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    Slash variable pay or cut jobs? IT firms stuck between a rock and a hard place

    Slash variable pay or cut jobs? IT firms stuck between a rock and a hard place

    Slash variable pay or cut jobs? IT firms stuck between a rock and a hard place
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    By Kanishka Sarkar   IST (Published)

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    IT variable payout issue: No firm would want to adopt a practice that puts them at risk of losing talent but if the management feels that to secure the long-term future of the firm a transactional step is required they would rather take that than adopt a more drastic step like lay-offs etc, Jang Bahadur Singh, Director, Industry Lead - Technology, Human Capital Solutions, Aon said.

    After Wipro held back the variable payout to its mid and senior-level, Infosys joined the tech giants’ club to have deferred or reduced the variable payout to a section of employees for the April to June 2022 quarter amid shrinking margin.
    There were reports of Tata Consultancy Services (TCS) deferring quarterly payout and bonus by a month to August, which employees usually receive as part of their July salary. However, TCS denied it, saying the variable is paid in month one or two as per the normal process.
    The hubbub around variable and bonus payments comes at a time when tech companies are struggling to maintain margins mainly due to high employee benefit expenses and costs. As such, the elevated level of attrition leading to higher employee costs is denting the profitability of the Indian IT industry.
    While Indian IT companies take a call between slashing variables or handing out pink slips, more than half of US companies are planning to lay off employees to brace for a downturn.
    A PwC survey, for which 700 executives and board members across the US were polled, found that 52 percent of companies have enacted hiring freezes, four of 10 have rescinded job offers or axed signing bonuses for new hires, and roughly half have started laying off or are preparing to cut headcount.
    Top tech firms such as Microsoft, Apple, Amazon, Google, and Netflix, among others, have already announced layoffs. And Twitter has warned of halving bonus payouts apart from layoffs and a hiring freeze.
    Are tech firms not concerned about attrition anymore?
    Jang Bahadur Singh, director, industry lead - technology, Human Capital Solutions, Aon, said the last year was tough for firms not just in terms of dealing with high attrition but also due to difficulty in getting talent in and at a much higher cost than previous years. "This is reflected in the margins reported by the large IT services firms in India," he said.
    "Given variable pay is directly related to margin realisation, some firms have decided to defer/reduce the payouts mostly at the leadership levels. No firm would want to adopt a practice that puts them at risk of losing talent, but if the management feels that to secure the long-term future of the firm, a transactional step is required, they would rather take that than adopt a more drastic step like lay-offs etc.," he told CNBCTV18.com.
    Siva Prasad Nanduri, the chief business officer at TeamLease Digital, said holding variable pay or deviating from the promises made is not a good practice as it will upset employees' morale and mood, which might not be a good cultural practice.
    According to Singh, high attrition continues to be a concern on a rolling 12-month basis, but there has been some cool-off in demand over the last quarter or so. "We also see firms segmenting talent and adopting a differentiated strategy instead of a cookie-cutter approach," he said.
    Nanduri attributed attrition to higher manpower/wage/operation costs that multiple corporate houses made during the pandemic and/or the talent war.
    "We anticipate that over the next one quarter, the margins would bottom out as the investments made towards hiring freshers or alternate channels will start yielding results," he told CNBCTV18.com.
    Singh, however, said in the past 12-18 months, attrition numbers continued to hover around the 25-30 percent mark for most IT services firms. He expects the number to come down as the uncertainty around chief information officer’s (CIO) spending, given inflationary pressure in the US, continues and is likely to hit demand projections and revenue realisation.
    At the same time, this environment could see an influx of global capability centres (GICs) in the country, which could counterbalance the impact of lower spending to increase demand for technology talent again. "In such an environment, the attrition numbers are unlikely to come down to pre-pandemic levels and will remain around the 20 percent mark at the very least," said Singh.
    The TeamLease official said that the outlook for hiring had seen a marginal dip, but there is good positive intent to hire across TeamLease's customers in the coming quarters.
    Singh said most of the firms were investing in digital skill sets and continue to be worried about attrition in these pockets but, with a much larger bench, are more tolerant of attrition in legacy segments.
    "When it comes to segments like cloud computing, mobility and virtualisation, data engineering and analytics, strategy and experience or commerce, we continue to see high demand. We expect the hiring spurt to continue similar to the last 12 months," he said.
    Market outlook
    While companies invest in hiring fresh talent, JP Morgan turned bearish on the tech sector and downgraded all IT stocks in its portfolio as it expects margins to take a further hit. The brokerage firm has lowered its rating on Infosys, Tech Mahindra, Mphasis, and Persistent Systems to ‘neutral’ from ‘overweight’.
    It believes margin erosion shall persist in the medium-term and stay meaningfully below the long-term averages. The firm also sees limited incremental margin levers going ahead.
    Macquarie has an overweight stance on India's IT services as it sees little downside to revenue and margin estimates. It has predicted more tailwinds than headwinds to margin from hereon. The global brokerage's top picks continue to be HCL Tech, followed by TCS and Infosys. It maintained an overweight rating on all three tech stocks with a target price of Rs 1,420, Rs 4,150, and Rs 1,870, respectively.
     
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