Staying competitive by transferring pay risks through performance-based compensation

MY interest in performance-based compensation in Sri Lanka heightened when combating the trickle-down effects of the Global Financial Crisis of 2008 and the end of the civil war in 2009.

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The conclusion of Sri Lanka’s civil war in May 2009 ushered in an era of optimism, excitement, and perceived stability. There was great anticipation of a boom in several key sectors, particularly the Tourism Industry. Businesses that had taken risks and weathered the conflict, operating in a sheltered market with limited competition, had enjoyed super profits. This prosperity, coupled with the Government’s push for postwar development, signalled a ripe opportunity for new entrants, both local entrepreneurs and powerful players of global repute.

The rapid influx of these new entrants fundamentally reshaped the competitive landscape. What followed was a classic case of supply outpacing demand growth, especially in industries directly benefiting from the peace dividend. The increased market presence meant that firms were no longer able to command premium prices unless they had significant, non-replicable barriers to entry such as legal protection where patents or copyrights secured temporary monopoly rights, extreme economies of scale that made it cost-prohibitive for a second firm to enter (e.g., utility infrastructure), network effects where the value of the product increased exponentially with each new user (e.g., social platforms), brand dominance that promised consistently reliable services/products or control of key resources through exclusive access to rare raw materials or proprietary technologies. In the absence of such an unassailable competitive advantage, the competitive focus quickly shifted, and firms found themselves competing on price.