What the India Inc salary cuts could mean

By: |
August 22, 2020 7:30 AM

The salary-cuts, amidst the economic pain of the pandemic, have significant implications for the banking sector and NBFCs, Apart from Household consumption

A fall in salary payouts for companies has implications for the banking and NBFC sectors.A fall in salary payouts for companies has implications for the banking and NBFC sectors.

The Q1FY21 results of the corporate sector were always going to be of interest. That’s not just because of declining sales and profits, which can hold for most sectors that were not allowed to function at an optimal level, but also because of how the salary bill moved. Ever since the lockdown announcement, several companies decided to go in for cost rationalisation, and the staffing component was the first casualty.

The logic was that, as there was no or limited production of goods and services for an indefinite period, there was no reason to foot the full salary bill. Further, as companies were not sure about when these bans would be lifted, they had to suspend operations and could not bear this cost. At the lower level, comprising unorganised labour, the lockdown meant that the migrant population was on the road. For those in the organised sector, different measures were used to lower the salary cost.

First, the headcount was reduced depending on the estimates made internally on what should be the optimal level of staff for the year. Those in the services industry, which involved social interaction, were the most-affected as the first strains were witnessed even before the lockdown was formally introduced. Airlines industry, for example, had cut down on the salaries of their staff even before the lockdown. Second, there was a systematic reduction in the salaries of employees, and various modalities were used. There were no pay-cuts for those at the lower level—Rs 5 lakh per annum or lower. But, as one moved upwards in the echelon, salary-cuts in the range of 5-30% were invoked. Third, knowing very well that the company would not be doing well, increments were held back or annulled for the year. Besides, as Q4FY20 and full-year FY20 results showed, most companies were in the red, with declining top line and profits; so, there was a reason not to give increments. Last, with a bit of accounting flexibility, the variable portion of the salaries of staff was cut on account of company performance.

In the corporate world, a substantial part of the salary is often in the form of variable pay, which is linked to the company’s functioning. Those responsible for sales targets tend to have a higher proportion of their salary in this form. For the others, the parameter is often the overall performance of the company. This is a discretionary part of the salary, and, hence, can be tweaked to lower total salary outflow. A combination of zero or lower increments and sharp cuts in the variable pay can reduce the cost outflow on employees.

The FY21 first-quarter results reflect all these aspects to a certain extent. The results announced so far indicate an interesting pattern. While the aggregate salary bill for around 560 companies indicate a growth of 3.7%, from Rs 1.20 lakh crore to Rs 1.25 lakh crore, the pattern across sectors is quite stark. The accompanying table presents the growth in this component in 26 sectors.

It shows that sectors affected by the lockdown for a longer period have also been affected more in terms of rationalisation of staff cost. Also, those sectors which still have not witnessed any major relaxation in their operations, have been pushed back further. Realty, auto, media, hospitality have all been pushed back on this account. Out of these, the service-oriented industries confront the impediment of uncertainty. This also means that, going ahead, there could be further cuts, especially in headcount in these sectors. The pattern so far has been that companies first invoke salary cuts, and when operations cannot be resumed or are severely constrained, go in for a reduction in headcount.

On the positive side, the industries which witnessed an increase in the salary bill were banking, IT, healthcare, agro-based. These continued to do well as their operations are categorised as essential goods and services. Chemicals and plastics are intermediary goods that go in the production of essential goods. Hence, they also witnessed marginal growth.

A precondition for any revival in employment and restoration of pay packages must be the removal of lockdowns permanently. In fact, the periodic localised lockdowns push many sectors further back and are a concern for companies. Corporations will be better able to draw their production plans, which includes the deployment of labour, if there is a certainty of operations. For instance, theatre-owners being told that opening of theatres with a graded SOP will be allowed from, say, December onwards is far more preferable than having the local government blowing hot and cold over the resumption of such services. Therefore, it is essential to have an exit plan communicated to all production units.

A fall in salary payouts for companies has implications for the banking and NBFC sectors. There has been a tendency in the financial system to move towards the retail segment, to protect against the build-up of adverse asset portfolio post the NPA crisis, which was recognised in 2016. The assumption was that while one big-ticket default in infrastructure can set the bank back significantly, it was less probable that there could be such large scale defaults on the retail front.

However, Covid and the lockdown has changed these dynamics. RBI’s Financial Stability Report highlights the high proportion of retail loans availed of the repayment moratorium; as of April 2020, this was around 55%. Intuitively, borrowers who opted for such a moratorium would be challenged to service their loans when their incomes are part of this large segment of sectors where salary payouts have come down. Therefore, declining salary payouts is a concern for both the reflection of employment growth as well as income sustenance, which affects debt-servicing ability. This is one area which would merit more discussion when the issue of restructuring of loans comes up in this segment.

The picture on the employment front is, hence, quite grim. The organised corporate sector has, per force, reduced salary payouts, and quite sharply. This will impact the future consumption of the concerned households amid uncertainty. Also, for the debt-laden households, meeting debt-servicing commitments post-moratorium will be a major concern.

The author is Chief Economist, CARE Ratings
Views are personal

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