Compensation Management at Tata Consultancy Services Ltd.

:
Coping with Turbulent Times in the Indian IT Industry

Case Details: Price:

Case Code : HROB112 For delivery in electronic format: Rs. 300;
For delivery through courier (within India): Rs. 300 +
Case Length : 18 pages
Rs. 25 for Shipping & Handling Charges
Period : 2003-2008
Themes
Pub Date : 2008 Strategic Human Resource Management/ Human
Capital/ Employer Branding/Organizational
Teaching Note : Available (3 pages)
Behavior
Organization : Tata Consultancy Services

Industry : Computer, IT & ITES

Countries : India

Abstract:
The case discusses the compensation 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 the salary was
arrived after considering business unit EVA,
corporate EVA, and also 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 cuts were a result of the macroeconomic challenges that the Indian IT companies
were facing -- rapid appreciation of the rupee against the US dollar and the recession in the US 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 employees.

» Discuss various concepts related to compensation management.

» Discuss the importance of variable compensation in light of its ability to motivate employees and enhance
organizational productivity.

» Discuss the pros and cons of the EVA-based compensation management system and also analyze EVA as a
performance measurement tool.

» Understand the rationale behind the cut in the compensation of the employees at TCS.

» Understand how macroeconomic variables could affect a company's HR policies.

» 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, Incentives, HR policies, Recruitment, Employee satisfaction,
Employee attrition, Retrenchment, Retaining, Employee training, Career development, Tata Consultancy Services,
Satyam Computers, Wipro, Infosys, Information technology

There's no ceiling on the bonus. It can be equal to the fixed portion of the salary, providing the cell has shown that
kind of EVA growth. It is not just compensation, we wish our employees to also get a feeling of ownership for their
own unit, and its performance. We want each employee to feel as if they are running their business. They have to
think like entrepreneurs and know the cost attached to their business and how will they add value to the
investment."1

- S. Ramadorai, CEO and Managing Director, Tata Consultancy Services Ltd., in 2000, Regarding its
Economic Value Added (EVA)-based Compensation Management System.

"We undertake a review of variable pay every quarter and this time, we decided to make an adjustment." 2

- S. Padmanabhan, Global Human Resources Head and Executive Director, Tata Consultancy Services
Ltd, in February 2008.

"This wage cut is a reflection of the caution. It reinforces the management view of macroeconomic challenges." 3

- Harit Shah, Research Analyst, Angel Broking4, 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 announced its plans to cut 1.5
percent of the variable component of employees' compensation.

It clarified, however, that there would 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 was the biggest market for the Indian 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 caught
the entire IT Industry by surprise. 

The EVA payment made in advance for the third quarter was to be deducted from the variable
salaries in the fourth quarter. The variable component of the salaries of the TCS employees
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.
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, 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 headquarters in Mumbai. It was formed as a division of
Tata Sons Limited (TSL), one of India's largest business conglomerates, and was called 'Tata
Computer Center.' F C Kohli (Kohli) was appointed 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 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 management constantly kept track of the 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 of TCS gave a jolt to its employees by 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 the FY 2007-2008...

The Reasons

TCS cited several reasons for cutting down employee salaries. The major reason for the unprecedented cut in
variable pay was its inability to meet the EVA target for the third quarter of the FY 2007-2008. The rise of the rupee
against the US dollar was another major concern for TCS. The rupee had appreciated by 12 percent against the US
dollar, building tremendous pressure on the company's margins and revenues. (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 employees. 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 that it would make salary adjustments in the next quarter, the employees remained divided and
expected this trend to continue. A TCS employee said, "Though the official word is that the situation will be reviewed
by March end, we are preparing for a regime 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 the 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