Thursday, September 6, 2007

Compensation levels in IT industry will come down

What is so sanctimonious of the high salary levels in India of people working in IT companies? When we say higher it is in comparison with that in other industries - new old economy and new new economy. Should companies in IT industry have to always compensate higher than that by other industries.

In response to appreciation of the rupee against the dollar, I have read/heard that companies are looking at alternate models for the business, need to accept lower profitability levels, increasing of billing rates, increasing the work hours of employees etc. Why is that we do not hear of talks about decreasing of the salaries?

Salaries in IT industry is by far the highest compared to that in any other industry in India. Why is the salary level in IT companies high in the first place. Companies which were running the IT companies started paying much higher than counterparts in other industries. That is to say someone in IT industry was paid much higher in IT company than his colleague who also had made his mark in the company or industry. This was primarily because the earnings in IT industry were in dollars. Lots of dollars poured in. The employees were paid high because it made sense to share this large gain from the dollar revenue by the companies with the employees. The salary was factored on the revenue, there was no other reason other than this.

To take an example and then are real examples for this. If a company had two divisions, lets say one in IT export and the other in manufacturing, then the employees in the first division were paid significantly higher than the employees in the second division, simply because the first division earned revenue in dollars and the second in rupees.

The traditional demand-supply rule for determining the salaries did not apply then. i.e. post 1995 when IT in India started booming and every company was trying to retain and attract talent mostly from other companies. Times were also good on the billing front. So profitability remained high and growth was taken for granted. Post 2002, the scenario on compensation re-emerged but with with one very critical additional factor - entry of MNCs, captive units, start-ups, all of which made it a cut throat competition. Nevertheless, growth was sustainably high. Revenues crossed the billion dollar mark.

But my own judgment is that compensation for one sector cannot remain significantly higher than that for other industries if the basic qualities in the manpower are not different. To me a civil engineer with 6 years of experience and working in a hydro project in Assam is as critical as a mechanical engineer working in tool & die shop in Jalandhar or a chemical engineer working on an oil platform off the Mumbai basin. To me their contributions are as important as that of a software engineer in Banagluru. It is accepted that differences based on the industry will be there. There will also be other factors like whether it is a sunrise industry, demand and supply, growth of the industry as such etc. But it is difficult to fathom the very significant difference in the salary levels between IT industry and others.

Somewhere along there has to be a balance. It cannot be that one sector alone gets paid considerably higher than other sector. The same demand and supply will even this out at some time. If sector A generates lot of foreign exchange and pays its employees high, at some time the foreign exchange reserve will increase and will thus will see the local currency level appreciate, which then lower the local revenue value of the foreign revenue which will then mean a lower capacity to pay the employees which means that the local salary levels have to come down.

I do not see how this trend can be countered. It has to happen. Its happening will also be for the good. Because it will narrow the differential between that for one segment vis a vis the other segment which is healthy from a social and economic point of view. People will not run behind education in one particular stream and thereby reducing the availability of manpower for other sectors. One segment of the population will alone not be the reason for pushing up costs right from the auto fares to real estates. Slow and steady increase in income levels will bring in a better appreciation of the value of money.

Maybe the employee will be able to realise things which his seniors in the industry enjoyed at the early stages of his employment and will have to wait for a longer period of time now. Which is good because it will bring parity with his counterparts in other industries.

Why then companies are hesitating to relook at the salaries of their employees? Why cannot we go ahead and say that we are going to decease your salary now. Earlier the exchange rate helped us pay your high salaries. Now that they are unfavourable we have to pay you lower. Maybe it is because of the fear of losing out employees. Maybe such a thought itself is blasphemous. Actually money alone does not matter either for attrition or retention.

Salary decreases are inevitable. If economics kept the salary levels high, then it is the economics which bring them down. companies will have to succumb to this at some point. Someone has to bell the cat. Some leader will emerge who will lead the way and as usual there will be others who will follow.