Compensation Management at Tata Consultancy Services Ltd.

: Coping with Turbulent Times in the Indian IT Industry Abstract: The case discusses the compensation management practices at Tata Consultancy Services Ltd. (TCS), one of the leading Indian IT companies. TCS' compensation management system was based on the EVA model. With the implementation of Economic Value Added (EVA)-based compensation, the salary of employees comprised of two parts – fixed and variable. The variable part of the salary was arrived after considering business unit EVA, corporate EVA, and also individual performance EVA. During the fourth quarter of the financial year (FY) 2007-2008, TCS announced its plans to slash 1.5 percent of the variable component of employee salaries since its EVA targets for the third quarter of FY 2007-2008 were not met The announcement came as s jolt not only to TCS employees but also to the entire Indian IT industry. The company came in for severe criticism and it was accused of not being transparent with respect to EVA calculation. However, some analysts felt that the pay cuts were a result of the macroeconomic challenges that the Indian IT companies were facing -- rapid appreciation of the rupee against the US dollar and the recession in the US economy (USA was the largest market for the Indian IT companies) Issues: » Analyze TCS' HR practices with respect to its policy related to compensation of its employees. » Discuss various concepts related to compensation management. » Discuss the importance of variable compensation in light of its ability to motivate employees and enhance organizational productivity. » Discuss the pros and cons of the EVA-based compensation management system and also analyze EVA as a performance measurement tool. » Understand the rationale behind the cut in the compensation of the employees at TCS.

Tata Consultancy Services Limited (TCS).. CEO and Managing Director. and its performance. Global Human Resources Head and Executive Director. The rapid appreciation of the Indian Rupee against the US dollar over the previous year and the imminent recession in the US economy. It clarified. It can be equal to the fixed portion of the salary. had put a lot of pressure on Indian IT companies. however. we decided to make an adjustment. in February 2008."2 . Padmanabhan. They have to think like entrepreneurs and know the cost attached to their business and how will they add value to the investment.» Understand how macroeconomic variables could affect a company's HR policies. The announcement came soon after TCS found it unable to achieve its Economic Value Added (EVA) target for the third quarter of the FY 2007-2008. Angel Broking4. It reinforces the management view of macroeconomic challenges. Squeezing the Employee Pay Packets During the fourth quarter of financial year (FY) 2007-2008. » Appreciate the importance of HR goals and strategies in the success of an organization There's no ceiling on the bonus.Harit Shah."3 . It is not just compensation. the largest Information Technology (IT) company in India announced its plans to cut 1. that there would not be any changes in the perquisites of its employees. "We undertake a review of variable pay every quarter and this time.. Squeezing the Employee Pay Packets Contd. Tata Consultancy Services Ltd. in 2000.S. Tata Consultancy Services Ltd.5 percent of the variable component of employees' compensation. Regarding its Economic Value Added (EVA)-based Compensation Management System. which was the biggest market for the Indian IT companies. The unprecedented move by TCS caught the entire IT Industry by surprise.. The EVA payment made in advance for the ."1 . We want each employee to feel as if they are running their business.S. "This wage cut is a reflection of the caution. Ramadorai. providing the cell has shown that kind of EVA growth. we wish our employees to also get a feeling of ownership for their own unit. in February 2008. Research Analyst.

TCS. it managed the punch card operations of Tata Iron and Steel Company . with a staff of 10 consultants and 200 operators. TCS was the market leader among the Indian IT industry as of 2008. Established in 1968. one of India's largest business conglomerates. During its early days.31 billion. For instance. Background Note TCS was established in 1968 with its headquarters in Mumbai. TCS. According to S Mahalingam (Mahalingam). the division was renamed Tata Consultancy Services (TCS). 13. Its revenues for the third quarter of the FY 2007-2008 increased by 5. Chief Financial Officer (CFO). TCS decided to cut salaries since the company's margins were severely impacted.72 percent to Rs.' F C Kohli (Kohli) was appointed as the first General Manager in 1969. and even went up to 40-50 percent in the case of senior management.) 59..24 billion and net profit rose by 6. The decision came as a shock to many employees and the media gave wide coverage to TCS' decision. The variable component of the salaries of the TCS employees constituted 30 percent of their total compensation.04 percent to Indian Rupees (Rs. undertook IT consulting assignments with other Tata Group companies.5 In the wake of the appreciating rupee and signs of recession in the US economy. Soon after..third quarter was to be deducted from the variable salaries in the fourth quarter. The employees' fears were compounded when TCS showed some 500 of its employees the door in February 2008 on performance grounds. It was formed as a division of Tata Sons Limited (TSL). and was called 'Tata Computer Center. "Fundamentally the business operates on sound principles.

and the number of people available for being placed in other projects.....(TISCO). their skill sets. According to the employees the salaries were not on a par with the industry standards. however. Performance-Linked Salary Structure Despite being rated as one of the top IT employers in India.. . TCS Announces Pay Cuts In January 2008. The HR Policies TCS gave utmost importance to its human resource function. TCS had drawn criticism for its compensation structure. the management of TCS gave a jolt to its employees by announcing its plans to cut 1.. TCS was also under pressure to follow the Employee Stock Options (ESOP) schemes followed by its competitors. the status of projects on which they were working.5 percent of the variable component of the total compensation of its employees. The TCS senior management constantly kept track of the vast intellectual assets. which had to be utilized efficiently. The reason cited for this was the company's inability to meet the EVA target for the third quarter of the FY 2007-2008... ESOPs had emerged as one of the most powerful tools for retaining employees. The company viewed its employees as assets.

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