Increasing wage costs pressure talent, profitability

Nasscom, Hewitt compensation survey finds revenue growth partly absorbing staff costs

"Outsourcing companies are now falling prey to increasing wage costs for specialised skills and the need to constantly align reward practices to the market continues," according to Nishchae Suri, Asia Pacific business consulting leader with Hewitt Associates.

"Movement to tier II and tier III cities has expanded the talent base, but on the other hand, the shift from low-end business processes to higher value knowledge-based processes has amplified the challenge of hiring specialised manpower, " he added.

Suri made the remarks while sharing the findings of the Nasscom-Hewitt Total Rewards Study 2005. Pressures on talent and profitability increased in 2005 and companies looked at ways to establish competitive advantage.

Among other findings, the study reports that there is growing trend of the industry moving towards differentiated total rewards practises based on specialised skill and complexity.

Around 48 per cent of the survey partners said that they had paid premiums for specialised skills at the hiring stage and the quantum payout was often left to the recruitment manager's discretion. Nearly the same number reported that they had designed fixed pay ranges and placed employees with hot skills in a higher quartile within the same range.

Other methods adopted by the industry to retain such employees were hot skill allowances; sign-on bonuses and frequent salary revisions.

The study also highlights the changing rewards landscape as impacted by the introduction of the Fringe Benefit Tax. As per the study results, most organisations in the IT and ITeS industry chose to bear the tax burden themselves rather than pass it on completely to the employees.

Attraction and retention of employees remain key issues for the IT and ITeS industry. With more sectors moving on a high growth trajectory, the talent war is increasing and attrition soaring. At the junior level surveyed organisations reported an average attrition rate of 30 per cent in the IT and 40 per cent in the ITeS industry.

Capability development continued to be the area of focus with 70 per cent of the survey partners of the Nasscom-Hewitt study, emphasising on the ongoing assessment of skills, knowledge and abilities to identify the employees' development opportunities.

Performance-based pay is gaining ground within the industry as most employees view it as an opportunity to earn more. Over 80 per cent of the organisations across the two industries report a prevalence of short-term incentive plans and about 40 per cent report the prevalence of long term incentive plans with stock options being the most favoured.

Compensation movement as per the study has been in the range of 8-10 per cent on total cost to company. Though over the years the industry has witnessed double-digit salary increases, the actual compensation movement on the median has not moved in the same proportion with the companies ramping up operations and augmented hiring.

Organisations in the sector are increasingly designing compensation structures which are tax-friendly and allow employees to exercise their choice of benefits through a single flexible allowance.

Of the 91 IT organisations approached, 27 per cent reported a formal differentiation based on hot skills, whilst 41 per cent said that they clearly did not differentiate between skills in specific functions. The rest maintained that they had no formal policy for differentiation, but differentiated compensation basis criticality of resource requirement.

In the ITeS industry, 66 per cent of the organisations reported a formal policy of differentiating compensation based on process complexity.

Bangalore and NCR reported a 3-6 per cent increment in compensation over the national average. Most organisations do not have a very high differentiation in compensation across locations, those that do differentiate pay based on locations, primarily align it to attraction and retention challenges in the location and cost of living differences.

The survey covered over 125 local and foreign companies.