IT companies bite bullet, begin variable pay cuts

Information technology (IT) companies may be putting up a brave front but the slowdown has alarmed them enough to make them cut variable pay of staff.

Tata Consultancy Services (TCS), which recently evicted Infosys Technologies as the industry bellwether, is said to have made the first move in this regard.

Yogesh Aggarwal and Vivek Gedda, analysts with HSBC, said the largest software services company paid only 25-50% of the total quarterly bonus to employees above the ‘associate consultant’ level in the June quarter.

“Companies have already started paying lower percentage of discretionary bonuses,” they wrote in a note on Tuesday.

By snipping the variable component of the salary, TCS is protecting its margins — a common norm in times of slowdown when revenues slip on account of dwindling budgets of tech customers.

Aggarwal and Gedda believe the lower percentage of discretionary bonuses could offer close to 5% ‘margin cushion’ for large local tech services vendors likes TCS and Infosys, which pay 30-40% of the salaries as discretionary bonuses.

Nandita Gurjar, group HR head and senior vice-president, Infosys Technologies, said since variable pay is linked to performance, it would naturally constitute a lower percentage of the salary during slowdowns.

“Yeah, it (variable pay) comes down when the revenue growth slows down,” she said.

Gurjar, however, did not say whether techies at the second-largest IT firm would be paid lower variable pay this year.

Infosys is said to have variable pay of near 30% of the total offshore wage bill.

This, according to Aggarwal and Gedda, translated into around 5% of margin cushion.

“We ascertain that about 2.6% of margin protection is easier to achieve by cutting variable pay and avoiding significant damage to employee morale and productivity,” they said in their report.
Rostow Ravanan, CFO, MindTree Ltd, said the mid-sized tech company had trimmed variable salaries in 2008 to soften the blow from the last slowdown.

He said from this fiscal year the company had introduced a new scheme where variable pay for junior employees was delinked to company’s revenue and tied to their own performance. “However, it (variable pay) will continue to be linked to profits,” said Ravanan.

Typically, variable pay is lower at junior level constituting of less than three years experience and is split into three parts comprising company performance linked incentive (CPI), variable company performance incentive (VCPI) and individual performance incentive (IPI).

Generally, companies avoid tinkering with the CPI component as it is paid on a monthly basis and could dent employee morale and productivity. It is usually the VCPI and IPI that get cut first.

“Both VCPI and IPI account for about 50% of the total variable pay and are paid quarterly and provide a margin cushion of around 2.6%,” the HSBC duo said.

Tweaks in variable pay have helped companies safeguard margins during rough patches in the past too.

But E Balaji, managing director and CEO of Ma Foi Randstad, a human resource consultant, said companies touch variable pay only as a last resort.

“We get a feeling that companies have become cost conscious and are tightening belt by bringing down expenditures on travel, office parties and others. The natural progression would be to focus on incentives and variable pay,” he said.

Sunil Goel, director of executive search firm GlobalHunt, said the snip in the variable pay was a correction in the exorbitant hike that was introduced in it post 2008 downturn.