What has forced companies like TCS, Infosys and Wipro to cut down on variable pay to their employees?

The Indian IT sector was always cash rich and zero debt and steady profits helped the story. However, in the last few quarters, the Indian IT companies are facing a lot of headwinds on the margin front. Costs, especially the employee and travel costs, are just getting out of hand. IT companies are still cash rich; remember they are the companies that have done the maximum number of generous buybacks in India. However, rising attrition and a spike I employee compensations, is literally pushing the major IT companies to the wall.

IT companies have already started taking measure to cut costs in order to protect margins in the future quarters. For instance, Infosys has scaled back the average variable pay-out of employees in the current year to about 70%. They may review this decision later. Wipro and TCS have held back variable pay-outs to the employees while they are likely to release some of the funds in the next few months. The bottom line is that there is a fear among IT companies that the costs may spike to a level when maintaining valuations may be tough.

In a sense, quality manpower has always been a challenge for the IT sector. In recent times, the shortage of skilled manpower has created a margin squeeze as IT companies are forced to pay higher costs just to retain people and avoid the hassles of too much attrition. Apart from Infosys, even TCS, Wipro, Tech Mahindra and HCL Tech are taking measures to either reduce or to postpone variable pay. The idea is to align costs more with growth in revenues. However, none of the IT companies have officially spoken about it.

This situation was caused by the huge mismatch between supply and demand for manpower. That hit employee costs and put pressure on operating margins. The lower variable pay will curtail employee pay-outs and to protect margins. Most of the IT companies have seen operating margins compress by 300 to 500 bps in the last few quarters amidst a spike in the attrition rates. The panic was evident in the sharp fall in the IT index by 2.5%. However, the next few quarters may hold he key.