Inflated salaries, falling margins, slowing demand: Why Indian IT companies are cutting variable pay

High levels of attrition, increasing travel costs, and fears of a recession that’s affecting demand for IT services are putting pressure on the margins of tech companies.

It’s not often that three of India’s biggest software companies deliver bad news to employees in lockstep.

Last week was an exception. After reports that Wipro and Tata Consultancy Services had either slashed or deferred variable pay-outs for certain employees, Moneycontrol reported that Infosys was cutting variable pay to 70 percent.

TCS subsequently said variable pay for the first quarter had not been delayed and the entire amount would be paid as scheduled in the first or second month.

However, tech companies are under pressure after a banner year of clocking double-digit growth as enterprise clients migrated to the cloud and spent money on technology. But with high growth came an acute demand for talent and subsequently, high attrition levels.

Companies back-filled attrition by hiring a record number of freshers, but it takes months to train and deploy them in projects. As a result, they also hired experienced employees, turned to sub-contractors, and paid higher salaries to prevent employees from leaving.

Compressed margins

That was an expensive cocktail that worked in a robust demand scenario, with most employees working from home. But with offices opening up, travel costs rising, and demand looking uncertain, the cost tailwinds have tapered off, forcing companies to look at other ways to improve margins. Ergo, the cuts in variable pay.

“Margins have come off way higher than what analysts had forecast. The concern now is that with attrition going through the roof, companies had to pay much higher salaries, which impacted compensation discipline,” said a top executive in the sector who did not wish to be identified.

Deferred spending

However, the industry executive said the alignment of variable pay with individual and company performance is good.

“It brings greater discipline to performance management. Having said that, this cannot be uniformly applied to all levels of the workforce as the ability of those at junior levels to impact larger company performance is limited,” the executive said.

While analysts said client spending is expected to be stable for the next few quarters, there are concerns over deferments in discretionary spending or longer spending cycles in some pockets.

According to HFS Research CEO Phil Fersht, there is definitely a slowdown in demand for IT services as enterprise leaders hold fire on spending decisions due to negative economic forecasts.

“IT services firms have focused wage increases on the junior and mid-layers to stem attrition and are less concerned about senior leaders jumping ship in this economy. The leading providers are preparing for margin squeezes and a slowdown,” he said.

On the possible levers to contain this, Fersht said hiring must be slowed down, key talent retained and bonuses aligned to maintain profit margins.

Differential treatment

He said the top performers who have aspirations could be disappointed if they don’t get their bonuses and their promotions are deferred or hikes are reduced because of cost optimization.

Mishra said it's not easy to give differential treatment to top performers in large organizations. Policies have to be applied uniformly because other employees would be disappointed and may leave, thinking the employer isn’t being fair.

“The leadership team has got a difficult job at hand to convince or to keep applying the glue which will hold their top talent. If they lose average talent or below-average talent, they may not lose their sleep, but they will lose their sleep if top talent is leaving them and that is not very unlikely,” he said.

Top talent could be headhunted by other companies that continue to hire, he said.

Infosys said the average variable pay-out at an organization level is 70 percent and an employee’s final pay-out will depend on their pay grade and their unit or department. In its email to employees, Infosys said investments in hiring and compensation revisions have impacted margins in the immediate term. TCS said on August 23 that it has not delayed variable pay to employees for the first quarter and that it was normal to give it in the first or second month. An email sent to employees in specific grades, a copy of which Moneycontrol has reviewed, said the performance bonus was yet to be finalized.