Compensation Management at Tata Consultancy Services Ltd.

: Coping with Turbulent Times in the

Indian IT Industry

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

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.

Squeezing the Employee Pay Packets Contd...

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...

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...