Why entry level salaries for IT firms will remain low – with or without the ‘cartel’

Mohandas Pai, a co-founder and ex-CFO of Infosys pointed out the IT companies have formed a cartel to keep entry-level salary low.

Making a strong pitch for a better deal for freshers, Pai said in the last seven years, salaries of freshers in the software industry have stayed stagnant, while the same for senior-level employees have grown multi-fold. Over-supply of engineers in India is being exploited by these companies, a trend that Pai feels is "totally wrong".

Had we not known who the speakers were the quotes could have been attributed to any labour union leaders. But coming from the veterans of the Indian IT industry it is a profound statement.

At an emotive level, the statements are correct. Entry-level recruits need to be paid well. As Pai pointed out, adjusting for inflation, the remuneration of freshers in the IT industry has, in fact, come down by 50 percent in the last seven years.

However, let's look at the issue of fresher salaries holistically.

Among engineers, software engineers are one of the highest paid. Add to that the perk of working in an air-conditioned office in a metro city will give you an idea of where the over-supply is coming from. Engineers from other streams prefer working for a software company rather than getting their hands dirty by working on the shop floor. L&T’s erstwhile chairman AM Naik in his Chairman speech had highlighted the issue of getting qualified engineers since most prefer to work in the software sector.

In any case, the toppers or engineers from top engineering institutions prefer to take up higher studies like an MBA from a reputed institution or go abroad for higher studies. Those who prefer to pursue a career in information technology like to work in a challenging atmosphere. That is where the main contradiction to the veteran’s statements lies.

Indian IT companies, especially the bigger ones have grown through what can crudely be said termed as cost arbitrage. It is a low-end coding job that has been commoditized and the only differentiator is the cost at which the job can be completed. Which is why we see middle level coders lose their jobs recently as they could be replaced by lower cost ones.

An engineer from an elite institute would like to challenge his own capabaility rather than take up a routine job. Which is why we see engineers from these institutions choosing to work for start-ups operating on shoe-string budgets or working for e-commerce companies that sell clothes or real-estate rather the big names in IT space.

Agreed, money is one of the factors for a young college pass-out. Bt most would still choose a challenging job profile that will help them in the long term rather than go in for a high pay-packet with a monotonous and low-end job profile.

As for the point of fresher salaries not being hiked over the last seven years, one needs to look at the external environment. Indian IT sector derives most of its revenue by catering to the banking, financial services, and insurance (BFSI) space. These sectors have been in a crisis situation since the financial meltdown in the US in the previous decade and repetitive Eurozone crisis in the present decade. Both these areas are where most of the customers of Indian IT companies reside. It is not that by keeping freshers salaries low, promoters are reaping more money.

Lack of growth saw equity markets market punish the IT sector. Indian companies were too busy counting money by sticking to their old business model that they did not see the writing on the wall till they hit it. Digitisation, automation and artificial intelligence had made the old business model redundant. Jobs of many engineers (read coders) were automated thus leading to a case where fewer employees could complete the job. This situation added to the problem of oversupply that has been mentioned by Murthy and Pai.

A company’s management responsibility is to the board who in turn is responsible to the shareholders. Every shareholder would seek for maximization of profit without conceding on growth opportunities. In such a scenario where engineers are easily available at low price points, it just does not makes business sense to increase salary levels and cost.

Like it or not an IT company fresher is akin to the foot soldier in a manufacturing company. Even without increasing ground-level salaries, Indian companies were struggling to maintain operating margins. A slowing global economy and emergence of similar business models in other parts of Asia and South America added to the pricing pressure for Indian companies. In such a situation increasing the cost by raising salary levels would have been suicidal.

Coming to the point of senior employees getting paid at much higher levels than the fresher, this is not an apple-to-apple comparison. The growth of a senior employees salaries being much higher than a fresher is a norm in every industry everywhere in the world (except for public sector companies). The senior employees have a riskier profile and are responsible for adding business, while the fresher is an implementer or the executor.

The senior person who gets business to the company is a priced asset and an easy target for competitors. Companies need to incentivize them enough to retain such talent. A fresher, on the other hand, can be easily replaced. Further, the incentives of senior employees are not random, rather they are linked to his performance. If he does not perform, he is not paid. Freshers are not exposed to such vagaries of salary spikes. Theirs is a stable and relatively risk-free job.

The rule of money is applicable in markets as much they are in the corporate world -- with more risk comes more returns.

Both Murthy and Pai have raised a genuine issue of stagnant salary levels in IT sector as compared to those in say finance line. Ask this question to any fresher from a management school which sector would be willing to pay more, one that is growing at a rapid pace or one that is struggling with its business model and thus survival and you will know why fresh engineers have missed the bus.