Shyamal Majumdar: The rising employee cost

HUMAN FACTOR

While the salary earners have every reason to rejoice, their employers may be feeling a trifle uncomfortable. Assocham's latest survey has found that the staff cost of India Inc is increasing at a faster rate than the growth in net profit and total income. While the net profit of 100 companies, tracked by the chamber's Eco Pulse analysis of the second quarter results, went up by 18 per cent, income was up 20 per cent, "" salaries rose 22 per cent.

However, this comes as no surprise, as according to the 9th annual salary increase survey by Hewitt, India had the best average pay increase in the Asia-Pacific region in 2004 at 13.7 per cent, and the party is expected to continue in 2005 with an expected hike of 14.2 per cent.

Predictably, the information technology and the IT-enabled services (ITES) sector led the pack in the Assocham survey, with a 36 per cent increase in staff costs against a bottomline growth of 29 per cent and topline rise of 30.5 per cent. The trend is worrying quite a few in India's IT outsourcing industry, which has thrived so far because of the low employee costs in the country. Besides, countries like the Philippines, China and Vietnam have already started eroding India's competitive advantage on this account.

The financial sector is another example. Thanks to the aggressively expanding retail business of financial institutions, particularly in the private sector, staff cost in this sector has shown an increase of 22.48 per cent as against net profit growth decline of 1.7 per cent. The magnitude of increase in staff cost can be judged by the figures of LIC Housing Finance and Geojit Financial Services, which showed a 138.12 per cent and 100.57 per cent increase in staff cost, respectively. The toplines for these two companies rose 20.8 per cent and 160 per cent, respectively and the corresponding bottomlines rose 27.7 per cent and 321 per cent.

The pharma companies also followed a similar trend and despite registering a negative growth of 30 per cent, bore the brunt of additional staff cost of 13 per cent.

Or, take the example of the media industry, though this has not been covered in the Assocham survey. In Mumbai, employee costs have skyrocketed for most media houses after the launch of a couple of newspapers and sundry niche publications and websites. NDTV, for example, has seen its employee cost moving up to Rs 18.6 crore in the second quarter of this financial year compared to Rs 12.75 crore in the corresponding period last year.

Hindustan Times, which has launched its Mumbai edition, has seen an increase in its employee costs to Rs 28.23 crore compared to Rs 18.72 crore in the same period.

While some increases in employee cost are inevitable when the industry is in an expansion mode, questions are being raised in several circles whether such whopping increases are sustainable in the long run. "What's worrying is while salaries are rising, skill sets are not. There is simply not enough new talent available to fill the vacant slots, leading to an artificial increase in wage levels" says an HR analyst.

The analyst, however says India's IT industry need not worry too much on this front as the salary differential with other countries is still quite high. About 100,000 engineers graduate from Indian colleges every year and many of them are employed with the outsourcing industry for troubleshooting and providing technical support at salaries that are dramatically lower compared to the pay scales in the US. Indian engineers typically earn one-eighth of the salaries of their counterparts in the US and Europe. The average pay of an Indian IT professional, for instance, is $700 a month compared to more than $5,000 in the US.

Also, according to industry body Nasscom, there may not be an immediate threat as Indian outsourcing firms have incorporated elaborate plans to circumvent rising wages. Most Indian IT firms that operate globally have also begun implementing backward linkages to cheaper locations. For instance, Wipro, Infosys, Satyam and TCS have already set up operations in China, given the lower wage cost of software engineers there because of the excess supply of trained manpower.

HR analysts say another reason why India Inc shouldn't fret too much is that compared to global averages, the Indian top management has much ground to cover. While the Indian managers' salaries and perks barely touch 2 per cent of the company's net profits, worldwide, top managers take home as much as 11-15 per cent of the net profits.