NEW DELHI: As many IT companies are facing margin pressures due to increases in employee costs and inflated attrition levels, top IT service providers either announced deductions or delays in performance-linked incentives or variable pay last week.
IT giant Infosys has deducted 30% of the average variable pay of employees for the June quarter on margin pressure. In its email to employees, the company said, “The average bonus payout for Q1FY23 is 70% at an organisation level and your final individual payment will be governed by your unit/department guidelines.”
Wipro is also said to have held back variable pay of employees. In order to retain talent, the company in first quarter announced that it will offer promotions to its employees every quarter starting July and salary hikes from September. In its statement, Wipro said, “We have also completed the first cycle of quarterly progressions effective July 1, 2022. We have no further comments on the quantum of variable pay.”
The country’s largest IT services firm Tata Consultancy Services (TCS) said it will payout 100% variable pay for its employees when reports surfaced about the company’s delay in Q1 variable compensation payout. With recession fears, high employee costs and soaring attrition rates, it is quite a challenging second half for the IT sector.
“Variable pay may not have any direct correlation with the recession or with the fear of recession. Payouts are really contextual and could be due to various reasons. Companies are cautious on the cost leverage that they had lost in the past few quarters,” says Vijay Sivaram, CEO, Quess IT Staffing.
Post-pandemic, as most IT companies are on a recovery path due to favourable economic conditions, they might want to redirect investments towards maximising their growth, says Yeshab Giri, chief commercial officer, Staffing & Randstad Technologies, Randstad India.
He says that there might be a temporary delay in the variable pay being offered to employees. While the concerns related to the global economy and inflation might persist for some time, the overall scenario of the IT sector looks extremely optimistic, particularly due to a potential uptick in hiring trends over the next two quarters, he adds.
Slowdown in hiring
Though IT companies say they are seeing a strong demand environment, they are also witnessing a bit of slowdown in clients’ decision-making. Also, after hiring many freshers last fiscal, IT companies are pausing hiring now.
“There is a certain amount of moderation that we have seen in IT hiring today. Several companies had over-hired in the past few quarters, incubating freshers and lateral hires in record numbers,” says Sivaram.
However, digital skills and skills such as fullstack, DevOps, analytics and cloud continue to be on a growth trajectory and hiring will certainly continue for such roles. He adds that companies are assigning existing employees to newer projects rather than inducting fresh hires for the same.
TCS, Infosys and HCL Technologies have cumulatively added only 37,396 employees in the April-June quarter, compared to 68,257 employees in the January-March quarter. Talking about attrition, Ritesh Varma, global head: business solutions, Newgen Software, says that. “We must accept that attrition is the hard reality of the day. This phenomenon is not limited to a few organisations but spans the entire IT industry.”
“While the last two years have been full of learning for the industry, we are now witnessing an uptick in transformational initiatives. The demand is increasing as many organisations are willing to invest in new-age technologies like low code for digitalisation,” he adds.
Recession fears and IT industry
Analysts have said that the EBIT (earnings before interest and taxes) margin of IT services companies will stay stressed due to rising wage revision, travel expenses and higher retention costs. Infosys’ operating margins in the first quarter were at 20%, a drop of 150 basis points compared to the previous quarter. Wipro’s Q1 operating margins were lower at 15%.
On recession fears, Roshan Shetty, Chief Revenue Officer, Sonata Software says that the demand for core applications, modernisation and sustainability initiatives will continue to be unimpacted to a large extent. In addition, some industries will be less impacted by these recession fears, he says.
“Discretionary spending may see some re-prioritisation. We do not foresee a significant slowdown of demand though cost pressures are likely to exist. Macroeconomic headwinds do affect discretionary spending to some extent but core spending remains largely unaffected,” he adds.
Omkar Tanksale, Senior Research Analyst, Axis Securities, too says that a potential slowdown in the world’s largest economies may witness discretionary spend cuts from clients, leading to a slowdown in the IT services revenue growth momentum. This scenario may put short-term pressures on the Indian IT Services industry. However, long-term IT spending still remains resilient, he adds.
IT sector outlook
- Infosys cuts average variable pay to 70%
- TCS, Infosys and HCL added only 37,396 employees in Q1, compared to 68,257 in the previous quarter
- Potential slowdown in largest economies may witness discretionary spending cuts from clients
- Attrition levels are likely to remain inflated
- According to analysts, long-term IT spending still remains resilient
- Wipro’s Q1 operating margins were lower at 15%.