Feature

Bridging the pay gap

To match the higher pay packets offered by MNCs, Indian IT firms need to adopt a benefits-oriented strategy that focusses on career growth and enhancing the skills of employees, says Vinutha V

For most software professionals, the lure of a fat pay packet is the most attractive part of working with MNCs. This trend has been a cause for concern to Indian IT majors that are unable to match the salaries offered by their foreign competitors. High quality service at lower cost is the USP of Indian IT companies. This has been achieved by keeping employee costs as low as possible. Foreign paymasters have taken advantage of this to attract the best talent available in the country.

The salary differential

The gap between salary structures of MNCs and Indian software companies continues. MNCs entered the Indian market as they found employee costs significantly lower compared to those prevailing in the US and Europe. Nitin Sethi, Head, Talent & Organisation Consulting Analytics, South India, Hewitt Associates says, “The average salary of a software professional in India is still at around 15 percent of a software professional in the US. The MNCs found it easier to ‘buy talent’; recruit trained resources from Indian companies at significantly higher salaries. This is helping them save time and costs of training employees. The approach has worked well, particularly since the bulk of IT employees are in the age group of 24 to 30 years.”

MNCs are banking on their financial muscle-power to woo talent. Says Solomon Suresh, Vice President-HR, Hinduja TMT, “MNCs have always been ready to offer higher salaries to attract the best talent and set up a base quickly. Indian companies may not pay higher salaries based on business growth and the margins they get. They want to play differently by offering ‘total employment’—give more value addition to jobs in terms of a better work environment and career growth.” To compete with MNCs, Indian companies are investing in building their brands.

Another aspect where MNCs differ from Indian firms is remuneration scale. “The pay differential between an entry-level software engineer in an Indian company as against an MNC is much higher than the differential between program managers in both companies,” says Sethi. Moreover, while MNCs follow a pay-for-performance model, traditionally, Indian companies have followed a seniority-based model. As such, the incidence of ‘variable’ or performance pay is much higher among MNCs. However, if foreign companies lure people with fat salaries, Indian firms make good on the overall package, which also includes insurance and stock options.

Impact of attrition

Companies that are not able to retain people may face challenges in terms of revenue loss, customer dissatisfaction and operational costs Girish Nair Vice President-HR Aztec Software	People are looking at employment and employability. They expect to work and learn at the same time. Indian companies should take advantage of this trend R Natarajan Vice President-Finance and HR Tavant Technologies India	Companies should retain their workforce by offering employee-friendly insurance policies, career guidance, learning and development S Nagarajan Founder and Chief Operating Officer 24/7 Customer

A direct result of the salary gap between Indian companies and MNCs is the significantly higher attrition rates being faced by the former. According to a Hewitt Associates survey conducted in 2004, the average annual attrition for MNCs is between 8-15 percent, while that of Indian companies is significantly higher at 15-25 percent. These high attrition rates not only mean high replacement and training costs but also delayed projects or assignments due to the loss of critical resources. Girish Nair, Vice President-HR, Aztec Software says, “Companies that are not able to retain people due to their inability to pay better, may face challenges in terms of revenue loss, customer dissatisfaction and operational costs.”

Interestingly, experts believe that it is not in the interest of Indian IT companies to compete with MNCs on salaries. Sudeesh Yezhuvath, Chief Operating Officer of Subex Systems, explains why, “In software services sector, cost of people is the largest expense. If they try to match the salary structure of MNCs, revenues might not go up at the same pace and margins will be squeezed.” For the BPO segment, the threat from foreign paymasters would not be widespread because MNCs require people based on particular projects or certain skill areas and might retrench them once the job gets done.

Benefits-oriented vs pay-oriented

Most successful Indian IT companies have been benefits-oriented. The entry of MNCs, which are largely pay-oriented, has forced Indian companies to reinforce the advantages of benefits-oriented packages. S Nagarajan, Founder and Chief Operating Officer of 24/7 Customer says, “Indian companies are able to build a strong culture and develop it further to make the workplace more attractive. Companies should retain their workforce by offering employee-friendly insurance policies, career guidance, learning and development.” Benefits should be offered in both tangible and intangible forms. Current and prospective employees should be informed that longer they stay, the more attractive the benefits in terms of pay and perks.

R Natarajan, Vice President-Finance and HR, Tavant Technologies India, points out, “As the trend indicates, people are looking at employment and employability. They expect to work and learn at the same time. Hence, companies should grab and leverage on this opportunity.”

The strength of the Indian software sector when compared with other companies across the globe, remains in the quality of services and the low-cost advantage. Maintaining the same or enhancing the quality factor could increase the number of customers and margin. Srineevas Chakravarthy, Vice President, People Department of Aditi Technologies states, “If companies make a concentrated effort on improving quality, they can move up the value chain from traditional software customisation into high-end technology areas and get more clients, which translates into increased revenue. With that, most Indian software companies will have enough in their coffers to pay higher salaries.”

India Inc still attracts talent

While Indian IT companies are rethinking various strategies to counter salary challenges from MNCs, the situation does not threaten their existence yet. Particularly for mid-managers and above, remuneration is not the first priority. It is a part of the list that includes workplace ethics, career growth, onsite opportunity and learning. For young people just joining the industry, salary remains the key attraction. Interestingly, despite the offer of higher remuneration, skilled professionals continue to join Indian companies.

The salary challenge from MNCs is leading to a healthy competition among Indian IT companies, who are refocussing on quality and time of delivery. The situation that seems turbulent now, will eventually change. With increase in business, global opportunities and higher margins, the existing salary gap between MNCs and Indian software firms may reduce in the next five years.

vinutha@expresscomputeronline.com