Case Details:

Case Code Case Length Period Pub Date Teaching Note Organization Industry Countries : : : : : : : : HROB112 18 pages 2003-2008 2008 Not Available Tata Consultancy Services Computer, IT & ITES India

Price:
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Themes
Strategic Human Resource Management/ Human Capital/ Employer Branding/Organizational Behavior

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. 1 2 4 5 6 8 10 11 13

Squeezing the Employee Pay Packets Background Note The HR Policies Performance-Linked Salary Structure TCS Announces Pay Cuts The Reasons The Debate Outlook Exhibits

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.

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.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...

Exhibits
Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit I: Top IT Employers in India (DQ-IDC BES Survey 2007) II A: Employee Satisfaction Scores of IT Companies (DQ-IDC BES Survey 2007) II B: HR Scores of IT Companies (DQ-IDC BES Survey 2007) III: TCS' Position in BusinessWeek Top 100 IT Companies: 2007 IV: Indian Rupees to US$1 V: How IT & ITES Companies Have Reacted to the Rupee-rise