Variable pay cuts may shore up IT cos' bottomlines

MUMBAI: At a time when most IT companies are struggling to boost profits, a reduction in variable pay can have big benefits. Employee costs account for 50-80% of the total operating expenses and variable pay accounts for 10-15% of the total employee expenses in this sector. A quick calculation shows that even if there is a 50% decline in variable pay, the impact on the bottomline would be in the range of 10-20%, not a small amount in the current downturn.

As per the FY08 results, employee expenditure for the country���s second-largest software exporter Infosys Technologies is around 77% of its total operating expenses.

The figure is around 70% for TCS, 51% for Wipro and 58% for HCL Technologies.

���The variable pay is around 30% of the offshore salaries, which translates to roughly 4-5% of revenues,��� said Infosys Technologies CFO V Balakrishnan, in response to a query from ET. For Wipro, variable pay accounts for around 14% of the total employee expenses, according to Wipro executive V-P (human resources) Pratik Kumar.

���A large enough cut in wages (certainly in variable pay, and perhaps base pay) and a large enough reduction of bench or underperforming manpower can drive margin defence for Indian Techs,��� said brokerage firm CLSA in a recent report to its clients. ���This is well known, as wages form 52%+ of revenues and 80%+ of total costs for the industry,��� it added.

Given the bad market conditions, the expectation is that these companies might cut down drastically on variable pay.



���Indian software companies might cut down on the variable component this year, and this will have positive impact on the bottomline of these companies,��� said an analyst from a Mumbai-based brokerage house. ���TCS has already done so, and I think Infosys has as well,��� he added.

Taking a conservative estimate of a 50% cut in variable pay, Infosys could save around Rs 500 crore or 10% of its projected annual net profit for 2008-09. A similar calculation indicates that the savings could be around Rs 580 crore or 15% of the estimated net profit for Wipro in FY09. The impact for other companies would also be in a similar range. But not all IT companies may opt for this route.

Recently, Cognizant Technology paid healthy bonuses to its employees for fiscal ended December 2008. A company spokesperson confirmed this was true. However, Cognizant has added the highest incremental revenue in absolute terms (not including acquisitions) among the top IT firms in FY09, considering revenue estimates for FY09 or the guidance given out by the companies themselves.