keep growing in the future and to keep building competitive advantage.
And the premium landscape is clear. Generative AI, ML, advanced analytics are now attracting 40% to 50% premium on base skills. Banking and financial services provide above market premium for cybersecurity, high risk data governance, cloud architecture, platform engineering and so on. So, skills are evolving and skill-based pay is not only here to stay, but also fast replacing traditional models.
The other point is ESG, which is hot topic right now. ESG was always regulated and has a lot of implications on the organization and its profitability, and how it is seen by regulators. But the rewards element has now started entering that conversation in a big way. ESG integration in pay, especially with large Indian and global organization, comes in the form of embedding ESG metrics into executive incentives, including top leadership incentives and pay structures. Typically, we have seen that the long-term incentives that are given to top executives, of that 5% to 20% of weightage comes from ESG metrics. This is a bold and deliberated move towards creating ESG outcomes. Over a period of time, especially the social dimension, pay equity, fair wage practices, gender representation will start factoring into weightages even for CXO minus one roles, and these are all connected to ESG outcomes. So, this is an area worth watching out for.
Next is Labour Codes. Most organizations are going through this transformation as we speak, but the new Labour Codes represent a fundamental restructuring of the compensation framework, where the construct of wages, inclusions and exclusions, where exclusions are capped at 50% has a huge impact on how you look at retirement liabilities like increases PF, gratuity, bonus and leave encashment. It has completely affected the way organizations do full and final settlements at the end of the year for individuals and shaken up the foundation of corporate rewards in India. However, it is moving in the right direction and with the right spirit in mind and over the next two to four months, we will get more clarity. But this regulatory catalyst is another wake up call for the total rewards professionals in the country as it impacts how we look at salary structures, auditability of salary structures, cost impact of PF and gratuity, update payroll system with the new calculations, and develop employee communication because employees are the most confused right now. Additionally, tracking state-wise notifications for multi state compliance for large organizations is going to be an important factor for total rewards teams everywhere.
The next factor is diversity and inclusion, from a rewards imperative is also becoming critical. In 2026, we see a huge focus on shifting value initiatives around LGBTQ plus inclusion, gender diversity in pay, age and generational diversity in pay, and how there are new audit structures that are coming into play to check for pay equity and inclusion in the total rewards strategy, which is going to even decide EVP of an organization.
And this is a very measurable metric, but it is coming to force in India. And finally, I think the CHRO action agenda that I want to leave everyone with is that leaders need to do the following, pronto. They should look at the Labour Codes restructuring impact, and they should assess the risks that they carry from Labour Codes standpoint, as of yesterday.
Second, align the board and the CFO in the direction of total rewards strategy over the next few years and even prepare employees from systems and process standpoint. From a medium-term strategy standpoint, focus should be on integrating total rewards design, variable pay, benefits optimization ,and protecting critical talent through targeted interventions.
Like I said, the budgets will not change, but how do organizations structure their budgets, how they outlay that budget for various purposes needs to change by the CHRO along with the CXOs. Finally, organizations must shift towards skill-based pay structures and invest in an AI-ready workforce, especially with jobs changing rapidly because of AI and building compensation frameworks that attract and retain AI skilled talent while preparing for a two-tiered organization – the one with digital and human workers.
Pallavi
Thank you, Abhishek. That brings us to the end of this episode of EY India Insights. Thank you so much for joining us and spending your time sharing all the valuable insights on the changing dynamics of competitive compensation.
Abhishek
Thank you, Pallavi.
Pallavi
To all our listeners, thank you for listening. Stay tuned for more conversations on the trends shaping the future of work and business. Until next time, this is Pallavi, signing off.
Strategic HR Transformation team at EY specializes in HR management, consulting & strategy—evolving HR into a human value activator that drives innovation.
EY India delivers people advisory tax services to manage mobility, compliance, and workforce transformation across global markets and evolving regulations.
