By attacking Infosys board over the salary hike offered to Chief Operating Officer UB Pravin Rao, company co-founder NR Narayana Murthy is missing the trees for the woods. He is basing his arguments without looking at many factors, thus seeming to be a bit out of place, though his point on salaries of lower-rung staff is spot on.
With Murthy in an email sent to select media questioning the logic behind the "60-70 percent" salary hike offered to Rao has indicated the founder-board dispute over the executive salaries is back at the country's second largest software exporter.
"Giving nearly 60 percent to 70 percent increase in compensation for a top-level person (even including performance-based variable pay) when the compensation for most of the employees in the company was increased by just 6 percent to 8 percent is, in my opinion, not proper," Murthy said in the letter.
Rao’s salary compensation was increased by 35 percent to Rs 12.5 crore. According to an analyst, when Murthy is complaining of increase in pay with performance-based variable and linking it to the lowest rung employee, he is not stating that Rao’s variable is linked to a number of factors - his performance, meeting the company’s targets and also the company’s performance. If any one of this is missing, Rao’s variable will change, an analyst pointed out. On the contrary, the lower-level employees' increments are not as directly linked to the company’s performance.
Dismal industry outlook
When Murthy is complaining about Rao’s salary hike, he is not factoring in the dismal outlook for the Indian IT industry. There are multiple headwinds, including a still struggling global economy, the emergence of new technology that is changing business models and the US protectionism, which are leading to a not-so-rosy outlook for the sector.
The top five -- TCS, Infosys, Wipro, Cognizant and HCL Technologies -- are not hiring in en masse from campuses as they used to earlier. According to a report in the Business Standard, IT companies are expected to hire 40 percent less this year. The top five IT services companies hired around 60,000 engineers from campuses this fiscal, as against little more than 100,000 last year. The reason for the reduction in recruitment at the entry level is on account of aggressive use of automation and technological advances that have rendered the lower level jobs in the sector redundant.
In such a scenario, the salaries of engineers, programmers and all other lower level jobs in the IT industry has remained more or less at the level that Infosys is paying to its employees, says Kris Laxmikanth, chairman and managing director, The Head Hunters India, Bengaluru, and visiting faculty, Institute of Management, Ranchi.
An Infosys programmer who currently gets around Rs 3 lakh annual salary will get 7-8 percent routine hike annually and will get the same amount were he to leave the firm and join another. “In fact, it will be difficult for him to find a job in another firm at that level as the job requirements are low in the IT industry,” Laxmikanth pointed out.
In a way, the dispute at Infosys is symptomatic of the struggles that the sector itself is facing. The companies are forced to raise the emoluments at the higher level to retain the priced executives who have the potential to boost the business while the lower-rung staff continues to see meager hikes. That is the reason variable to the top level executives makes a lot sense.
What is variable pay
Variable pay is performance-based salary. For instance, if a COO gets a salary of Rs 5 crores, of this 20-25 percent is variable pay which is dependent on him/her having achieved the target the company has set when he joined the firm.
Some companies such as Infosys give stock options to the candidate with a lock-in period. So while the share of the company has a market value for instance of about Rs 1,000, the top level management may get it for Rs 1 or Rs 10 or any other amount that is much lower than the market value. The number of shares will increase depending on the period the candidate has been signed up for by the company. The lock-in period is to ensure that the individual does not leave the company soon.
Variable pay can also take the salary south. For instance, Cognizant Technologies did not do well in 2016 and as a result the bonus given to employees was negligible. "A substantial portion of the top management’s salary is linked to variable, i.e, almost 50 percent fixed salary and the rest as variables. When the company did not fare well last year, many got lesser than 50 percent as variables,” Laxmikanth said.
On Murthy's contention that every senior management person at an Indian corporation should show self-restraint in his or her compensation, Laxmikanth feels he can say that because as a promoter he gets dividend.
"His stock options appreciate unlike Rao’s which would invariably have a lock-in period," Laxmikant said.
Whither compassionate capitalism
‘Compassionate capitalism’ that Murthy is talking about is a nice discussion to have but that is not how the real world of business functions, says Kamal Karanth, former MD, Kelly Services – a human resources solutions company. “In a world where the shareholders are expecting a high bottom line or an industry leading bottom line that Infosys had in the past, you need the top guy to stretch out and earn," says Karanth.
What Murthy is saying about Rao now, says Karanth, is only one half of the story. “No one is aware in the public domain what deliverables are tied to Rao’s salary hike. The board must have felt that to keep the pressure of delivery on Rao, it had to make the required salary hike. All that we know is salary is high and the promoter (Narayana Murthy) is reactive. “
“The pressure is on delivery and sales at Infosys. To ensure that the top management, including vice presidents and operation heads are encouraged to meet the tight deadlines in the lacklustre IT industry at present, salary hikes have to be given,” says Laxmikanth. He says, the trend in the industry is to pay almost half the salary to every position top down in a firm. So when the VPs and operation heads salaries are revised, Rao as number two at Infosys has to get a salary hike as well.
Comparing ‘mails’ from people from the lower end of the pyramid who can write and complain to Murthy to what the top management is risking when they get hikes is not fair to them and also to the board’s image when Murthy puts it out in the public arena. The job of the top management is to keep costs low and give high dividends to the shareholders.
“Else there will be people like Murthy who will complain about bad performance as he has done in the past,” said an analyst.
Updated Date: Apr 03, 2017 14:28 PM