A measured step

, and July 24, 2018

Traditionally, Indian IT firms have been dependent on the US market for revenue generation. But they have been facing challenges since 2017 because of the US government’s protectionist stance and the advent of automation technologies. In a knee-jerk response to this situation, these companies decided to withhold salary hike for employees. However, most fail to analyze the implications of such measures in the overall context of strategic human resource perspective.

Human resources are one of the key components of any organization. In Indian IT firms, compensation is the key determinant of an organization’s ability to attract and retain talent. At a macro level, compensation packages are determined by market forces, but at the micro level it may vary because of the difference in increments given to employees performing similar tasks.

To understand the dynamics of small-sized Indian IT firms and the compensation policies, one should keep in mind three dimensions: business scenario, employee talent, and job vacancy.

 

interplay of three dimensions

Business scenario could be favorable or challenging. Since the 1990s, the Indian IT industry has been registering 15 to 25% YoY growth. From an organizational context, if the YoY growth rate is around 24%, the revenue, and along with it the strength of human resources, doubles in three years. This kind of growth rate can promote employees to the next level every three years even if there is no attrition. This is the most favorable situation for IT firms. When the growth rate becomes 18%, it takes four years to double the revenue and employee strength. As long as growth rates are above 15%, the scenario can be termed as favorable; companies can then provide salary hikes of 10% without impacting the margins significantly. The situation starts to become challenging when the growth rates fall to single digits.

Employees can be categorized as talented or not talented. A talented employee is one who understands the technology thoroughly and can apply her knowledge in a variety of situations. Non-talented employees are typically ‘do as directed’ kinds; they need constant supervision and motivation for performing basic tasks.

 IT firm vacancy can be categorized as critical and non-critical. Critical vacancies are those that require niche skills—which talent acquisition teams find difficult to fill, and hence result in revenue loss. Given the exchange rate advantage, even low-end vacancies remaining unfilled for six months cost the company a lot more than the additional amount needed to attract talent. For example, leaving a $20 per hour vacancy unfilled for six months would cost a company $20,000 in terms of revenue loss, which is much higher than the entry-level salaries. Therefore, even if a firm pays 50% premium to the going market salary rate, it is still likely to make a gross margin of more than 20%. In contrast, if a vacancy remains unfilled, it not only causes revenue loss but also raises concern about the firm’s ability to provide expert resources. Expert engagement is one of the core values a firm brings to its customers as a service provider. A non-critical vacancy is one that does not lead to significant revenue loss.

IT firms may opt for different compensation-related intervention practices for eight possible situations (Colbert, 2004). Table 01 depicts the ‘as is’ situation regarding practices prevailing in IT organizations.

 IT firms thrive when the business scenario is favorable, there are enough talented employees, and are not many critical vacancies. Compensation packages for talented employees are favorable in this context. Critical vacancy, favorable times, and availability of talented employees forms another context. However, in a challenging business scenario, the organization maintains its status quo vis-à-vis critical as well as non-critical vacancies. Another scenario is of talented employees identifying a critical vacancy in the market and taking it up. The compensation package during these situations helps the organization retain talent.

compensation options

 When there is a critical vacancy, the compensation package for non-talented employees may differ during favorable and challenging times. Non-talented employees may stay back in the organization during favorable times even if the hike is only moderate. Further, even if there is no hike, they may stay back during challenging times as they have no other option. An organization opts for similar interventions for a non-critical vacancy during favorable and challenging times, for non-talented employees.

Compensation intervention matrices remain the same for talented as well as non-talented employees. Perennial shortage of talented personnel in most IT firms opens up ample opportunities. During good times, the same companies invest in good talent and hire them at a premium. When the business environment turns bad, organizations need to cut costs and take painful measures. In such cases, there are two options:

  • let go of poor performers (low level of utility) by laying them off
  • pause salary hikes for the entire organization (many a time, it is a mix of both).

Talented employees may leave the organization as soon as they spot an opportunity. During favorable times, talented employees in critical jobs would receive maximum pay hike and those in non-critical jobs moderate hike. But still they may leave on identifying new opportunities.

proposed solution

 To mitigate this challenge, we propose a new compensation policy for Indian IT firms. Table 02 indicates the ‘to be’ condition.

 

IT organizations must concentrate on the box considering challenging times and talented employees. They should offer a moderate hike during challenging times if the employee is talented and performs a critical job. They should also give at least minimal hike to talented employees involved in non-critical jobs too. If such practices are followed, talented employees will be motivated to stay back even though they may have other job offers. (Balkin & Gomez-Mejia, 1987)

The new compensation policy would help retain the right talent. Loyalty is rewarded in the longer term, and companies do have retention policies. However, if this argument were to be completely true, there would not have been attrition rates of 20% for more than a decade in medium-sized Indian IT firms, which do not have employer branding. The fact that people switch jobs and go for better (paying) opportunities is an unwritten rule in the industry. If a firm chooses to defer salary hikes because of financial pressure, then it risks losing some of the best talent it has, to its competitors. Mediocre talent that does not have ample opportunities elsewhere has no choice but to continue with the firm. Most small-sized IT organizations are subject to business cycle variations.

In MSMEs, the ratio between non-talented and talented employees is high. When the business cycle becomes challenging, implementation of carte blanche ‘no hike’ policy leads to talented employees seeking jobs elsewhere. They are hired by large IT firms, as they recruit talented and experienced employees and freeze entry-level hiring. In contrast, in MSMEs, there is a freeze on hiring across the board. When cyclically, the business situation becomes favorable, recruitment starts again. But owing to the presence of non-talented employees, the talent level of new hires also gets compromised. The situation worsens during the next challenging state of the business cycle—the remaining talented employees would also try to leave the organization for better opportunities. Thus, there will be a systemic drop in the proportion of talented employees and the firm’s competency level (Lado & Wilson, 1994). This is the result of a flawed compensation policy framework. The practice of the HR policies suggested above would minimize the loss of talent. The ‘as is’ condition is depicted in exhibit 01. In these challenging times, the desired state for any IT firm would be to achieve exhibit 02, in which the competency level (Greer, Lusch & Hitt, 2017) of the firm is preserved and enriched.

References

*https://hbr.org/2017/03/why-do-employees-stay-a-clear-career-path-and-good-pay-for-starters

Wright, P. M., Dunford, B. B., & Snell, S. A. (2001). Human resources and the resource based view of the firm. Journal of management, 27(6),701-721.

Colbert, B. A. (2004). The complex resource-based view: Implications for theory and practice in strategic human resource management, Academy of Management Review, 29(3), 341-358.

Balkin, D. B., & Gomez-Mejia, L. R. (1987). Toward a contingency theory of compensation strategy. Strategic management journal, 8(2),169-182.

Lado, A. A., & Wilson, M. C. (1994). Human resource systems and sustained competitive advantage: A competency-based perspective. Academy of Management Review, 19(4), 699-727.

Greer, C. R., Lusch, R. F., & Hitt, M. A. (2017). A Service Perspective for Human Capital Resources: A Critical Base for Strategy Implementation. The Academy of Management Perspectives, 31(2), 137-158.