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Expenses on salaries and wages by firms in India have grown faster than net sales (gross interest income in the case of lenders) in nine of the last 15 years.
This has led to a steady rise in the share of net sales that companies spend as employee expenses. The ratio of expenses on salaries and wages expenses to net sales improved (which means it declined numerically) during the post-pandemic boom in demand growth in FY22 and FY23, but employee expenses are again growing faster than revenues, eating into companies’ margins and profits.
The six years in which companies’ net sales grew faster than employee expenses are FY11, FY12, FY18, FY19, FY22, and FY23. In all other years, employee costs had grown faster than companies’ net sales, adversely affecting companies’ margins and profits.
The long-term data suggests revenue growth for companies has been volatile in the last 15 years with year-on-year (Y-o-Y) growth ranging from about 5.3 per cent (in FY16) to a high of 27.2 per cent (in FY23).
In contrast, expenses on salaries and wages are relatively sticky, growing in the range of 6.6 per cent (in FY21) to a high of 19.1 per cent in FY11. (See the adjoining charts.)
The analysis is based on a common sample of 667 companies from the BSE 500, BSE Mid Cap and BSE Small Cap indices excluding their listed subsidiaries. These companies had a market capitalisation of Rs 323 trillion on Friday, accounting for 70.4 per cent of the combined market capitalisation of all companies listed on the BSE.
In the last 10 years, the combined net sales of companies went up at a compound annual growth rate (CAGR) of 7.9 per cent compared to 9.5 per cent CAGR growth in their salaries and wages during the period. In the last five years, the companies’ net sales increased at a CAGR of 10.7 per cent compared to 10.3 per cent growth in their employee costs during the period. The H1FY25 data have been annualised to calculate CAGR growth.
The gap between growth in net sales and salaries and wages is even bigger if companies from price-sensitive sectors are excluded.
Net sales for companies -- ex-metals and oil -- increased at a CAGR of 8.8 per cent in the last 10 years against 10.8 per cent growth in their salaries and wages in the period.
Even in the last five years, these companies’ net sales grew slower than employee costs (11.9 per cent vs 12.1 per cent CAGR).
As a result, services and general manufacturing companies (excluding metals and oil) have seen a steady rise in salaries and wages as a proportion of net sales.
Expenses on salaries and wages accounted for 14.88 per cent of the net sales of these companies in the first half of FY25, up from 11.25 per cent in FY12 and 13.8 per cent in FY19.
The trend has been similar for companies excluding BFSI (banking, financial services and insurance), mining and metals, and oil and gas. These companies’ salary and wage expenses were equivalent to 15.8 per cent of their net sales in the first half of FY25, up from 11.3 per cent in FY12 and 14.7 per cent in FY19.
Information-technology services companies, which are the single-biggest employer in the corporate sector, have seen faster growth in their employee costs than their net sales.
As a result, employee costs accounted for 56.1 per cent of net sales in H1FY25, up from 50 per cent in FY11 and 52.4 per cent in FY19.
With salary expenses of Rs 4.24 trillion in FY24, the sector accounted for 32 per cent of all the employee expenses of all listed companies in our sample.
Chief Economic Advisor V Anantha Nageswaran last week pointed out listed companies were making higher profits but they were paying less. He said that there would not be adequate demand for the companies’ own products without a judicious balance between the share of corporations’ income making up their profits and that going to workers as wages. The Economic Survey 2023-24, submitted in Parliament in July this year, also said that companies hiring and compensation growth hardly kept pace with a dramatic rise in corporate growth in the post-pandemic period (between FY20 and FY23).
Analysts say employee compensation is tied to corporate growth with a lag and not the other way round. “Companies raise salaries and expand hiring when they experience higher demand growth and faster revenue growth. Slower top line growth in turn reduces their requirements for resources including manpower leading to low salary growth and slowdown in hiring,” said Dhananjay Sinha, co-head research and equity strategy, Systematix Institutional Equity.
