Rising rupee may hit IT hikes

This is a very good article published today in The Economic Times on the impact of rupee appreciation, which may become a permanent macro economic phenonmenon, on the pay hikes as well as on recruitment in Information Technology sector, which bore the brunt of rupee appreciation effecting the margins of IT companies. As already told, every 1 percent appreciation in rupee against US dollar, the margins of export oriented IT companies are effected to the extent of 35-50 basis points or 0.35 to 0.50 percent.

Is the IT party over? For the moment, it looks so. With the strong rupee impacting adversely the profits of every IT company, salary increments are expected to take a hit. And more of the salary is likely now to become part of the variable component, so that you get more only if you work more and perform better. “There is tremendous pressure to keep costs down,” says Venkat Shastry, partner in executive search firm Stanton Chase International.

“Over the next few quarters, I don’t see anybody providing for any serious salary increases or making corrections, even if that means higher attrition. It’s been madness in 3 to 10 years’ experience category in the past few years. That will taper down.”

Salary cost is by far the biggest component of cost, accounting for 45% of IT companies ’ costs and 40% of BPO costs. With many mid-size and small IT/BPO firms seeing a fall in profits in the Q1 of this fiscal, and most larger ones witnessing a sharp slowdown, varied options are being considered to keep the salary component under check or to get more work out of each employee. The pressure to do this is more so as Indian IT’s competitors like IBM, Accenture and EDS have not been impacted by rupee rise as much, given that they have only a fifth or less of their workforce in India. Says Gangapriya Chakraverti of Mercer India, “Variable pay will come up in a big way. Compensation related to productivity and contribution will take over. Companies will have to be careful about headcount. They will no longer have the luxury of maintaining a large talent pool that’s sitting idle.” Such pools are maintained to provide for attrition or to use in the event of the firm suddenly bagging a big project.

Adds Gautam Sinha, CEO of TVA Infotech, “The mid quartile which has been getting close to 15-20 % increments in compensation packages, will see tightening. Companies might not decrease the percentage of increment; instead they might link it to productivity and performance and downsize number of people being awarded raises. This is because companies are getting work and signing new deals. So they need the workforce to deliver the job. But they can afford to be choosy about who they want to appraise.”

Rupee’s rise is expected to hit BPO employees harder than IT. Unlike infotech, where 30% to 50% of employees work onsite and paid in dollars, in BPOs, 90% of the work is done in India and employees are paid in rupees. “Mid and senior level executives in BPOs have been getting increments of 14-20 %. I think that will come down to 8-15 %. Overall weighted average of increments used to be 7-8 %. That may be down to 4-5 %,” Vashistha says.

The Source : The Economic Times - July 23, 2007