When salaries grow faster than the income of companies

• In the construction sector, the CAGR of staff costs was 44% against total income growth rate of 39% between 2004-05 and 2008-09.

• The CAGR of staff costs of IT companies was 34% against total income growth of 32% during the same period.

• For refineries, the CAGR of staff costs was 27% against total income growth of 23% in the same period.

In other words, salaries in these sectors increased at a faster rate than the income of the companies in the given period. The salary expenses in sectors like aluminium, transport and power also grew at a faster rate than their total income, according to an analysis of 2,504 listed companies between 2004-05 and 2008-09 by the FE Research Bureau.

The study also found out that salary expenses in sectors like tyre, shipping, banks, textiles, automobiles & ancillaries didn?t keep pace with the rise in income. For example, the CAGR in staff cost of tea companies was 4.6% against 6% growth in the total income during the study period.

But at an aggregate level, while the net income grew 21%, the CAGR of salaries was 20%. Interestingly, the ratio of staff cost to total income went down from 6.55% in 2004-05 to 6.22% in 2008-09. The ratio was 6.31% in 2006-07.

Harish Menon, executive director, H-Zone Capital, a market consultancy firm, attributes the trend of a more than proportionate rise in the salaries of employees in certain sectors to the persistent demand for quality workforce to augment capacities.

The rise in salary expenses of companies was to retain talent at a time when companies were on a rapid expansion spree. For example, rising attrition in talent-scarce and emerging sectors like retail saw a dearth of experienced people and companies were increasing their bench strength in the anticipation of exponential growth in business based on various projections.

D R Dogra, deputy managing director, Care Ratings, a credit rating agency, elaborates that the staff costs of certain sectors increased because they were trying to reduce the employee attrition and increase their headcount to meet growing business needs.

The construction sector takes the cake as far as rising salaries are concerned because of aggressive expansion of infrastructure projects by the government, particularly in road building and housing. In fact, the share of staff costs to total income of construction companies increased from 4.49% in 2004-05 to 5.21% in 2008-09.

Construction companies are still looking for talented people because of the government?s increased focus on infrastructure and healthy order books.

Indian infrastructure and construction companies are even foraying abroad. For example, Punj Lloyd is working across 32 countries including Australia and Britain. Since they employ locals, it costs them more. Says Sidharath Tuli, president, HR, Punj Lloyd, ?We employ local manpower at our global sites and train them to empower them for future opportunities.?

It?s not just the construction sector, but even related industries like steel and cement have registered higher growth in salaries. The ratio of staff costs to total income of steel companies in the FE sample increased from 7% in 2004-05 to 8% in 2008-09. The magnitude of the increase in staff costs can be judged by the figures of SAIL and Tata Steel, which showed 120% and 64% increase in staff costs, respectively. In contrast, the total income of these two companies increased 58% and 68%, respectively. Also, employee costs are more fixed in nature whereas product prices are volatile in the steel industry leading to year-on-year variations in the ratio of staff costs to total income.

In fact, even hiring is picking up in infrastructure. Says industry leader B D Mundhra, chairman, Simplex Infrastructures, ?Since the country has to develop, construction will take place. So, recruitment will follow.?

It?s corroborated by K Pandia Rajan, MD, Mafoi Management Consultants, ?In the infrastructure space, the net additional growth in hiring will be higher than last year.?

Power is another sector, where employee costs have gone up during the last five years. The CAGR of the total income of power companies was 16% against CAGR of 24% of staff spends.

With the entry of a number of private companies in the power sector, the ratio of staff costs to the total income has shown a rise in the past five years. The increase in staff costs can be gauged by the figures of Reliance Infrastructure and Tata Power, which logged 131% and 88% increase, respectively.

The IT sector still retains its premium position in salary growth. It grew 34% against total income growth of 32% compounded annually from 2004-05 to 2008-09. For example, the magnitude of increase in staff costs can be witnessed in companies like Infosys Technologies and Wipro, which registered a rise of 213% and 221%, respectively. On the other hand, the total income for these two companies increased 195% and 193%, respectively.

Ajit Isaac, MD and CEO, Ikya Human Capital Solutions, a talent-consulting firm, says, ?Even during the slowdown, IT companies are giving modest increments to their employees to keep their morale high. It could also be shooting up staff costs.”

Hiring too is picking up. Says Rajan of Mafoi, ?IT companies are looking at the domestic market for business. It?s not surprising to see hiring picking up, but it will be lesser than last year.”

Refineries are also following a similar trend. Particularly since the government of India has placed increased focus on oil exploration. Since refining companies need to invest in trained technicians, it has contributed to higher costs for these companies. Also, with a lot of private companies entering into the exploration activities, the demand for qualified manpower has increased leading to a competition-led hike in the employee salaries.

The refineries also followed a similar trend. While the staff cost CAGR was 27.1%, the total income recorded a CAGR of 23.1%. The magnitude of increase in staff costs can be judged by the figures of Reliance Industries, which increased by 178%. The total income increased by 120%.

While some increases in employee cost are inevitable when the industry is in an expansion mode, it would be interesting to see whether the upward trend in salary expenses continues in these sectors now.