scorecardresearch

Margin erosion: Why IT companies should think beyond variable pay cut

Attrition is super high for the IT sector. And variable pay cuts can exacerbate the drop-out rates.

Margin erosion: Why IT companies should think beyond variable pay cut
For IT companies, any cut in their employee’s salary can only be the last ditch effort to stay cost-competitive.

By Priyadarshi Nanu Pany

The recent reports of some large-cap Indian IT companies either deducting or delaying variable pay for their employees have triggered some concerns about how the future will pan out for the ecosystem. IT companies are facing varied global headwinds that have exerted pressure on their profit margins. The conditioned reflex for most of the biggies in the country’s $200 billion software industry is to prune a portion of the employee’s compensation. This is viewed as a compassionate step for employee retention as opposed to crude layoffs. The scenario is unlike US where the big corporations have either fired employees for mediocre performance or are planning to retrench them. By contrast, the six-million Indian IT workforce is not under the purview of labour laws. In fact, IT companies have held a vocal position that since their work pool is highly qualified and well paid, they don’t fall under the provisions of Industrial Disputes Act.

Market watchers believe that the EBIT (earnings before interest and taxes) margin of IT services companies will be under stress due to rising wage revision, travel expenses and higher retention costs. Infosys’ operating margins in the June quarter were at 20%, a drop of 150 basis points (or 1.5 per cent) compared to the previous quarter. Wipro’s Q1 operating margins, too, were lower at 15%. For Tier-I companies, operating margins have slumped to below pre-Covid levels. In its sample set of 13 major listed IT companies, rating firm ICRA has predicted revenues to moderate.

Also Read: Indian IT firms cut staff bonuses as U.S, European clients tighten budgets

The global macro climate is turning inclement for Indian IT vendors to operate. The US is battling runaway inflation. Plus, there are lurking fears of inflation in the US and the Euro Zone. A slowdown in the two largest overseas markets could mean clients tightening spends. And, Indian IT firms face a challenge to recalibrate their costs to stay competitive and continue turning profits in a changing landscape.

However, slashing performance-based incentives can dampen the spirits of talented folks. Attrition is super high for the IT sector. And variable pay cuts can exacerbate the drop-out rates. While it’s true that higher costs of acquiring talent have crimped margins, cutting variable pay can induce resentment from the employees. It’s only a piecemeal solution. The gap in the supply of digital talent is real and it will not peter out anytime sooner. Nor will the crisis at the macro level.

It’s amply known that employee salaries account for around 50 per cent of costs for IT services firms. For IT companies, any cut in their employee’s salary can only be the last ditch effort to stay cost-competitive. We all know how critical talent is to the booming success of the IT ecosystem. And quality digital talent continues to be in short supply. Black Swan events like the Covid pandemic wrecked economies. But they also brought in windfall gains for the IT industry. The sector is propelling the digital transformation drive for enterprises. It’s possible because of the talented folks with skills in crafting emerging technology solutions.

Also Read: Infosys joins other IT majors in cutting or deferring variable pay

But when the talking point is largely centered on variable pay cut, IT services firms can tackle it from a different angle. I have been a tech entrepreneur for over 24 years. But I have never been a votary of variable pay. I believe it’s a complex component of the salary structure which hardly sinks in with all employees. The scope and implications of variable pay are best grasped by the guys managing finances. What’s more, variable pay rewards are linked to the overall performance of a company, spanning verticals. That makes it unequal and less palatable. Say, a clutch of star-performers of a successful project can suffer variable pay cut even though their project has set the cash registers ringing.

What I advocate here is a project-based incentive system, substituting the variable pay. Teams tasked with the ideation and timely delivery of their projects will be motivated to perform when incentives are dangled. Further, it will also induce ownership among the cohorts. From the overall cost perspective, the project-based incentive system augurs well for any IT company. You reward your performers when your projects spin money. Plus, you don’t have any compulsion to offer variable pay to all employees, even when their performance is below par.

The other challenge that IT companies need to take head on is retaining talent. Despite offering the best in pay and perks, attrition refuses to abate. And when project managers or team leads quit midway, IT service provider is left in soup. The situation can also create a chasm in trust with the clients. To prevent it, the IT firms can structure the employee agreements differently. There can be a mutually agreeable pact where the concerned project manager and his folks commit their services till the project is commissioned. The pact isn’t legally enforceable but it can serve as the barometer of goodwill between the employer and employees.

Also, when it comes to hiring and retaining quality talent, IT services firms can focus beyond traditionalists. This means scouting for talent who are not too overwhelmed by fancy job titles and bulgier pay. They are the folks who value work ambience and non-transactional career progression more than traditionalists. Managing the margins pressure needs an immersive approach to costs- both internal and external. And your workers’ pay is not the first strike.

(The author is Founder & CEO, CSM Technologies Pvt Ltd. Views are personal.)

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.