Compensation Management at Tata Consultancy Services Ltd.

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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)

"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.

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:

Squeezing the Employee Pay Packets

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.
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.

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...

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...