Investing in IT stocks? TCS cuts employee salaries

Some bad news for the employees in the IT sector. TCS has decided to cut the salaries of the employees by about 1.5% for the January to March Quarter. The employees are already apprised of the news item. As per the news source, a typical software engineer with get a deduction of 2000 in the monthly salary for the remaining months in this financial year.

The claim made by the TCS management is that it's due to the dollar rising and quarterly loss. It is said that the dedcutions are justified as Recovery Losses - or "Taking back what was already paid".

TCS is one of the biggies in the IT sector, not only in India, but also worldwide. Trade and Investment Analysts are taking it as a strong signal for the weakening of IT sector. Apart from that, it may soon set a trend for other IT companies to follow. Remember, the major cost for an IT company is Human Capital and that's what takes the maximum cost.

Another big news is that TCS is set to takeover T-Systems, the German based IT major (As per CNBC). No wonder, if this acquisition goes through, then the employees of T-Systems may face the cutoffs to normalize their salaries in track with those of TCS.

Here is the news item from the Economic Times:

MUMBAI: Tata Consultancy Services (TCS), India’s largest software exporter, is effecting a small across-the-board cut in employee salaries based on the company’s performance in the third quarter, a move reflecting caution amid tough times for the outsourcing industry. A top company official confirmed the move while stock market analysts said TCS is sending signals that revenue growth has not met internal targets and employees can’t expect a big wage increase this year.

TCS has clipped a portion of the variable pay linked to its performance, effectively reducing an employee’s salary by about 1.5% for the January-March quarter, TCS executive director and global human resources head S Padmanabhan told ET. “We undertake a review of variable pay every quarter and this time, we decided to make an adjustment,” he said. “We will revisit it in April.”

This is the first time in two years that the IT giant has reduced the variable portion linked to company performance. Mr Padmanabhan said the outsourcing sector faces macroeconomic challenges, which had to be factored in the quarterly review. The variable pay related to individual performance has not been touched, he added.

“This can send a strong signal to the employees that revenues have not measured up to internal targets,” a Mumbai brokerage analyst said. “The cut is small and is unlikely to attract a howl of protests, but employees will get the message that all is not well with the sector. Instead of giving them a shock at the time of annual salary review, the management has sought to lower their expectations of wage inflation through this small cut,” the analyst said.

TCS had reported a 5% quarter-on-quarter revenue growth and 6.7% rise in net profit for October-December, in line with market expectations. It had expressed ‘cautious optimism’ in the face of fears over a US slowdown and reasserted its ability to manage the rise in rupee’s external value.

A recruitment expert said a move by any of the top three software companies to temper variable pay would be quickly followed by smaller companies. “In the last couple of months, we have seen some lead indicators that there is moderation in wage increases. Companies have been following a little bit of a cautious approach,” Ma Foi Consultants COO E Balaji said.

Ma Foi data reveal that yearly wage hikes have fallen to ‘high single percentages’ from 15-16%. Job-hoppers get not more than a 12-15% hike in their new jobs compared to 25-30% earlier. “It is all part of the business cycle. Once stability comes back, wages will return to normalcy,” Mr Balaji said.

After years of heady growth, India’s outsourcing industry is facing the prospect of a slowdown due to US economic worries triggered by the subprime mortgage crisis. Major clients may cut back their spending on technology and postpone upgradation.

Meanwhile, the profitability of companies like TCS has also been hit by the rapid rise in wages and rupee’s rally against the dollar. These companies will also come out of export-related income tax holiday next year. “This wage cut is a reflection of the caution. It reinforces the management view of macroeconomic challenges,” Harit Shah of Angel Broking said. Mr Padmanabhan said the company’s deal pipeline is strong and continues to grow. The review is part of a recurring quarterly process, he said.

Typically, a TCS employee gets 70% of salary as fixed component and the rest as variable. The latter, in turn, is split into one part linked to individual performance and the other to company performance. The company-related variable in paid in advance each quarter.

Outsourcing companies have asked investors to wait till late January to get a clearer picture of how the medium-term business outlook shapes up. TCS is the first company to align its wage payout to the unfolding environment. Other companies will be watched for their response, though a source said Infosys has been paying out 100% of performance-linked wages over the last three quarters.

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