IBS Center For Management Research

HROB/112
IBS Center for Management Research
Compensation Management at Tata Consultancy Services Ltd.:

Coping with Turbulent Times in the Indian IT Industry
This case was written by Hadiya Faheem, under the direction of Debapratim Purkayastha, IBS Center for Management
Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to
illustrate either effective or ineffective handling of a management situation.
 2008, IBS Center for Management Research. All rights reserved.
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License to use for IBS Campuses only. Sem II, Class of 2013-15
HROB/112
Compensation Management at Tata Consultancy

Services Ltd.: Coping with Turbulent Times in the
Indian IT Industry
“There’s no ceiling on the 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
 Harit Shah, Research Analyst, Angel Broking4, in February 2008.
SQUEEZING THE EMPLOYEE PAY PACKETS
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. 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.
1
“TCS Shifts to Performance-linked Salary Structure,” The Economic Times, November 27, 2000.
2
“TCS Jitters Industry - Salary Cut Move. This is Called Recession,” www.msjawahar.wordpress.com,
February 1, 2008.
3
“TCS Cuts Staff Salaries in Tune with Tough Times,” www.economictimes.indiatimes.com, January 30, 2008.
4
Angel Broking headquartered in Mumbai, India, is one of the top 3 broking houses in India.
Compensation Management at Tata Consultancy Services Ltd.:…
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. There is an appreciation of rupee, which will definitely have an impact, which
the market has priced. The company was also cutting costs to ease the impact on margins by
balancing the need to cut travel costs with the need to visit potential clients to boost business.”6
TCS was not the only company facing problems in the Indian IT industry; the industry as a whole,
in fact, was feeling the heat. Infosys Technologies Limited7 (Infosys) and Wipro Technologies 8
(Wipro), the two other major Indian IT companies, were also struggling due to increased wage
inflation and salary hikes. According to analysts, the business dynamics of the Indian IT industry
had not been good and the wage cut by TCS was an indication that all was not well with the
industry. Experts opined that the Indian IT industry was headed for a fall with attrition hovering at
around 43 percent.9 The mounting employee costs would force other IT companies to follow in
TCS’ footsteps, they said. A business analyst at HSBC Holdings plc10 (HSBC) said that it was not
only the IT sector but the whole outsourcing business that had suddenly become sluggish and
added that a few more shockers were soon expected. 11
The decision to cut pay was criticized in many quarters. The employees criticized TCS for not
being transparent in the compensation policy for its employees. They alleged that TCS had never
paid excess compensation to them when the company had achieved better results than the set
targets but that it was the first in the industry to cut salaries when targets were not met. There were
also concerns that the cut in pay would result in an increase in attrition numbers. The image of
TCS as one of the best IT employers in India also came into question. Though some analysts said
that the Indian IT industry would sail through the turbulent period safely, some contended that IT
employees had to realize that the days of a consistent double digit growth in their salaries were
over and that the only option before the Indian IT companies was to look for alternative sources of
revenue and to explore new markets rather than rely on the US market alone.
BACKGROUND NOTE
TCS was established in 1968 with its headquarters in Mumbai. It was formed as a division of Tata
Sons Limited (TSL), one of India’s largest business conglomerates, and was called ‘Tata
Computer Center.’ F C Kohli (Kohli) was appointed as the first General Manager in 1969. Soon
after, the division was renamed Tata Consultancy Services (TCS).
5
Reeba Zachariah, “Re Woes: TCS to Slash Variable Pay Component,” www.timesofindia.indiatimes.
com, January 30, 2008.
6
“TCS Limits Salary Hike to 12-15%,” www.sify.com, June 25, 2007.
7
Infosys Technologies Limited headquartered in Bangalore, India, is one of the largest information
technology services company in India. Its revenues for the FY 2006-07 stood at US$ 3.1 billion.
8
Wipro Technologies, headquartered in Bangalore, India, is the third largest information technology
services company in India. Its revenues for the FY 2006-07 stood at US$ 1.64 billion.
9
Binita Jalan, “Attrition May Play the Spoilsport for the Indian Industry,” www.merinews.com,
January 20, 2008.
10
HSBC Holdings Plc is a leading global player in the banking and financial services industry. It provides a
comprehensive range of financial services, namely, personal financial services, commercial banking,
corporate investment banking, private banking, and other related businesses.
11
Sudip Kumar, “Salary Cut in TCS Stimulates Panic in IT Industry,” www.instablogs.com, January 31, 2008.
During its early days, TCS, with a staff of 10 consultants and 200 operators, undertook IT
consulting assignments with other Tata Group companies. For instance, it managed the punch card
operations of Tata Iron and Steel Company (TISCO). When the entire initial money invested by
TSL was exhausted, TCS started looking for outside clients to sustain its operations. In 1969, TCS
bagged the first banking software project – the Inter Bank Reconciliation System12 (IBRS) from
the Central Bank of India (CBI), one of its earliest clients. The successful implementation of the
IBRS at CBI helped TCS secure similar orders from 14 other banks. In the next couple of years,
TCS also executed orders for municipal authorities and telephone companies in India.
In the 1970s, TCS felt the need to equip itself with improved technological capabilities. The
company believed that this could be achieved by tapping overseas markets and serving foreign
clients, as they demanded high quality standards. It felt that it could upgrade its technology by
executing their orders. In 1974, TCS bagged its first international order from Burroughs
Incorporated13 (Burroughs). The same year, it obtained another overseas order from an Iran-based
electricity generation company.
After the positive response from Burroughs, TCS started concentrating on the US market. In the
late 1970s, TCS obtained its first big foreign order from the Institutional Group and Information
Company (IGIC), a data center for ten banks, which catered to 2 million customers in the US. TCS
was assigned the task of maintaining and upgrading IGIC’s computer systems. This was TCS’ first
full-fledged on site project, where its engineers worked on the premises of IGIC.
In 1979, TCS inaugurated its first international office in New York under the leadership of S
Ramadorai (Ramadorai). This enabled the company to boost its marketing efforts in the US. In the
same year, TCS got another major order for developing the accounts receivables system of
American Express Company14 (Amex), one of the largest financial companies in the US. The
successful implementation of this order significantly enhanced the goodwill TCS had among its
US clients. The fact that US companies were also looking for ways to reduce costs by outsourcing
IT projects to low cost service providers helped TCS. In the 1980s, TCS bagged several
prestigious IT projects from foreign companies like SIS SegaInterSettle AG 15 (SEGA).
In 1981, in a bid to improve its research and development (R&D) skills, TCS established the Tata
Research, Design and Development Center (TRDDC) at Pune. The center played a key role in
developing world class products and providing technical assistance to its consultants and other
employees. In the late 1980s, with increasing orders from across the world, TCS felt that it would
be both convenient and economical for the company to execute orders from India rather than from
the customers’ sites located overseas. TCS therefore imported an IBM mainframe machine, IBM
3090, in 1988 to its Chennai office to execute mainframe related projects. With Chennai as a base,
TCS marketing teams looked abroad for clients whose projects could be executed in India at lower
costs. With this, TCS pioneered the offshore development of IT projects in India. In 1991, TCS
opened its first Offshore Development Center.
12
The IBRS offers a dynamic mode of matching entries, which reduces the matching-time cycle by achieving
a higher percentage of matches within a shorter time frame. The IBR system consists of as many distinct
databases as there are zones in the bank, with one database for inter-zonal entries. The database for each
zone processes all the entries of that zone and segregates all inter-zonal entries in an inter-zone data store,
which can be downloaded at a suitable frequency and uploaded to the inter-zonal database for further
processing. The product evolved over the years since it was first implemented in 1968.
13
Headquartered in Detroit, USA, Burroughs produced billing machines, typewriters, virtual memory
computers, etc. The company was later renamed as Unisys Corporation.
14
American Express Company, headquartered in New York City, New York, is one of the leading financial
services company in the world. Its main focus business areas are cards and traveler’s checks.
15
SEGA is a subsidiary of the Switzerland-based SIS Group and it is involved in the custody and settlement
of Swiss securities and securities from other parts of the world.
Another favorable development for TCS was the liberalization of the Indian economy in 1991.
Several provisions, especially those relating to the import and export of IT goods, were relaxed.
TCS could now import computers whenever it wanted, without the problem of stringent and time-
taking licensing procedures. This also enabled the company to handle larger size orders and
increase its revenues.
In the mid-1990s, TCS’ revenue growth was propelled by the Internet revolution. In 1997, TCS
made its Management Consultancy Division (MCD), which had operated independently until then,
a part of its software consultancy division. MCD’s functional consultants, with expertise in areas
such as Human Resource Development (HRD), Management Information Systems (MIS), and
Materials Management (MM), offered strategic and operational solutions, working in close
collaboration with software consultants. Commenting on the vision for TCS, Kohli said, “We see
our future as system consultants and not as management consultants or computer consultants or a
company with vast resources. The aim is to leverage the knowledge base in a specific business and
expertise in technology. Globally, businesses are realizing that no problem has a worthwhile
solution without factoring in information technology. From the TCS standpoint, this has to be done
to sustain growth and move up the value chain.”16
For the fiscal year ending March 31, 2008, TCS generated total revenues of US$ 5.7 billion. As of
April 2008, TCS employed over 111,407 people in 47 countries around the world. 17
THE HR POLICIES
TCS gave utmost importance to its human resource function. The company viewed its employees
as assets, which had to be utilized efficiently. The TCS senior management constantly kept track
of the vast intellectual assets, their skill sets, the status of projects on which they were working,
and the number of people available for being placed in other projects. TCS determined its
manpower requirements based on inputs from senior consultants, who provided information on
changes in technology and the potential demand for new IT skills in the immediate future. This
enabled the HR department to plan and schedule recruitment and training programs.
TCS took care of every aspect of human resource management, from recruiting to training and
career development. The company viewed recruitment as an ongoing process. To fill entry level
positions, the company picked up candidates from college campuses across the country. TCS
deployed over 50 senior executives who maintained contacts with leading educational institutions
in India. The company combined its aim of recruiting software engineers with the broader
objective of improving educational standards in India. It sponsored IT conferences and seminars in
these institutes. The company also engaged in reforming the course curriculum and teaching
methods for these institutes.
TCS was well recognized in the industry for its emphasis on employee training. The company
invested a large amount of money on this activity. In late 1997, the company inaugurated a training
center in Thiruvananthapuram, Kerala, to impart IT skills in the latest technology to its new
recruits. The center had the capacity to train 600 employees at a time. The atmosphere resembled a
college campus, providing a congenial environment in which its fresh out-of-college recruits could
learn. In 1998, TCS spent 6 percent of its total annual sales on training. Training contributed
significantly to the quality of the company’s products and its brand image. Praising TCS for its
training programs, Radha Krishnan, Chief Executive Officer (CEO), Innova Solutions, a software
services company based in Silicon Valley, US said, “The training at TCS is no doubt excellent,
and that is why everybody tries to lure a TCS engineer.”18
16
“TCS Shifts Focus from Development to Solutions,” www.rediff.com, October 30, 1997.
17
“Q4 2007-2008 Press Release (Indian GAAP),” www.tcs.com.
18
Shivanand Kanavi, “Megasoft,” Business India, June 7, 2004.
In addition to training, TCS also believed in grooming its employees into consultants and
managers. In their first couple of years at the company, employees were put to work on different
technological platforms and applications. This was important for TCS as technologies and
customer needs and preferences changed rapidly. The company did not try to develop its
employees as specialists, as it knew that they would become useless once their area of
specialization became obsolete. After two years, according to individual performances, the
employees were promoted as system consultants. The TCS management provided them with ample
opportunities to go up the corporate ladder. This approach was different from that of many other
IT companies, who stressed specialization of their workforces.
The success of TCS’ HR policies was reflected in the fact that its annual employee attrition rate
was 12.6 percent for the FY 2007-2008, the lowest in the industry. Of its employees, 28 percent
were women while foreign nationals from 62 different countries, constituted 9.1 percent of its total
employee base. 19 The attrition rates in other IT companies stood at 15 percent during the same
period. 20 In 2007, Dataquest, one of the leading technology publications in India, ranked TCS first
in its list of Top 20 employers in India21 (Refer to Exhibit I for top IT employers in India). The
company was recognized after attaining impressive HR scores and employee satisfaction levels
(Refer to Exhibit II A for employee satisfaction scores and to Exhibit II B for HR scores of IT
companies). The same year, TCS was awarded the 23rd rank on the BusinessWeek22 Top 100 IT
Companies (Refer to Exhibit III for the ranking details).
PERFORMANCE-LINKED SALARY STRUCTURE
Despite being rated as one of the top IT employers in India, however, TCS had drawn criticism for
its compensation structure. According to the employees the salaries were not on a par with the
industry standards. TCS was also under pressure to follow the Employee Stock Options 23 (ESOP)
schemes followed by its competitors. ESOPs had emerged as one of the most powerful tools for
retaining employees. Several industry observers opined that the absence of stock options limited
TCS’ ability to attract the best talent in the industry.
In a bid to combat these criticisms, TCS came up with the proposal that it would follow a
performance-linked salary structure called the Economic Value Added (EVA) model in 1999.
With this EVA model, it aimed to give differential pay scales to employees at the same level of the
hierarchy based on the performance of the individual and the company.
TCS was the pioneer in implementing EVA as a part of its competitive salary structure. EVA
determined the compensation based on the value delivered to the employer. It was measured at
individual, department, and enterprise levels. According to the EVA model, the total corporate
value depended on the performance of business units and the performance of the people in those
units. Individually, the employee needed to know his/her contribution to the drivers that enhanced
the EVA of a business unit, which in turn would enhance the EVA of the corporation.
19
“Q4 2007-2008 Press Release (Indian GAAP),” www.tcs.com.
20
“TCS Continues to have the Lowest Attrition Rate in the Industry,” www.tatamail.com, February 27, 2007.
21
“TCS Best Employer, Wipro Nowhere among Top 20,” www.economictimes.indiatimes.com, August 28, 2007.
22
BusinessWeek was one of the leading business magazines published in the world. It was first published in
1929 and owned by McGraw-Hill.
23
ESOPs can be defined as contribution of the employee pay package for investing in the stocks of the
employer company. ESOPs enable the employees to buy shares of the company for which they work, at
or below the market prices. They can gain from future increase in the stock price. ESOPs are generally
used as part of incentive programs. By offering them ownership in the company employees could be
motivated to perform more efficiently.
The main drivers of EVA were revenue, cost, and capital charge. Individuals could contribute to
the growth of EVA by acting on the drivers that they controlled. The main revenue drivers were
product licensing fees, fees billed for onsite or offsite work, sales, billable hours, response time,
and domain skills. On-time delivery contributed strongly to EVA as better delivery cycles
increased the orders from customers. Cost drivers were determined both at the individual as well as
the department levels, and they also included sales & marketing and recruitment expenditure.
Project leaders were well aware of EVA targets, the revenue, and cost drivers.
After determining the EVA targets, the employees were informed about the ways of attaining
them. An individual was expected to work toward improving the entire benefit package consisting
of three components like corporate EVA, business-unit EVA, and individual performance. The
individual received a percentage of the total EVA based on the improvement of corporate EVA.
While paying out incentives to junior level employees, individual performance was given
maximum consideration. The unit’s performance was given the highest consideration for middle
level employees, and corporate performance was given the greatest importance at the senior
management level.
TCS offered salaries in a two-tier package structure that consisted of fixed pay and variable pay.
The fixed pay amounted to 70 percent of the salary and the variable pay to the rest. The fixed pay,
which was not subject to any change on the basis of EVA, was different at different levels, and
changed only when the cost of living increased substantially or when the pay scales in the industry
went up considerably.
Out of the total EVA, every employee got a certain percentage as incentives based on the
improvement of the corporate EVA. If the business unit did well, the employee would also get
incentives as a part of the business unit EVA. Individual performance would determine the
individual EVA. According to Ramadorai, “There’s no ceiling on the bonus. It can be equal to the
fixed portion of the salary, providing the cell has shown that kind of EVA growth.”24
In order to maintain consistency in pay and ensure that it did not vary much every year, TCS
created a bonus bank. The variable pay was paid not immediately but after a certain interval.
Initially, a target bonus was allocated that could be paid only after realization of the target, and
was multiplied by a factor if the targeted EVA was surpassed. When targets were exceeded,
potential bonus was declared and was deposited in a bonus bank. The individual bonus bank had
two components; while the first component consisted of a share for corporate performance; the
second was for project and individual performance.
The amount was accumulated each year but employees could withdraw only up to two-thirds of
the amount each year. This left some balance in the bonus bank, which was used to maintain
compensation levels for employees during lean times. The bonus bank provided a long-term plan
and demanded consistent performance from employees. According to Mahalingam, “This gives
employees an ability to take a long-term view of things. There is no way that employees can go
totally wrong in their (EVA) projections.”25
TCS had a clear stand on ESOPs. ESOPs were offered to only a few employees while most of the
employees were under the purview of EVA. However, the TCS management believed that the
ideal compensation system would be a combination of both EVA and ESOPs. According to
Ramadorai, “One is not a replacement of the other. EVA focuses on value creation and ESOPs
provide the commitment as well as rewards over the long term.”26
24
“TCS Shifts to Performance-Linked Salary Structure,” www.tata.com, November 27, 2000.
25
Prasad Sangameshwaran, “Courting EVA, the TCS Way,” Indian Management, August 2002.
26
Prasad Sangameshwaran, “Courting EVA, the TCS Way,” Indian Management, August 2002.
TCS ANNOUNCES PAY CUTS
In January 2008, the management of TCS gave a jolt to its employees by announcing its plans to
cut 1.5 percent of the variable component of the total compensation of its employees. The reason
cited for this was the company’s inability to meet the EVA target for the third quarter of the FY
2007-2008. Considering the cut as a meager adjustment, Pradipta Bagchi (Bagchi), General
Manager, Corporate Communications, TCS said, “The cut down is just a small adjustment as
against the total compensation paid by the company before starting of the third quarter.”27
The variable salary for the third quarter was paid in advance to the employees and the company
proposed to adjust the excess amount during the fourth quarter of 2007-2008. The variable
compensation for the third quarter amounted to Rs. 3.76 billion while TCS achieved an EVA target
of Rs. 2.93 billion. The advance payment to be adjusted in the fourth quarter amounted to Rs. 0.83
billion.28 According to analysts, the TCS salary cuts were considered as a negative move that gave
a warning sign to employees that everything was not fine in the IT sector. Commenting on the
wage cut, a Mumbai brokerage analyst said, “This can send a strong signal to the employees that
revenues have not measured up to internal targets. 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.”29
The pay cuts gave a jolt to not only the over 0.1 million TCS employees but also to the 7 million
IT employees across India. A TCS employee said, “It is not about economics but our livelihood. If
our income is going to be this uncertain, how can we plan for our future?”30 Moreover, their
problems were compounded when the company announced that the salary cut would be adjusted in
their allowance after the declaration of the fourth quarter results for the FY 2007-2008. In the
release to the employees, TCS said, “In Q4, we will follow the same basis of advance payment of
Variable Pay as per expected EVA projections at the beginning of 2007-08. When the audited
results for Q4 are announced in April 2008, appropriate adjustment in Variable Pay will be made
either upward or downward as the case may be.”31 Commenting on this announcement, an
employee at TCS said, “The company has not given exact reasons for the cut in Q3. Now, it wants
us to prepare for the fourth quarter too. This is the first time that the company has cut down the
variable allowance.”32
In addition to slashing a part of the variable salary, the pay hikes were also expected to stabilize
due to the increase in wage inflation. Commenting on the moderation of wage hikes, Mahalingam
said, “The average salary hike is about 15 per cent per annum each year. We expect salaries to
stabilize. This would broadly depend on 2-3 issues and therefore brings in a variable component.
However, the industry is concerned about ensuring margins, it would certainly put more pressure if
a similar hike is to be offered this year.”33
In an industry where pay hikes of 40 percent were common, Phiroz Vandrevala (Vandrevala) said
that TCS pay cut was their initial step to “introducing realistic expectations”. 34 According to a
survey by CLSA35 Asia Pacific, around 40 percent of the employees in the Indian IT industry
27
“TCS Cuts Salaries,” www.infotech.indiatimes.com, January 31, 2008.
28
“TCS Cuts Salaries,” www.infotech.indiatimes.com, January 31, 2008.
29
30
D Madhavan, “Pay Cut Worries TCS Employees,” www.newindpress.com, February 5, 2008.
31
K. Sreedevi, “Techies in Jitters over TCS Salary Cut Move,” www.sify.com/news, January 30, 2008.
32
D Madhavan, “Pay Cut Worries TCS Employees,” www.newindpress.com, February 5, 2008.
33
“Tech Sector Wage Inflation Poised to Sober Down,” www.thehindubusinessline.com, February 21, 2008.
34
Rhys Blakely, “Tata Cuts Salaries as IT Outsourcing Flags,” www.business.timesonline.co.uk,
January 30, 2008.
35
CLSA Asia-Pacific headquartered in Hong Kong was a leading investment banking, brokerage, and
private equity services group in the Asia-Pacific markets.
expected an annual salary hike of 20 percent over the next 10 years.36 Analysts opined that if this
trend of wage hikes continued, India would become too costly and would face difficulties in
providing services at competitive prices. It was speculated that other IT companies would follow
suit and consider moderating salaries. According to an IT Specialist at Ma Foi Consultants, other
companies had also taken “cautious approaches”.37
However, Infosys and Wipro said that they did not have any plans to consider the approach
followed by TCS. T V Mohandas Pai (Pai), HR Director at Infosys, said, “Everybody in the
industry is subject to the same market conditions. Whether you cut employee salaries based on
business outcomes depends on the business model you follow. As long as we sell on value and not
on price, we will remain competitive.”38 Wipro too denied rumors of cutting employee salaries.
Pratik Kumar, Corporate Vice President, HR, Wipro confirmed that the company was not
considering any such move.
Analysts were of the view that the increasing wage inflation could be stabilized by moderating the
wage hikes. According to Ganesh Natarajan, apex body, NASSCOM, “There is no need to panic
and we do not have to revisit salaries. But there has to be a moderation in expectations of salary
increases. With the inflation hovering around 4%, it is my view that salary hikes will be moderated
around 9-10% from the earlier average of 15%.”39
To add to employees’ fears, TCS asked about 500 employees whose performance was not up to the
mark to leave the company in February 2008. This was based on the performance ratings obtained
by the employees in the company’s bi-annual performance appraisal system that ranked the
employees on a scale of 1-5. According to TCS, “If an employee gets a grade of 2 or less during
one appraisal cycle, he or she is put on a performance improvement plan which includes additional
training as well as assignments on new projects. If at the end of the second appraisal cycle, the
employee does not come up to the mark and his or her ratings do not improve beyond 2, then TCS,
after proper counseling, disengages with them.”40 Industry watchers viewed these job cuts as a
cost-cutting measure by TCS amidst the rising rupee and fears of a recession in the US.
THE REASONS
TCS cited several reasons for cutting down employee salaries. The major reason for the
unprecedented cut in variable pay was its inability to meet the EVA target for the third quarter of
the FY 2007-2008. The rise of the rupee against the US dollar was another major concern for TCS.
The rupee had appreciated by 12 percent against the US dollar, building tremendous pressure on
the company’s margins and revenues.41 (Refer to Exhibit IV to see how Indian Rupees rose against
the dollar; and Exhibit V for how IT/ITES companies have reacted to the rupee rise).
Another reason was the slowdown in the US economy that forced IT companies to cut their
corporate spending. The earnings and revenues of IT companies were expected to decline since the
US was the largest market for the Indian IT industry, accounting for around 61 percent of the
36
Shyamal Majumdar, “TCS Bells the Cat,” www.business-standard.com, February 7, 2008.
37
Rhys Blakely, “TCS Slashes Bonuses as Strain Shows in Indian IT Industry,”
www.business.timesonline.co.uk, Jan 31, 2008
38
Reema Jose, “TCS Variable Pay Cut Rings Alarm Bells in IT Industry,” www.financialexpress.com,
January 1, 2008.
39
Reema Jose, “TCS Variable Pay Cut Rings Alarm Bells in IT Industry,” www.financialexpress.com,
January 1, 2008.
40
“500 TCS Staff Resign,” www.hindu.com, February 6, 2008.
41
“TCS Employees to Make Good Rs 83 Crore Shortfall in Revenue Target,” www.domain-b.com,
January 30, 2008.
exports.42 Commenting on the impact of the US slowdown on the Indian economy, Simon
Ormston, Head, Outsourcing market, BT Global Services 43 said, “The global economy will be
impacted… The US is by far India’s biggest market.”44
According to a report by HSBC and Capital Markets45 (Capital Markets), the US slowdown was
expected to lead to a decline in net profit margins and revenues of IT companies in the range of
500 to 1,500 basis points46 in the fiscal 2007-200847 (Refer to Table I for the revenue growth
estimates of major Indian IT companies for 2007-2008).
Moreover, the service tax on rented and leased premises in conjunction with the obligation of
minimum alternate tax48 (MAT) was likely to take a toll on IT companies. According to certain
estimates by Emkay Research49 (Emkay), a service tax of 12.5 percent on rented and leased
premises would affect IT companies by 50-100 basis points. The impact of MAT was expected to
affect the earnings in the range of 1-6 percent. 50
Table I
Indian IT Companies: Revenue Growth Estimates: 2007-2008 (in %)
Company HSBC JM Morgan Stanley
2006-2007 2007-2008 2006-2007 2007-2008
Infosys 47.3 33.6 47 29
Satyam 36.3 31.6 35 24
TCS 40.6 31.3 40.7 28.2
Wipro 41.1 30.7 40 26
Source: “Effect of US Slowdown on IT Earnings,” www.offshoringtimes.com, 2007.
Amidst the panic about a possible slowdown in the US economy, TCS’ decision to cut 500 jobs
was also viewed as a cost-cutting measure. However, TCS brushed off speculations regarding cost-
cutting and said that the employee resignation was part of their appraisal process. Bagchi said,
“This is not an exceptional thing, it happens every year and it is part of our annual performance
exercise. In TCS, everyone has to go through an appraisal cycle where they are rated between 1
and 5 depending on their performance. If in one appraisal cycle anyone is rated below 2, we put
them on PIP (performance improvement plan). Under this, they are given extra training. Even after
this if their rating is below 2, then they are asked to look for other jobs.”51
Though TCS viewed the US slowdown as a threat, it also said that the slowdown had not affected
it much as contracts from new clients and increasing business volumes had helped it maintain its
businesses. Vandrevala said, “As of now, it’s business as usual, though of course [a US slowdown]
42
“US Slowdown to Effect Indian Tech Companies: Satyam,” www.infotech.indiatimes.com, February 14, 2008.
43
BT Global Services was the business services and solutions division of the Telecommunications
Company BT Group plc headquartered in London, England, UK.
44
“US Slowdown to Effect Indian Tech Companies: Satyam,” www.infotech.indiatimes.com, February 14, 2008.
45
Capital Markets was a financial information services company based in India.
46
A basis point is used to express the fractional interest rate, where 100 basis points are equal to 1 percent.
47
“Effect of US Slowdown on IT Earnings,” www.offshoringtimes.com, 2007.
48
Minimum Alternate Tax was initiated by the Tax Reform Act, 1969. It was imposed on 155 wealthy
classes of tax payers who were exempted from many deductions under the normal tax.
49
Emkay Research headquartered in Mumbai, India was a financial services company that focuses on
operations related to wealth management and stock broking.
50
“Effect of US Slowdown on IT Earnings,” www.offshoringtimes.com, 2007.
51
“500 TCS Employees Quit after Appraisal,” www.inhome.rediff.com, February 5, 2008.
is a threat.”52 However, TCS expressed its concern over the cuts in IT spending by companies due
to the US slowdown. Infosys, on the other hand viewed it as an opportunity. Commenting on the
US slowdown, Narayana Murthy (Murthy), chief mentor, Infosys, said, “The fact that there may be
a slowdown in the US means people will become much more concerned over better value for
money...We could look at it as an opportunity.”53
Industry watchers opined that there would not be any adverse impact of the slowdown on Indian IT
companies. In early 2007, Mitchell D Cohen, Entertainment Leader, PricewaterhouseCoopers 54
(PwC) Global Technology, had said, “Indian IT firms will surely work their way out of this
slowdown. We do not see much impact.”55
While TCS attributed several reasons for the pay cuts, one of the reasons cited was that it aimed to
cut on employee costs as it planned to create more jobs in India. According to Vandrevala, “We
plan to take more and more work to India. That remains the biggest lever we have to ease costs.” 56
Industry observers opined that TCS’ step toward containing employee costs was a bid to increase
its profit margins since its second quarter margins were severely affected by 117 basis points due
to the increments it offered to its employees in the first quarter of 2007.
THE DEBATE
TCS’ move to cut employee salaries received severe criticism from some quarters. TCS’ reputation
as one of the topmost IT employers in India took a beating as its decision to cut salaries shocked
many of its employees. Many employees even opined that TCS could have cut down on some of
its other expenses instead of cutting the compensation of its employees. An employee at TCS said,
“TCS has grown rapidly and so this news has come as a shock to many, especially the newer
employees who have left their well-paid jobs to join. Imagine the impact it has on the morale of
the employees. If it is just the EVA then why don’t they plug other expenses like the travel,
magazines, stationery, telephone, and other overheads that are high costs and yet easy to curb? I
am sure employees will cooperate, but who would be willing to take the brunt on their salary.”57
Earlier in 2003, TCS had taken a similar decision, causing an uproar in the IT industry when it
reduced the variable salaries of employees by 10 percent. This was due to the initial impact of
EVA which was implemented in the company from April 1, 2003. The reduction in the variable
salary resulted in an overall reduction of the monthly take-home salary for most of its employees.
TCS was severely criticized for this move.
A few employees alleged that the employees had more at stake this time around as there was
actually a 20 percent cut on the variable pay that led to a 10 percent cut on the total salary.
Confirming the cut, a TCS spokesman said, “The pay cut of 20 per cent was due to internal targets
that were not met for the October-December quarter 2007.”58
52
Rhys Blakely, “Tata Cuts Salaries as IT Outsourcing Flags,” www.business.timesonline.co.uk,
January 30, 2008.
53
“US Slowdown May be Good for Indian IT: Murthy,” www.sify.com, January 28, 2008.
54
PricewaterhouseCoopers headquartered in New York City, New York, is a leading professional services
firm in the world. It provides various services in the fields like Accounting, Audit, Taxation, Financial
Advisory etc.
55
“US Slowdown to Hit Top Indian IT Cos,” www.rediff.com, April 9, 2007.
56
Rehys Blakely, “Tata Cuts Salaries as IT Outsourcing Flags,” www.business.timesonline.co.uk,
January 30, 2008.
57
Rabin Ghosh, “TCS Staff to Pay as EVA Goal’s Not Met,” www.sify.com, January 30, 2008.
58
Venkatesh Ganesh, “IT Pay-packets Head for Squeeze,” www.hindustantimes.com, January 27, 2008.
10
The recent announcement of pay cuts resulted in employees criticizing TCS’ much acclaimed TATA
code of ethics that boasted of moral and ethical values. A few employees also questioned the National
award for Excellence in Corporate Governance bagged by TCS for its corporate governance practices,
innovative practices, procedures followed at the Board, and high standard of disclosure and
transparency to its stakeholders, in November 2007. The employees decried the fact that a company,
which according to them, did not show any transparency in its policies, had bagged the award.
The employees alleged that the company never disclosed the EVA target and the way it was calculated.
The percentage of the company component, which formed one of the factors for EVA calculation, was
never made public. A few employees contended that TCS never increased their variable pay when the
EVA targets were more but that it was the first to cut when its EVA targets were not met. Earlier in
2001, when TCS achieved revenue of US$ 1 billion, employees expected some monetary benefit. To
their dismay though, all they faced was a heavy cut in their salaries, they said.
Expressing their concern over the salary cuts, the employees said that this step only served to demotivate
them and spike attrition. Experts opined that in addition to being the leader in the IT industry, TCS’ USP
had been job security and a steady salary structure. The wage cuts were expected to wreck its image. With
the retrenchment of 500 employees in 2008, its image was likely to go down further. However, TCS had
attributed the retrenchment only to its performance appraisal process and said it had nothing to do with the
other alleged reasons. Some analysts too were of the opinion that the sacking of 500 employees had
nothing to do with the slowdown in the US economy and the rise of the Indian Rupee. They said that it
would be a routine exercise in the future as employees who could not keep up with the growth of the
company would be asked to leave. Rivi Varghese, CEO of Customer XPs59 said, “As an industry grows
higher up the chain, it is but natural that a small percentage of the people will not be able to keep pace
with that. So it is a question of expectations not being met.”60
A few employees even considered the TCS pay cuts as part of its IT Cleansing Cycle, wherein the
company laid off old employees in a bid to employ new and dynamic ones. The best way was to
trim down the wage levels which would indirectly trigger the employee to leave the organization.
The employees said that the variable pay cuts were the tactics adopted by TCS to show that they
were in line with the industry and market expectations, and to state that “TCS still enjoys the
industry leading growth.”61
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.”62
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 the rising rupee and signs
of a slowdown in the technology spend in the US due to recession. According to executives and
consultants in the tech industry, the average hike for employees was expected to be around 12-14
percent in contrast to the 14-18 percent hikes given in the previous years.63 Commenting on the
stabilization of wage hikes, Natarajan said, “A slightly lower wage hike is good for the industry.
But it is extremely difficult to predict if this will be done during the year.”64
59
Customer XPs headquartered in Bangalore, India, is a software products company specializing in real
time predictive analytics, embedded enterprise decision management, etc.
60
“Indian IT Industry: Has the Slowdown Started?” www.nativeindian.worldpress.com, February 10, 2008.
61
62
“TCS Staff to Lose 1.5% of Total Salary,” www.businessnews-blog.blogspot.com, January 30, 2008.
63
V Rishi Kumar, “Tech Sector Wage Inflation Poised to Sober Down,” www.thehindubusinessline.com,
February 21, 2008.
64
V Rishi Kumar, “Tech Sector Wage Inflation Poised to Sober Down,” www.thehindubusinessline.com,
February 21, 2008.
11
However, according to another report by ECA International (ECA), a London-based HR firm, the
hikes in Indian multinationals was likely to increase by 14 percent in 2008.65 Lee Quane, Hong
Kong-based Asia general manager for ECA said, “Salary increase in India is expected to be the
biggest this year as companies have to keep in mind the inflation for their employees to maintain a
good economic stature.” 66
Industry insiders were also of the opinion that managing the growth would be a key challenge in
the IT industry. Contrary to what the industry insiders had said, the growth outlook for the IT
industry was positive. Gartner Inc. 67 (Gartner) estimated that the Indian IT industry was poised to
grow to US$ 10.73 billion by 2011.68 The Vice President of Gartner, Partha Iyengar (Iyengar),
said, “There is no sign at this point and no evidence of a slowdown (of IT industry) and India will
continue to grow at a rate of 25-30 per cent.”69 According to analysts at JPMorgan, TCS’ margins
would increase by 50 basis points in 2008.70 There were indeed concerns regarding the short
supply of skilled manpower for the Indian IT sector. A shortfall in the skilled manpower was
expected to the biggest challenge to the Indian IT sector rather than the slowdown in the US
economy or the rise of the Indian rupee against the dollar. Iyengar said, “Only 25 percent of the
total graduates in India were employable.”71
Industry experts said that the Indian IT industry should try to reduce its dependence on the US
economy and to increase their revenues from other markets like Europe and Asia. A few experts
saw a silver lining for the Indian IT industry despite the gloom of a slowdown in the US.
According to Navi Radjou, Vice President, Forrester Research, “Finally, finally, this might force
Indian IT providers to turn their attention to the domestic Indian IT market, which they long
overlooked.”72
65
“IT Sector Deflates, no More Soaring Salaries,” www.ibnlive.com, January 31, 2008.
66
67
Gartner Inc. headquartered in Stamford, Connecticut, US, is one of the leading IT research and advisory
services company in the world.
68
69
“No Slowdown in Indian IT Industry: Gartner,” www.in.rediff.com/money, February 18, 2008.
70
Kavita Kukday and Mini Joseph Tejaswi, “IT Cos to Log Better Net in Q3,”
www.timesofindia.indiatimes.com, January 11, 2008.
71
“No Slowdown in Indian IT Industry: Gartner,” www.in.rediff.com/money, February 18, 2008.
72
Nandini Lakshman, “Indian IT Prepares for a U.S. Recession,” www.businessweek.com, February 11, 2008.
12
Exhibit I
Top IT Employers in India
(DQ-IDC BES Survey 2007)
Rank Company
1 Tata Consultancy Services
2 HCL Infosystems
3 iGate
4 RMSI
5 Synechron
6 IBM
7 Capgemini
8 Infosys
9 Tavant Technologies
10 Sun Microsystems
11 Cognizant
12 Computer Sciences Corporation
13 Hexaware
14 Cadence
15 Accel Frontline
16 Ness Technologies
17 Cybage
18 AztecSoft
19 Aricent
20 Geometric Software
Source: “IT Best Employers: The Top 20,”
www.dqindia.ciol.com, August 31, 2007.
13
Exhibit II A
Employee Satisfaction Scores of IT Companies
Employee
Rank Company
Satisfaction Score
1 HCL Infosystems 75.4
2 iGate 72.5
3 TCS 70.8
4 RMSI 69.6
5 Capgemini 67.6
6 Tavant Technolgies 65.7
7 Sun Microsystems 64.7
8 Computer Sciences Corporation 63.9
9 Hexaware 63.6
10 Cadence 63.5
Source: “The Other Side of the Flat World,” www.dqindia.ciol.com,
August 31, 2007.
Exhibit II B
HR Scores of IT Companies
Rank Company HR Score

1 TCS HCL Infosystems 13.6
2 Infosys 13.1
3 Wipro 11.5
4 IBM 11.0
5 Synechron 10.9
6 Cognizant 9.4
7 RMSI 8.7
8 Ness Technologies 8.5
9 L&T Info 8.1
10 Tech Mahindra 7.9
Source: “The Other Side of the Flat World,”

www.dqindia.ciol.com, August 31, 2007.
14
Exhibit III
TCS’ Position in BusinessWeek Top 100 IT Companies: 2007
Rank Company
1 Amazon.com
2 America Movil
3 Telefonica
4 Hon Hai Precision Ind.
5 Telenor
6 Apple Computer
7 AT&T
8 Nintendo
9 Microsoft
10 China Mobile
23 Tata Consultancy Services
Source: “The Info Tech 100,”
www.businessweek.com, July 2, 2007.
15
Exhibit IV
Indian Rupees to US$1
* Graph for the period December 2007 to May 2008.
2007 Average Rates

January 44.2117
February 44.012
March 43.7936
April 42.0176
May 40.5561
June 40.5905
July 40.28
August 40.6791
September 40.1735
October 39.3661
November 39.3168
December 39.3752
Source: www.x-rates.com
16
Exhibit V
How IT & ITES Companies have reacted to the Rupee-rise

The rise in rupee value was challenging IT & ITES sector to have a re-look at their HR policies
and practices and to utilize the resources optimally in order to withstand this testing time. The
management of these companies reshuffled their strategies in general and HR policies in
particular. For instance, some companies resorted to acquiring foreign delivery centers (such as
Apollo Health Street’s acquisition of Zavata Inc. and Firstsource Solutions Ltd.’s acquisition of
MedAssist Inc.); cutting down operational costs; moving from input-based pricing to output-
based pricing in case of ITES firms; concentrating on domestic businesses and hedging, which
was yet another key solution to evade future US Dollar declines which was adopted by top
notch IT companies and ITES firms.
On the HR front, the companies resorted to slashing the number of recruitments and retaining
the best of the talented employees. The companies also explored the possibility of increasing the
number of working hours and shift from 5-day week schedule to 6-day week. In addition to this,
even the top companies were forced to reduce their wage bills. An Assocham Eco Pulse study 73
revealed that the growth of salaries in the top IT companies was just 25 percent compared to 64
percent in the previous year.74 Even the top companies such as Infosys that were not
significantly affected by the appreciation of rupee in the first quarter of fiscal year 2007 felt the
pinch in the second quarter. In addition to forcing the companies to reduce their employee-
related expenditure, the rise in rupee value had also resulted in a slowdown in new recruitments
in the sector.
Compiled from various sources.
73
The Assocham Eco Pulse study is conducted by Associated Chambers of Commerce and Industry of
India (ASSOCHAM), the premier body of chamber of commerce in India.
74
Sujata Dutta Sachdeva, “Rising Rupee Hits Salaries in IT Sector,” www.timesofindia.indiatimes.com,
November 22, 2007.
17
References & Suggested Readings:
1. “TCS Shifts Focus from Development to Solutions,” www.rediff.com, October 30, 1997.
2. “TCS Shifts to Performance-linked Salary Structure,” The Economic Times,
November 27, 2000.
3. “TCS Shifts to Performance-linked Salary Structure,” www.tata.com, November 27, 2000.
4. Prasad Sangameshwaran, “Courting EVA, the TCS Way,” Indian Management, August 2002.
5. Shivanand Kanavi, “Megasoft,” Business India, June 7, 2004.
6. “TCS Continues to Have the Lowest Attrition Rate in the Industry,”
www.tatamail.com, February 27, 2007.
7. “US Slowdown to Hit Top Indian IT Cos,” www.rediff.com, April 9, 2007.
8. “TCS Limits Salary Hike to 12-15%,” www.sify.com, June 25, 2007.
9. “The Info Tech 100,” www.businessweek.com, July 2, 2007.
10. “TCS Best Employer, Wipro Nowhere among Top 20,” www.economictimes.
indiatimes.com, August 28, 2007.
11. “The Other Side of the Flat World,” www.dqindia.ciol.com, August 31, 2007.
12. “IT Best Employers: The Top 20,” www.dqindia.ciol.com, August 31, 2007.
13. Sujata Dutta Sachdeva, “Rising Rupee Hits Salaries in IT Sector,” www.timesofindia.
indiatimes.com, November 22, 2007.
14. “Effect of US Slowdown on IT Earnings,” www.offshoringtimes.com, 2007.
15. Reema Jose, “TCS Variable Pay Cut Rings Alarm Bells in IT Industry,”
www.financialexpress.com, January 1, 2008.
16. Kavita Kukday and Mini Joseph Tejaswi, “IT Cos to Log Better Net in Q3,”
17. Binita Jalan, “Attrition May Play the Spoilsport for the Indian Industry,”
www.merinews.com, January 20, 2008.
18. Venkatesh Ganesh, “IT Pay-packets Head for Squeeze,” www.hindustantimes.com,
January 27, 2008.
19. “US Slowdown May be Good for Indian IT: Murthy,” www.sify.com, January 28, 2008.
20. “TCS Staff to Lose 1.5% of Total Salary,” www.businessnews-blog.blogspot.com,
January 30, 2008.
21. “TCS Cuts Staff Salaries in Tune with Tough Times,” www.economictimes.
indiatimes.com, January 30, 2008.
22. Rabin Ghosh, “TCS Staff to Pay as EVA Goal’s not Met,” www.sify.com, January 30, 2008.
23. Reeba Zachariah, “Re Woes: TCS to Slash Variable Pay Component,”
24. K Sreedevi, “Techies in Jitters over TCS Salary Cut Move,” www.sify.com, January 30, 2008.
25. “TCS Employees to Make Good Rs 83 Crore Shortfall in Revenue Target,”
www.domain-b.com, January 30, 2008.
26. “IT Sector Deflates, no More Soaring Salaries,” www.ibnlive.com, January 31, 2008.
18
27. Rhys Blakely, “TCS Slashes Bonuses as Strain Shows in Indian IT Industry,”
www.business.timesonline.co.uk, January 31, 2008.
28. Sudip Kumar, “Salary Cut in TCS Stimulates Panic in IT Industry,”
www.instablogs.com, January 31, 2008.
29. “TCS Cuts Salaries,” www.infotech.indiatimes.com, January 31, 2008.
30. “TCS Jitters Industry - Salary Cut Move. This is Called Recession,”
www.msjawahar.wordpress.com, February 1, 2008.
31. D Madhavan, “Pay Cut Worries TCS Employees,” www.newindpress.com, February 5, 2008.
32. “500 TCS Employees Quit after Appraisal,” www.inhome.rediff.com, February 5, 2008.
33. “500 TCS Staff Resign,” www.hindu.com, February 6, 2008.
34. Shyamal Majumdar, “TCS Bells the Cat,” www.business-standard.com, February 7, 2008.
35. “Indian IT Industry: Has the Slowdown Started?” www.nativeindian.worldpress.com,
February 10, 2008.
36. Nandini Lakshman, “Indian IT Prepares for a U.S. Recession,” www.businessweek.com,
February 11, 2008.
37. “US Slowdown to Effect Indian Tech Companies: Satyam,” www.infotech.indiatimes.
com, February 14, 2008.
38. “No Slowdown in Indian IT Industry: Gartner,” www.in.rediff.com/money, February 18, 2008.
39. “Tech Sector Wage Inflation Poised to Sober Down,” www.thehindubusinessline.com,
February 21, 2008.
40. V Rishi Kumar, “Tech Sector Wage Inflation Poised to Sober Down,”
www.thehindubusinessline.com, February 21, 2008.
41. “Q4 2007-2008 Press Release (Indian GAAP),” www.tcs.com.
42. www.x-rates.com
19

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Compensation Management at Tata Consultancy Services Ltd.:

 2008, IBS Center for Management Research. All rights reserved.

Compensation Management at Tata Consultancy

SQUEEZING THE EMPLOYEE PAY PACKETS

PERFORMANCE-LINKED SALARY STRUCTURE

TCS ANNOUNCES PAY CUTS

Rank Company HR Score

Source: “The Other Side of the Flat World,”

Indian Rupees to US$1

* Graph for the period December 2007 to May 2008.

2007 Average Rates

How IT & ITES Companies have reacted to the Rupee-rise

References & Suggested Readings:

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