IT cos may cut variable pay to manage costs

Source: TheEconomicTimes

Indian IT companies have refrained from going in for significant variable pay cuts of their employees in FY09. TCS, for instance, paid out 95% of its variable pay to 95% of the staff in FY09.

But early indicators show IT exporters may not fight shy of it in FY10, if the market situation in the US does not improve and if they come under pressure due to a stronger rupee.

Some of the smaller IT firms, such as the RPG Group-owned Zensar Technologies, have tweaked their variable pay structure starting FY10. The firm has introduced a variable pay component of 15% for junior-level employees, and revised the variable pay structure at the middle and senior-management levels.

Under the new structure, the variable pay component has been hiked for employees in the senior management from 20% to 35% and for mid-management employees from 10% to 25-30% of their salaries. The variable pay at the CEO-level is highest at 55% and there has been no change in that. Zensar vice-chairman and CEO Ganesh Natarajan said the new structure would reward performers.

The IT industry has been under pressure to manage costs, and in the past two quarters of FY09, profit growth has come from prudent cost management as much as from higher revenues.

“In FY09, I estimate the top firms would have paid between 85% and 90% of their variable pay. In the current fiscal, this could be 60-70%, especially if the rupee appreciates,” said Edelweiss Securities VP-research Viju George.

A recent calculation by ET showed employee costs accounting for 60-80% of the total operating expenses with variable pay accounting for 10-15% of the total employee expenses for a large number of IT firms. In other words, a 50% cut in variable pay would translate to a bottomline impact of 10-20%.

“The ability to adjust the variable component gives you some amount of leeway to handle the uncertainties and also inculcates a performance culture,” TCS global head (HR) Ajoy Mukherjee told ET.

While the variable pay component is higher at the senior levels, most firms have now changed the structure, which allows even junior level employees to have a variable pay component in their salary.

For TCS, the variable pay is around 30% of the salary on an average — this is across the company. It is similar for Infosys Technologies, where the variable pay is around 30% of offshore salaries.