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    Compensation Management at Tata Consultancy Services LTD

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    Rubel Mia
    Tata Consultancy Services (TCS) announced plans to cut the variable portion of employee salaries by 1.5% after failing to meet Economic Value Added (EVA) targets for the third quarter of fiscal year 2007-2008. TCS' compensation system tied a significant part of employee pay to business unit and company-wide EVA performance. The pay cuts surprised employees and the IT industry due to TCS' market leadership. Macroeconomic challenges like currency appreciation and U.S. recession were squeezing Indian IT company margins. While TCS said salary adjustments would continue to be reviewed quarterly, employees expected ongoing cuts as pressure grew on export revenues.

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    Compensation Management at Tata Consultancy Services LTD

    Uploaded by

    Rubel Mia
    329 views4 pages
    Tata Consultancy Services (TCS) announced plans to cut the variable portion of employee salaries by 1.5% after failing to meet Economic Value Added (EVA) targets for the third quarter of fiscal year 2007-2008. TCS' compensation system tied a significant part of employee pay to business unit and company-wide EVA performance. The pay cuts surprised employees and the IT industry due to TCS' market leadership. Macroeconomic challenges like currency appreciation and U.S. recession were squeezing Indian IT company margins. While TCS said salary adjustments would continue to be reviewed quarterly, employees expected ongoing cuts as pressure grew on export revenues.

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    Tata Consultancy Services (TCS) announced plans to cut the variable portion of employee salaries by 1.5% after failing to meet Economic Value Added (EVA) targets for the third quarter of fiscal year 2007-2008. TCS' compensation system tied a significant part of employee pay to business unit and company-wide EVA performance. The pay cuts surprised employees and the IT industry due to TCS' market leadership. Macroeconomic challenges like currency appreciation and U.S. recession were squeezing Indian IT company margins. While TCS said salary adjustments would continue to be reviewed quarterly, employees expected ongoing cuts as pressure grew on export revenues.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    329 views4 pages

    Compensation Management at Tata Consultancy Services LTD

    Uploaded by

    Rubel Mia
    Tata Consultancy Services (TCS) announced plans to cut the variable portion of employee salaries by 1.5% after failing to meet Economic Value Added (EVA) targets for the third quarter of fiscal year 2007-2008. TCS' compensation system tied a significant part of employee pay to business unit and company-wide EVA performance. The pay cuts surprised employees and the IT industry due to TCS' market leadership. Macroeconomic challenges like currency appreciation and U.S. recession were squeezing Indian IT company margins. While TCS said salary adjustments would continue to be reviewed quarterly, employees expected ongoing cuts as pressure grew on export revenues.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Compensation Management at Tata Consultancy Services Ltd.

    :
    Coping with Turbulent Times in the Indian IT Industry

    Case Details: Price:


    Case Code : HROB112 For delivery in electronic format: Rs. 300;
    For delivery through courier (within India): Rs. 300 +
    Case Length : 18 pages
    Rs. 25 for Shipping & Handling Charges

    Period : 2003-2008 Themes


    Strategic Human Resource Management/ Human
    Pub Date : 2008
    Capital/ Employer Branding/Organizational
    Teaching Note : Available (3 pages) Behavior

    Organization : Tata Consultancy Services

    Industry : Computer, IT & ITES

    Countries : India

    Abstract:

    The case discusses


    practices the compensation
    at Tata Consultancy Servicesmanagement
    Ltd.
    (TCS), one of the leading Indian IT companies.
    TCS' compensation management system was
    based on the EVA model. With the
    implementation of Economic Value Added
    (EVA)-based compensation, the salary of
    employees comprised of two parts ± fixed and
    variable. The variable part of the salary was
    arrived after considering business unit EVA,
    corporate EVA, and also individual performance
    EVA.

    During the fourth quarter of the financial year


    (FY) 2007-2008, TCS announced its plans to slash
    1.5 percent of the variable component of

    employee salaries
    third quarter of FYsince its EVA
    2007-2008 targets
    were not for
    metthe

    The announcement came as s jolt not only to TCS employees but also to the entire Indian IT industry. The company
    came in for severe criticism and it was accused of not being transparent with respect to EVA calculation. However,
    some analysts felt that the pay cuts were a result of the macroeconomic challenges that the Indian IT companies
    were facing -- rapid appreciation of the rupee against the US dollar and the recession in the US economy (USA was
    the largest market for the Indian IT companies)

    Issues:

    » Analyze TCS' HR practices with respect to its policy related to compensation of its employees.

    » Discuss various concepts related to compensation management.

    » Discuss the importance of variable compensation in light of its ability to motivate employees and enhance
    organizational productivity.

    » Discuss the pros and cons of the EVA-based compensation management system and also analyze EVA as a
    performance measurement tool.

    » Understand the rationale behind the cut in the compensation of the employees at TCS.

    » Understand how macroeconomic variables could affect a company's HR policies.

    » Appreciate the importance of HR goals and strategies in the success of an organization

    Contents:
    Page No.

    Squeezing the Employee Pay Packets 1

    Background Note 2

    The HR Policies 4

    Performance-Linked Salary Structure 5

    TCS Announces Pay Cuts 6

    The Reasons 8

    The Debate 10

    Outlook 11

    Exhibits 13

    Key Words:

    Compensation management, EVA, Variable compensation, Fixed pay, Wage inflation, Human resource, Employee
    Stock Options, Performance appraisal, Employee morale, Incentives, HR policies, Recruitment, Employee satisfaction,

    Employee attrition, Retrenchment, Retaining, Employee training, Career development, Tata Consultancy Services,
    Satyam Computers, Wipro, Infosys, Information technology
    There's no ceiling on t he bonus. It can be equal to the fixed portion of the salary, providing the cell has shown that
    kind of EVA growth. It is not just compensation, we wish our employees to also get a feeling of ownership for their
    own unit, and its performance. We want each employee to feel as if they are running their business. They have to
    think like entrepreneurs and know the cost attached to their business and how will they add value to the
    investment."1

    - S. Ramadorai, CEO and Managing Director, Tata Consultancy Services Ltd., in 2000, Regarding its
    Economic Value Added (EVA)-based Compensation Management System.

    "We undertake a review of variable pay every quarter and this time, we decided to make an adjustment."2

    - S. Padmanabhan, Global Human Resources Head and Executive Director, Tata Consultancy Services
    Ltd, in February 2008.

    "This wage cut is a reflection of the caution. It reinforces the management view of macroeconomic challenges."3

    4
    - Harit Shah, Research Analyst, Angel Broking, in February 2008

    During the fourth quarter of financial year (FY) 2007-2008, Tata Consultancy Services Limited
    (TCS), the largest Information Technology (IT) company in India announced its plans to cut 1.5
    percent of the variable component of employees' compensation.

    It clarified, however, that there would not be any changes in the perquisites of its employees. The
    rapid appreciation of the Indian Rupee against the US dollar over the previous year and the
    imminent recession in the US economy, which was the biggest market for the Indian IT
    companies, had put a lot of pressure on Indian IT companies.

    Squeezing the Employee Pay Packets Contd...


    The announcement came soon after TCS found it unable to achieve its Economic Value Added
    (EVA) target for the third quarter of the FY 2007-2008. The unprecedented move by TCS caught
    the entire IT Industry by surprise.

    The EVA payment made in advance for the third quarter was to be deducted from the variable
    salaries in the fourth quarter. The variable component of the salaries of the TCS employees
    constituted 30 percent of their total compensation, and even went up to 40-50 percent in the case
    of senior management. The decision came as a shock to many employees and the media gave
    wide coverage to TCS' decision.
    The employees' fears were compounded when TCS showed some 500 of its employees the door in February 2008 on
    performance grounds.

    Established in 1968, TCS was the market leader among the Indian IT industry as of 2008. Its revenues for the third
    quarter of the FY 2007-2008 increased by 5.04 percent to Indian Rupees (Rs.) 59.24 billion and net profit rose by
    6.72 percent to Rs. 13.31 billion.5

    In the wake of the appreciating rupee and signs of recession in the US economy, TCS decided to cut salaries since
    the company's margins were severely impacted. According to S Mahalingam (Mahalingam), Chief Financial Officer
    (CFO), TCS, "Fundamentally the business operates on sound principles...
    Outlook

    Despite TCS' claim that it would make salary adjustments in the next quarter, the employees remained divided and
    expected this trend to continue. A TCS employee said, "Though the official word is that the situation will be reviewed
    by March end, we are preparing for a regime wherein we continue with a pruned salary."

    Further, the pay hikes of employees in the Indian IT industry were poised to become moderate with pressure
    building on export earnings of Indian IT companies due to t he rising rupee and signs of a slowdown in the
    technology spend in the US due to recession...

    xhibits

    Exhibit I: Top IT Employers in India (DQ-IDC BES Survey 2007)


    Exhibit II A: Employee Satisfaction Scores of IT Companies (DQ-IDC BES Survey 2007)
    Exhibit II B: HR Scores of IT Companies (DQ-IDC BES Survey 2007)
    Exhibit III: TCS' Position in BusinessWeek Top 100 IT Companies: 2007
    Exhibit IV: Indian Rupees to US$1
    Exhibit V: How IT & ITES Companies Have Reacted to the Rupee-rise

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