The days of heady annual increments and bonuses are over - at least for now - for IT employees. Software giant Tata Consultancy Services has been making headlines over the last one week. The first was the company's decision to reduce the employees' paycheques by around Rs 10,000 during February and March this year. The second headline-grabbing action was Tuesday's announcement that around 500 of its staff had "resigned" due to poor performance.
The company says - with some justification - that not much should be read into these two decisions. After all, there is nothing guaranteed in variable pay, which is linked to performance, and the decision to "adjust salary" was taken only because it fell short of meeting the EVA target "due to a combination of external and internal factors".
Like many of its counterparts, TCS has a variable component in the salary structure of an individual that depends on the rating that he receives on a scale of 1-5. This component is linked to the company's performance and metrics. This was paid in advance for the third quarter and part of it is being deducted, as the targets were not met.
About the "resignation" of 500 employees, the company said it should be remembered that the group constitutes just around 0.5 per cent of the company's total employee strength. Besides, the company had asked an equal number of people to leave last year too.
Though India's IT companies wouldn't admit it publicly, the fact is that the TCS action signals clearly that the days of heady annual increments and bonuses are over for employees across sectors such as IT globally.
In fact, IBM was the first to do it in the US. Last month, thousands of its employees were staring at pay cuts as the company did what it calls a 15 per cent base salary adjustment across all units with eligibility for overtime.
IBM in recent months has been hit with lawsuits filed on behalf of thousands of US employees who claim the company illegally classified them as exempt from federal and state overtime statutes in order to avoid paying them extra whenever they worked more than 40 hours per week.
IBM found a way out by allowing them to collect overtime pay, but decided to cut their base salaries by 15 per cent to make up the difference. While the company said no worker will lose money, a report by the Associated Press indicated that many of them will lose money.
This is because one-third of the affected workers - more than 2,500 people - generally do not work enough hours to make up for the 15 per cent cut in base pay.
The reasons may have been different, but both TCS and IBM have done something which goes against conventional wisdom that says treat your employees as holy cows in a situation where you are not sure whether the employees who are walking out of the door today would come back tomorrow. More importantly, the feeling that is gaining ground is if TCS has done this, can others be far behind?
But sector analysts say the pay cut - or at least a moderation in pay hikes - was only to be expected. Concerns had been raised periodically that the adverse impact of rupee appreciation could force IT companies to cut down on costs.
Besides, there is the issue of cost competitiveness. In a survey released a couple of months back, CLSA Asia Pacific said 40 per cent of India's IT employees expect their salaries to rise by 20 per cent annually over the next 10 years.
That's the reason why quite a few analyst firms feel by 2010, India may become too costly to provide services at competitive costs. For example, Evalueserve, a leading provider of knowledge process outsourcing services, says Indian salaries have increased at an average of 14 per cent a year. If this trend continues, the cost-arbitrage benefit would get reduced from the present 40 per cent to 25 per cent by 2010.
The Conference Board, the world's pre-eminent business membership and research organisation, said in a study in October that the competitive advantage of low-wage countries is often exaggerated once the meagre productivity of their workers is factored in.
The manufacturing sector in India and China only pays between 2 per cent and 3 per cent of the US compensation level on average. But labour productivity in these countries is also far below the US level at 12 per cent to 13 per cent.
TCS may have unwittingly given a wake-up call to India's fast-growing IT sector.