Pressure on operating margins may have forced Cognizant to defer pay hikes

The move, for the second consecutive year, comes even as the company said last month that its outlook for the healthcare and financial services business had improved for this financial year

Cognizant Technology Solutions’ decision to defer salary hikes for its employees until August is largely due to the company’s tepid organic revenue growth and pressure on operating margins in a demand environment that remains uncertain despite green shoots in some business verticals.

 

The move, for the second consecutive year, comes even as the company said last month that its outlook for the healthcare and financial services business—two of its biggest revenue generators—had improved for this financial year.

 

Information technology (IT) services companies have either delayed annual increments or provided lacklustre ones over the past two years as discretionary spending remained low, deals were slow to materialise, and margin pressure persisted. Last year, the Nasdaq-listed company gave salary hikes between 1 and 5 per cent, though outperformers were paid above the average.

 

“Cognizant’s decision to defer wage hikes to August for the second consecutive year signals a focus on margin protection and financial prudence amid modest organic growth. While acquisitions have bolstered revenue, core business expansion remains sluggish and in the low single digits. Deferring hikes to mid-year allows the company to get a grip on business trajectory while also giving it an opportunity to retain talent without an immediate outflow of cash,” Hamsa Iyengar, an independent analyst, said.

 

Cognizant, which has its largest employee base in India, reported revenue growth of 2 per cent in 2024 compared to a year earlier. In constant currency, which negates the effect of currency volatility, growth stood at 1.9 per cent. However, the company said in February that this included about 200 basis points, or 2 per cent, of benefits from the Belcan and Thirdera acquisitions last year. Excluding those, the organic growth numbers were flat or negative for the second consecutive year, posing a challenge for chief executive Ravi Kumar.

 

The company, however, expects to grow between 2.6 and 5.1 per cent this year, or 3.5 to 6 per cent in constant currency. Without the impact of acquisitions, that growth rate stands at 1 to 3.5 per cent, indicating better client sentiment and an uptick in discretionary spending.

 

"We remain steadfast in our commitment to recognizing the hard work and dedication of our associates through merit increases and bonuses. As part of this ongoing commitment, merit increases for eligible associates will be awarded in August, exactly one year after the prior cycle. In fact, with the August 2025 cycle, the majority of our associates will have received five merit increases within the past four years. There has been no delay in the merit cycle, and any claims to the contrary are incorrect," Cognizant said in a statement.

 

Another concern for Cognizant is its adjusted operating margin, which has remained subdued for several years. It stood at 15.3 per cent for 2024 but is expected to inch up to between 15.5 and 15.7 per cent in 2025. While investors will welcome this improvement, as it is the company’s best guidance in the past five years, the figures remain below the pre-pandemic levels of 18 per cent.

 

“The halt in out-of-cycle hikes suggests a cautious approach as client spending trends remain uncertain with the big changes in the United States under the new administration. This move will offer Cognizant a chance to assess the potential impact on key sectors such as healthcare and life sciences, financial services, and manufacturing,” Iyengar added.

 

For 2024, the company’s operating margins across its businesses, barring financial services, “were negatively impacted by increased compensation costs, partially offset by savings generated from our NextGen programme and the beneficial impact of foreign currency,” according to its annual report.

 

Adding to the challenge is the attrition rate for its tech services businesses, which spiked to about 16 per cent in the fourth quarter ending December after remaining at comfortable levels for six consecutive quarters. The move to defer hikes to August from April also aims to balance cost control with talent retention.

 

James Friedman, senior fintech and IT services research analyst at Susquehanna International Group, noted that Cognizant’s fourth-quarter increase in attrition alongside a reduction in utilisation was surprising, as these two metrics usually move in the same direction.

 

“My sense is that Ravi and Jatin want to drive further automation and reduce linearity. Tempering the wage message is a bridge between the two—an output of automation and a means to decouple linearity,” Friedman said.