A mea­sured step


How can In­dian IT firms re­tain tal­ent dur­ing a lean pe­riod? Som Sekhar Bhattacharyya and Sumi Jha, NITIE, and Kar­tik Girish Vyas, In­foCepts, of­fer a so­lu­tion.

Em­ployee turnover is ex­pen­sive. Re­plac­ing an em­ployee who quits costs, on av­er­age, 21% of their an­nual pay. While it’s tempt­ing to dis­miss turnover as a fact of life in to­day’s fast-mov­ing job mar­ket, new re­search shows oth­er­wise.* Com­pen­sa­tion could be a strate­gic tool for tal­ent re­ten­tion, es­pe­cially when the go­ing is tough.

Tra­di­tion­ally, In­dian IT firms have been de­pen­dent on the US mar­ket for rev­enue gen­er­a­tion. But they have been fac­ing chal­lenges since 2017 be­cause of the US gov­ern­ment’s pro­tec­tion­ist stance and the ad­vent of au­to­ma­tion tech­nolo­gies. In a knee-jerk re­sponse to this sit­u­a­tion, these com­pa­nies de­cided to with­hold salary hike for em­ploy­ees. How­ever, most fail to an­a­lyze the im­pli­ca­tions of such mea­sures in the over­all con­text of strate­gic hu­man re­source per­spec­tive.

Hu­man re­sources are one of the key com­po­nents of any or­ga­ni­za­tion. In In­dian IT firms, com­pen­sa­tion is the key de­ter­mi­nant of an or­ga­ni­za­tion’s abil­ity to at­tract and re­tain tal­ent. At a macro level, com­pen­sa­tion pack­ages are de­ter­mined by mar­ket forces, but at the mi­cro level it may vary be­cause of the dif­fer­ence in in­cre­ments given to em­ploy­ees per­form­ing sim­i­lar tasks.

To un­der­stand the dy­nam­ics of small-sized In­dian IT firms and the com­pen­sa­tion poli­cies, one should keep in mind three di­men­sions: busi­ness sce­nario, em­ployee tal­ent, and job va­cancy.

in­ter­play of three di­men­sions

Busi­ness sce­nario could be fa­vor­able or chal­leng­ing. Since the 1990s, the In­dian IT in­dus­try has been reg­is­ter­ing 15 to 25% YoY growth. From an or­ga­ni­za­tional con­text, if the YoY growth rate is around 24%, the rev­enue, and along with it the strength of hu­man re­sources, dou­bles in three years. This kind of growth rate can pro­mote em­ploy­ees to the next level ev­ery three years even if there is no at­tri­tion. This is the most fa­vor­able sit­u­a­tion for IT firms. When the growth rate be­comes 18%, it takes four years to dou­ble the rev­enue and em­ployee strength. As long as growth rates are above 15%, the sce­nario can be termed as fa­vor­able; com­pa­nies can then pro­vide salary hikes of 10% with­out im­pact­ing the mar­gins sig­nif­i­cantly. The sit­u­a­tion starts to be­come chal­leng­ing when the growth rates fall to sin­gle dig­its.

Em­ploy­ees can be cat­e­go­rized as talented or not talented. A talented em­ployee is one who un­der­stands the tech­nol­ogy thor­oughly and can ap­ply her knowl­edge in a va­ri­ety of sit­u­a­tions. Non-talented em­ploy­ees are typ­i­cally ‘do as di­rected’ kinds; they need con­stant su­per­vi­sion and mo­ti­va­tion for per­form­ing ba­sic tasks.

Non-talented em­ploy­ees are typ­i­cally ‘do as di­rected’ kinds; they need con­stant su­per­vi­sion and mo­ti­va­tion for per­form­ing ba­sic tasks.

IT firm va­cancy can be cat­e­go­rized as crit­i­cal and non-crit­i­cal. Crit­i­cal va­can­cies are those that re­quire niche skills—which tal­ent ac­qui­si­tion teams find dif­fi­cult to fill, and hence re­sult in rev­enue loss. Given the ex­change rate ad­van­tage, even low-end va­can­cies re­main­ing un­filled for six months cost the com­pany a lot more than the ad­di­tional amount needed to at­tract tal­ent. For ex­am­ple, leav­ing a $20 per hour va­cancy un­filled for six months would cost a com­pany $20,000 in terms of rev­enue loss, which is much higher than the en­try-level salaries. There­fore, even if a firm pays 50% pre­mium to the go­ing mar­ket salary rate, it is still likely to make a gross mar­gin of more than 20%. In con­trast, if a va­cancy re­mains un­filled, it not only causes rev­enue loss but also raises con­cern about the firm’s abil­ity to pro­vide ex­pert re­sources. Ex­pert en­gage­ment is one of the core val­ues a firm brings to its cus­tomers as a ser­vice provider. A non-crit­i­cal va­cancy is one that does not lead to sig­nif­i­cant rev­enue loss.

IT firms may opt for dif­fer­ent com­pen­sa­tion-re­lated in­ter­ven­tion prac­tices for eight pos­si­ble sit­u­a­tions (Col­bert, 2004). Ta­ble 01 de­picts the ‘as is’ sit­u­a­tion re­gard­ing prac­tices pre­vail­ing in IT or­ga­ni­za­tions.

IT firms thrive when the busi­ness sce­nario is fa­vor­able, there are enough talented em­ploy­ees, and are not many crit­i­cal va­can­cies. Com­pen­sa­tion pack­ages for talented em­ploy­ees are fa­vor­able in this con­text. Crit­i­cal va­cancy, fa­vor­able times, and avail­abil­ity of talented em­ploy­ees forms another con­text. How­ever, in a chal­leng­ing busi­ness sce­nario, the or­ga­ni­za­tion main­tains its sta­tus quo vis-à-vis crit­i­cal as well as non-crit­i­cal va­can­cies. Another sce­nario is of talented em­ploy­ees iden­ti­fy­ing a crit­i­cal va­cancy in the mar­ket and tak­ing it up. The com­pen­sa­tion pack­age dur­ing these sit­u­a­tions helps the or­ga­ni­za­tion re­tain tal­ent.

Ex­pert en­gage­ment is one of the core val­ues a firm brings to its cus­tomers as a ser­vice provider. A non-crit­i­cal va­cancy is one that does not lead to sig­nif­i­cant rev­enue loss.

com­pen­sa­tion op­tions

When there is a crit­i­cal va­cancy, the com­pen­sa­tion pack­age for non-talented em­ploy­ees may dif­fer dur­ing fa­vor­able and chal­leng­ing times. Non-talented em­ploy­ees may stay back in the or­ga­ni­za­tion dur­ing fa­vor­able times even if the hike is only mod­er­ate. Fur­ther, even if there is no hike, they may stay back dur­ing chal­leng­ing times as they have no other op­tion. An or­ga­ni­za­tion opts for sim­i­lar in­ter­ven­tions for a non-crit­i­cal va­cancy dur­ing fa­vor­able and chal­leng­ing times, for non-talented em­ploy­ees.

Com­pen­sa­tion in­ter­ven­tion ma­tri­ces re­main the same for talented as well as non-talented em­ploy­ees. Peren­nial short­age of talented per­son­nel in most IT firms opens up am­ple op­por­tu­ni­ties. Dur­ing good times, the same com­pa­nies in­vest in good tal­ent and hire them at a pre­mium. When the busi­ness en­vi­ron­ment turns bad, or­ga­ni­za­tions need to cut costs and take painful mea­sures. In such cases, there are two op­tions: let go of poor per­form­ers (low level of util­ity) by lay­ing them off

pause salary hikes for the en­tire or­ga­ni­za­tion (many a time, it is a mix of both).

Talented em­ploy­ees may leave the or­ga­ni­za­tion as soon as they spot an op­por­tu­nity. Dur­ing fa­vor­able times, talented em­ploy­ees in crit­i­cal jobs would re­ceive max­i­mum pay hike and those in non-crit­i­cal jobs mod­er­ate hike. But still they may leave on iden­ti­fy­ing new op­por­tu­ni­ties.

pro­posed so­lu­tion

To mit­i­gate this chal­lenge, we pro­pose a new com­pen­sa­tion pol­icy for In­dian IT firms. Ta­ble 02 in­di­cates the ‘to be’ con­di­tion.

IT or­ga­ni­za­tions must con­cen­trate on the box con­sid­er­ing chal­leng­ing times and talented em­ploy­ees. They should of­fer a mod­er­ate hike dur­ing chal­leng­ing

times if the em­ployee is talented and per­forms a crit­i­cal job. They should also give at least min­i­mal hike to talented em­ploy­ees in­volved in non-crit­i­cal jobs too. If such prac­tices are fol­lowed, talented em­ploy­ees will be mo­ti­vated to stay back even though they may have other job of­fers. (Balkin & Gomez-Me­jia, 1987)

The new com­pen­sa­tion pol­icy would help re­tain the right tal­ent. Loy­alty is re­warded in the longer term, and com­pa­nies do have re­ten­tion poli­cies. How­ever, if this ar­gu­ment were to be com­pletely true, there would not have been at­tri­tion rates of 20% for more than a decade in medium-sized In­dian IT firms, which do not have em­ployer brand­ing. The fact that peo­ple switch jobs and go for bet­ter (pay­ing) op­por­tu­ni­ties is an un­writ­ten rule in the in­dus­try. If a firm chooses to de­fer salary hikes be­cause of fi­nan­cial pres­sure, then it risks los­ing some of the best tal­ent it has, to its com­peti­tors. Medi­ocre tal­ent that does not have am­ple op­por­tu­ni­ties else­where has no choice but to con­tinue with the firm. Most small-sized IT or­ga­ni­za­tions are sub­ject to busi­ness cy­cle vari­a­tions. In MSMEs, the ra­tio be­tween non-talented and talented em­ploy­ees is high. When the busi­ness cy­cle be­comes chal­leng­ing, im­ple­men­ta­tion of carte blanche ‘no hike’ pol­icy leads to talented em­ploy­ees seek­ing jobs else­where. They are hired by large IT firms, as they recruit talented and ex­pe­ri­enced em­ploy­ees and freeze en­try-level hir­ing. In con­trast, in MSMEs, there is a freeze on hir­ing across the board. When cycli­cally, the busi­ness sit­u­a­tion be­comes fa­vor­able, re­cruit­ment starts again. But ow­ing to the pres­ence of non-talented em­ploy­ees, the tal­ent level of new hires also gets com­pro­mised. The sit­u­a­tion wors­ens dur­ing the next chal­leng­ing state of the busi­ness cy­cle—the re­main­ing talented em­ploy­ees would also try to leave the or­ga­ni­za­tion for bet­ter op­por­tu­ni­ties. Thus, there will be a sys­temic drop in the pro­por­tion of talented em­ploy­ees and the firm’s com­pe­tency level (Lado & Wil­son, 1994). This is the re­sult of a flawed com­pen­sa­tion pol­icy frame­work. The prac­tice of the HR poli­cies sug­gested above would min­i­mize the loss of tal­ent. The ‘as is’ con­di­tion is de­picted in ex­hibit 01. In these chal­leng­ing times, the de­sired state for any IT firm would be to achieve ex­hibit 02, in which the com­pe­tency level (Greer, Lusch & Hitt, 2017) of the firm is pre­served and en­riched.

Ref­er­ences *https://hbr.org/2017/03/why-do-em­ploy­ees-stay-a-clear-ca­reer-path-and­good-pay-for-starters • Wright, P. M., Dun­ford, B. B., & Snell, S. A. (2001). Hu­man re­sources and the re­source based view of the firm. Jour­nal of man­age­ment, 27(6),701-721. Col­bert, B. A. (2004). The com­plex re­source-based view: Im­pli­ca­tions for the­ory and prac­tice in strate­gic hu­man re­source man­age­ment, Academy of Man­age­ment Re­view, 29(3), 341-358. • Balkin, D. B., & Gomez-Me­jia, L. R. (1987). To­ward a con­tin­gency the­ory of com­pen­sa­tion strat­egy. Strate­gic man­age­ment jour­nal, 8(2),169-182. • Lado, A. A., & Wil­son, M. C. (1994). Hu­man re­source sys­tems and sus­tained com­pet­i­tive ad­van­tage: A com­pe­tency-based per­spec­tive. Academy of Man­age­ment Re­view, 19(4), 699-727. • Greer, C. R., Lusch, R. F., & Hitt, M. A. (2017). A Ser­vice Per­spec­tive for Hu­man Cap­i­tal Re­sources: A Crit­i­cal Base for Strat­egy Im­ple­men­ta­tion. The Academy of Man­age­ment Per­spec­tives, 31(2), 137-158.

If a firm chooses to de­fer salary hikes be­cause of fi­nan­cial pres­sure, then it risks los­ing some of the best tal­ent it has, to its com­peti­tors.

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