Indian unicorns cut back on employee appraisals as cost-cutting takes priority

A majority of over 100 unicorns in India have slashed appraisal budgets for 2023 as the startups increasingly look to cut costs while grappling with a prolonged funding winter amid deteriorating macroeconomic headwinds.

About three in 10 unicorns have set aside a minimal to zero budget for increments this year, according to data by Aon commissioned exclusively by Moneycontrol. The appraisal budgets of unicorns have declined to an average of 7.7 percent of salary expenses in 2023, from 12.1 percent in 2022.

“Many companies are either doing no appraisals or delaying it by two to three months because they expect an average churn of 7 percent per month to rule out close to 15 percent eligible staff before the appraisal is disbursed, which will cut the increment payment,” said Mayank Kumar, cofounder of upGrad.

Kumar said the edtech unicorn has already completed appraisals and has started disbursing revised salaries from April, the first month of this financial year.

The cutbacks are not limited to startups. The data showed that one in five Indian companies have set aside a minimal to zero appraisal budget this year, while average salary increases have fallen to 8.2 percent from 12.4 percent in 2022.

“The mindset is basically that no appraisal is the best increment that a person can get in this (job) market,” Prateek Shukla, cofounder of Masai School, an edtech and skilling startup, said in an online interaction, adding that his company had set aside a 10 percent salary increase budget.

Startups cutting costs

The trend comes as a contrast to 2021, when startups hired aggressively amid immense investor interest and multiple fundraising rounds. With the funding pipeline running down, the tide has turned and tech startups are now racing to become profitable by cutting down the excess.

The first item on the list is reducing employee benefits, which skyrocketed a year ago. To be sure, Indian startups have let go almost 25,000 employees since the beginning of 2022 as they looked to reduce cash burn.

Anshuman Das, CEO of Careernet, told Moneycontrol that while layoffs have helped reduce expenses to an extent, the focus on frugality will affect hikes and bonuses this year.

“Last year startups were giving dramatically high hikes in the range of 20-30 percent. That will come down to almost singular digits. Companies are trying to rationalise their budgets… with layoffs. These very low to moderate hikes and bonuses have also been very stressed out,” Das added.

Coupled with lower hikes, startups are unable to show appreciation of their employee stock options (ESOPs) due to valuation declines, Aon highlighted. This comes as investors focus on stricter due diligence and ask more questions following the exuberance of the Covid era.

“However, since equity programmes are structured over a multiple-year time frame there is always a retention hook,” said Jang Bahadur Singh, director of human capital solutions at Aon India.

SoftBank-backed Unacademy expedited the vesting period of ESOPs by one year in an effort to compensate employees after saying in February it will not give employees increments in FY24.

However, Aon said promotions continue as per normal to recognise skill addition and higher contributions, declining only slightly from an average of 16.5 percent last year as startups take on cost-cutting measures.

“Given lower salary increases and option grants, organisations are not stopping promotions and the drop in this number is unlikely to be significant. However, there is a possibility that individuals might get promoted with only a title change or minimal promotion hikes,” said Aon’s Singh.

Appraisal season trends at Indian unicorns

Late-stage startups

Companies that hired employees in large numbers to build capacity on expectations of continued high growth have to take stricter measures to cut costs and become profitable, according to Das.

“Companies that have raised a significant amount of money are currently in a precarious position. Even small salary increases can pose a challenge for them due to the redundancy built into their system," he added.

Also Read: Less than 50% of Indian unicorns will end up making money for their investors: A91 Partners’ Abhay Pandey

At smaller companies, Das said employees can expect better hikes than late-stage ones as the former are heavily reliant on their employees since they are still building their product and tech.

"The loss of one or two key individuals can have a substantial impact," he said. "The larger companies have reached a stage of relative stability in terms of their product and technology, so they exercise tighter control over these resources, that mainly constitute operations staff."

Between rock and a hard place

However, attrition at startups is easing.

“Our attrition rates are half of what it was about four quarters ago. Our total acquisition expense for a new employee has come down significantly… Today, when I'm looking at the payroll cost as percentage of revenue, it has increased because of lack of attrition,” upGrad's Kumar said during a session at TiEcon Mumbai.

This can also be attributed to employees increasingly choosing to continue with their current employers, in spite of a below-average pay hike, due to a bleak job market and the lack of opportunities with most companies on a hiring slowdown, startup founders told Moneycontrol.

“The attrition rates at companies are declining compared to last year because of limited availability of opportunities in the job market. This has instilled a sense of concern among employees who are avoiding a transition and instead prefer to remain with their current employers,” said Scaler co-founder Abhimanyu Saxena.

Such conditions have resulted in a much higher percentage of employees being eligible for appraisal this year. Saxena said the increment budget of companies that witnessed a spike in attrition in FY22, some as high as 30 to 40 percent, is likely to shoot up.

According to data shared with Moneycontrol by a unicorn, about 67 percent of its workforce is eligible for appraisals compared with about 55 percent last year. Another startup, a soonicorn (one in line to become a unicorn – a company with a valuation of $1 billion or more), corroborated the trend, with about 84 percent of its employees eligible for increments compared with 53 percent last year.

Also Read: Soonicorns wait in queue as India’s unicorn drought exceeds 8 months

However, Saxena said increments will always be lower than the cost of rehiring.

“It is better to have lower attrition with above-par appraisals than a leaky bucket where you have to keep rehiring and building up costs related to that,” he added.