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.
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.
The executive said companies have been investing in retraining and upskilling in digital technologies, which is also taking costs up.
Elevated attrition has been a concern for a few quarters, with the rate at TCS the lowest among the IT giants at 19.7 percent for the first quarter of FY23. Attrition at Infosys climbed to 28.4 percent, while for Wipro, it was 23.3 percent.
Wipro CFO Jatin Dalal told analysts after announcing Q1FY23 results that attrition had one of the biggest impacts on the company’s cost structure. When attrition was being backfilled to replace someone with similar skills, capability and experience, companies had to pay a premium of 25 percent to 30 percent to lateral hires.
An industry executive said tech companies inflated salaries beyond what their compensation grid could afford to stay in the rat race for experienced digital talent, which compressed margins.
“Further, with travel restrictions easing and recessionary fears looming large, companies are walking the hallways of clients more often, leading to increased travel costs,” the person said.
While analysts had expected margins to be affected in the first quarter, they came in even lower than street forecasts. Wipro reported 15 percent compared to predicted margins of 16-17 percent. Infosys’ margin contracted to 20.1 percent sequentially from 21.6 percent, when expected margins were at 20.8 percent.
“Attrition is not cooling off anytime soon. There is a supply-side shortage and it takes time to deploy freshers. Companies are in a bind. A slowdown will do a world of good because it will give them time to fix the supply chain. Organisations have seen huge churn. Employees haven't met each other in the last two years,” a senior analyst told Moneycontrol.
The analyst said companies have to draw the line somewhere on profitability as efficiency had taken a backseat.
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 spends 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.
Omkar Tanksale, a research analyst at Axis Securities, told Moneycontrol that it is critical that companies listen to commentary from the client side.
“There might have been a delay in the demand side or a delay in discretionary spending from the clients that may be slowing down the revenue growth momentum in the short term. However, the long-term story still remains intact. In the short term, margins are surely under stress and they are likely to control it by cutting down the mid- to higher-level variable pays and have to get the employee pyramid right to sustain the margin side,” he said.
The decisions of companies to reduce variable pay for the first quarter primarily impacts mid- and senior-level employees and may not lead to a significant uptick in attrition, but companies could lose top performers, said Aditya Narayan Mishra, CEO of CIEL HR services.
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 optimisation.
Mishra said it's not easy to give differential treatment to top performers in large organisations. 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.
Last week, Wipro said in an email to employees that variable pay will not be paid to those in B and C (mid-manager level) and above, while junior employees in Bands A and B would receive 70 percent of their variable pay.
The company said there has been continued pressure on operating margins and attributed it to “inefficiency in our talent supply chain, project margins, and our investments in talent, technology, and solutions during the quarter.”
Infosys said the average variable pay-out at an organisation 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 finalised.