Compensation Management at Tata Consultancy Services Ltd.: Coping with Turbulent Times in the Indian IT Industry
Case Details:
Price:
Case Code
: HROB112
Case Length
: 18 pages
Period
: 2003-2008
Pub Date
: 2008
Teaching Note
: Available (3 pages)
Organization
: Tata Consultancy Services
Industry
: Computer, IT & ITES
Countries
: India
For delivery in electronic format: Rs. 300; For delivery through courier (within India): Rs. 300 + Rs. 25 for Shipping & Handling Charges Themes
Strategic Human Resource Management/ Human Capital/ Employer Branding/Organizational Behavior
Abstract:
The case discusses the compensation compensat ion management practices at Tata Consultancy Services 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 o f the salary was arrived after considering business unit EVA, corporate EVA, and also a lso 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 since its EVA targets for the third quarter of FY 2007-2008 were not met 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 c uts were a result of the t he macroeconomic macroeconomic challenges challenges that the Indian IT companies were facing -- rapid appreciation of the rupee against the US dollar and t he recession in the US economy 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 employ employees. ees. » Discuss various concepts related to compensation management. » Discuss the importance of variable compensation in light of its ability to motivate employees employees and enhan enhance ce organizational productivity. » Discuss the pros and cons of the EVA-based compensation management system and also analyze EVA as a performance measurement measurement tool. » Understand the rationale behind the cut in the compensation of the employees at TCS. macroeconomic variables could affect a company's HR policies. » Understand how macroeconomic » 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, Incentiv Incentives, es, HR policies, Recruitment, Employee satisfaction, Employee attrition, Retrenchment, Retaining, Employee training, Career development, development, Tata Consultancy Services, Satyam Computers, Wipro, Infosys, Information technology
Th ere's ere's no ceiling on t h he bonus. It can be equal to t h he fixed portion of t h he salary, providing t h he cell has has shown shown t hat hat kind ki nd of of EVA EVA growth growth . It It iis not not ju just st comp ensation, w e wish wish our our e employ ees ees to to also ge get t a a f ee eeling ling of of own own ership rship for for th th eir own unit, and and its its p erformanc e. e. We want each ach e employ ee ee to f ee eel l as as if if th th ey ar e running th eir busin ess . Th ey hav e to think lik think lik e entr entr epr en eurs urs and and know know th e cost cost attach attach ed to to th th eir busin ess and how how will will th th ey y add add valu valu e to th e 1 inv estm ent ." ." - S. Ramadorai, CEO and Managing Director, Tata Consultancy Services Ltd., in 2000, Regarding its Economic Value Added (EVA)-based Compensation Management System. "We und ertak e a a r r evi ew w of of varia varia bl e pay pay e ev ery ry q q uart uart er r and and this this tim e, w e d ecid ed d to to mak mak e an an adjustm adjustm ent ." ." 2 - S. Padmanabhan, Global Human Resources Head and Executive Director, Tata Consultancy Services Ltd, in February 2008. " This This wag e cut cut is is a a r r efl ection ction of of th th e caution . It It r r einforc es s th th e manag em ent nt vi vi ew w of of macro macro economic chall eng es ." ." 3 - Harit Shah, Research Analyst, Angel Broking 4, 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 anno unced its plans to cut 1.5 percent of the variable component co mponent of employees' compensation. It clarified, however, that there would wo uld 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 wa s the biggest market for the Indian Ind ian 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 caug ht the entire IT Industry by surprise. The EVA payment made in advance for the t hird quarter was to be deducted from the variable salaries in the fourth quarter. The variable co mponent of the salaries of the TCS empl e mployees oyees 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. dec ision. 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, 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...
Excerpts Background Note
TCS was established in 1968 with its headquart ers in Mumbai. It was formed as a divisi d ivision on of o f Tata Sons Limited (TSL), one of India's largest business conglomerates, and was ca lled 'Tata Computer Center.' F C Kohli (Kohli) was appo inted as the first General Manager in 1969. Soon after, the division was renamed Tata Consultancy Services (TCS). During its early days, TCS, with a staff of 10 consultants co nsultants 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)... 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 senior management constantly constantly kept track of t he 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...
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 (ESOP) schemes followed by its competitors. ESOPs had emerged as one of the most powerful tools for retaining employees...
TCS Announces Pay Cuts In January 2008, the management management of TCS gave a jolt to its employees by announcing 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 t he FY 2007-2008... 2007-2008...
The Reasons TCS cited several reasons for cutting down employee salaries. The major reason for t he unprecedented unprecedented cut in variable pay was its inability to meet the EVA target for t he third quarter of the FY 2007-2008. The rise of t he rupee against the US dollar was another major concern concern for TCS. The rupee r upee had appreciated by 12 percent against the US dollar, building tremend tremendous ous pressure on the company's margins and r evenu evenues. es. (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)...
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 employe employees. es. Many employees even opined that TCS could have cut down on some of its other expenses instead of cutting the compensation of its employees...
Outlook
Despite TCS' claim t hat it would make salary adjustments in the next quarter, the employees remained remained divided and expected this trend to continue. A TCS employee said, "Though the official word is that t he situation will be reviewed by March end, we are preparing for a regime wherein 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
