TCS breaks The ESOP myth

Written by Sudhir Chowdhary | Rachana Khanzode | Updated: Aug 3 2010, 02:25am hrs
In the high attrition-marred Indian IT industry, manpower retention is a key challenge for the managements of various technology companies. Disenchantment of any sorts can tempt their army of techies to seek greener pastures and the present industry attrition levels of 15-18% is an indication of the challenge they face. Not surprising, IT firms have periodically dangled employee stock option plans (ESOP) as a key incentive to keep their flock together.

Curiously, Tata Consultancy Services (TCS), Indias largest IT services firm, has defied the trend. Not only has the countrys largest software exporter broken the ESOP myth by retaining its employee base by not using it, it has also set itself on a high growth trajectory. On the manpower front for instance, it plans to hire around 40,000 employees this financial year. At the end of Q1 FY11, the total employee strength of the company was 1,63,700. Foreign nationals formed 7.2% of the total employee base and 31% were women.

During the last financial year, TCS saw an attrition of 11.8%, while during the first quarter of the financial year 2011, it reported an attrition rate of 13.1%. During the same quarter, Infosys Technologies reported an attrition rate of 15.8%. Wipro too, that uses ESOPs as a lever to retain employees, reported 15.8% attrition rate in the first quarter and 23% as annualised attrition rate.

Attrition levels in the IT industry presently hover between 15-18%.

It is important to take a holistic view of the prevalent trends in the industry for a sound understanding of TCS no show on the ESOP front. With the global economy reviving, tech firms have started witnessing a momentum in their volume growth. However, the sudden surge in demand from the clients over the last few months has taken a toll on the tech companies, who now struggle to retain their employee base. Over all the industry attrition is now expected to have touched about 15-18%.

Interestingly, it was not even a year back when the IT firms were struggling, even to maintain the huge employee base they had built during the hay days. The year 2008 and 2009 saw increased involuntary attrition and no wage hikes. Tech firms did wave off the frills that technology engineers were used to, especially at the clients onsite locations.

However, with volumes picking up and clients expecting an immediate delivery, having a right employee base has become an increasing concern amongst tech companies. While most of these firms have taken up various ways of retaining employees, using ESOP has been a lever used by most.

And this is where TCS stands apart from the rest of the crowd. Though Infosys too, has stopped giving out ESOPs during the last few years, it unwrapped a gift for staffers to mark its entry into its 30th year of operations last month wherein, each of the 1,13,000 employees got five free shares plus an additional share for each year they have put in with the company.

Is there a specific reason as to why TCS has desisted from giving out ESOP to its employees Ajoy Mukherjee, vice-president, head, global human resources, TCS, says, From the very beginning, we had decided that we will not use ESOP as a lever to retain employees. At that point in time, we took a view of the pros and cons of giving out ESOPs to employees and we realised that variable pay was a better option.

According to Mukherjee, most employees preferred taking cash in hand that was linked to the companys performance rather than ESOPs. The ESOPs are market-driven. So when an employee might want to exercise its options, it may not get the benefit as expected. For its 1,63,700 employee base, TCS now gives out variable pay linked to the companys performance.

In the recent annual report for the year 2009-10, TCS CEO and managing director N Chandrasekaran remarked: Given the volatile economic environment at the beginning of 2009-10, there was no annual increment for employees but as the business recovered from the second quarter onwards, employees were rewarded with quarterly variable payouts of between 125-150% and promotions.

Gaurav Gupta, country head of consulting and research firm Everest Group, says, One of the reasons why TCS has not given ESOPs to its employees could be because it has been a privately-held IT company for a long time. And by not giving out such monetary incentives, the company has also lost out on talent in the past.

Nevertheless, TCS is a unique case of not giving out stock option plan to its employees, especially when ESOP was high on the priority list of IT firms just a couple of years back, he informs. TCS has always invest ahead of demandin terms of solutions, manpower and markets. For example, it is way ahead of other Indian IT firms in China. Even in India, TCS is doing pioneering work in the government sector.

Like its peers in the IT industry, TCS too gave out wage hikes during the first quarter which was about 10-13% to offshore employees and 2-3% to its onsite employees. However, during the year when its employees did not get any wage hike, the combined pay package of the directors on board at TCS shot up by about 25% during 2009-10. The total pay package of its top management personnel and directors on board increased by over Rs 2.24 crore during the said period. The total remuneration of its key management personnel and board members during FY 2009-10 was Rs 16 crore as compared to Rs 12.80 crore in FY 2008-09.

Responding to a shareholders concern over the hikes given to the directors, in the recently held annual general meeting, the companys chairman Ratan Tata said, The top management are people who drive the revenues of the company and they need to be rewarded in a better way. TCS believes in honouring the people who bring in its wealth.

Harit Shah, research analyst (IT and telecom), Karvy Stock Broking, says, ESOPs or no ESOPs, attrition levels will remain in the IT industry, especially when it is on a high growth trajectory. Besides, ESOP is not the only lever to hold employees back. Brand visibility of the employer in the market place, the client list it commands, working environment it gives to its employees along with the career growth prospects are key to retain employees. On all these parameters, TCS seems to score high on the charts.

However, at a broad level, analysts feel that generally ESOPs are used to retain employees for a longer duration. With the variable pay format, TCS could miss out an opportunity to retain talent for a long term. This would in turn mean higher employee costs that would include cost of hiring new talent and training as well.

TCS generally gives a training of about three months before taking an employee on board. Some analysts are also of the view that TCS is not a good payer as compared to its peers and generally it is the culture that hooks an employee to the company. Noticeably in the last quarter, TCS has not been able to attract a lot of talent. Of the 10,849 offers it made in the first quarter, the firm had a net addition of only 3,271 employees. It has now increased its overall hiring requirements to 40,000 for the year from earlier 30,000.

TCS recently set up a Resource Management Group (RMG) that would work towards various retention initiatives. Mukherjee feels the strengthening of the firms people management and training would improve its retention levels. The company plans to bring in rotation of employees for on-site locations.

With the decrease in on-site opportunities, we intend to do rotation of employees so that more people get a chance to be at the clients location, says Mukherjee. There has to be a stress on aspirations and we have to ensure that business and HR works together to do that. The industry at the moment is witnessing the experienced band of about 3-6 years contributing to the majority of the attrition rate.

The RMG will also identify individuals that are keen on having newer challenging jobs. The experienced employees have different aspirations and wage is not necessarily a reason for an employee to move out. For the IT industry, it is increasingly becoming an aspect of having a challenging job. And so, we would want to retain such employees by moving them to such projects, says Mukherjee.

TCS also intends to translate a number of freebies into beneficial spends like increase in premium of health insurance and extra hospital coverage. Though, the company isnt keen on looking at a second round of wage hike, it might look at paying additional variable component, if the company continues to perform better.