Name: Shreya Gune

Subject: HRACM: Case Study- TCS Compensation

Roll No: 2K181080
nd
MBA: 2 Year.

A Case Study Review- Compensation Management at Tata Consultancy Services Ltd.

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:
Analyse 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
analyse EVA as a performance measurement tool.
Understand the rationale behind the cut in the compensation of the employees at TCS.
Understand how macroeconomic variables could affect a company's HR policies.
Appreciate the importance of HR goals and strategies in the success of an organization

"There's no ceiling on the bonus. It can be equal to the fixed portion of the salary, providing the
cell has shown that kind of EVA growth. It is not just compensation, we wish our employees to
also get a feeling of ownership for their own unit, and its performance. We want each employee to
feel as if they are running their business. They have to think like entrepreneurs and know the cost
attached to their business and how will they add value to the investment."

The company viewed its employees as assets, which had to be utilized efficiently. The TCS senior
management constantly kept track of the vast intellectual assets, their skill sets, status of projects on
which they were working and the number of people available for being placed in other projects.
TCS announces Pay Cuts in January 2008, the management of TCS gave a jolt to its employees by
announcing its plans to cut 1.5% variable component of the total compensation of its employees.
Squeezing the Employee Pay Packets
During the fourth quarter of financial year (FY) 2007-2008, Tata Consultancy Services Limited
(TCS), the largest Information Technology (IT) company in India announced its plans to cut
1.5 percent of the variable component of employees' compensation.
It clarified, however, that there would not be any changes in the perquisites of its employees.
The rapid appreciation of the Indian Rupee against the US dollar over the previous year and the
imminent recession in the US economy, which was the biggest market for the Indian IT
companies, had put a lot of pressure on Indian IT companies.
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. The unprecedented move by
TCS caught the entire IT Industry by surprise.
The EVA payment made in advance for the third quarter was to be deducted from the variable
salaries in the fourth quarter. The variable component of the salaries of the TCS employees
constituted 30 percent of their total compensation, and even went up to 40-50 percent in the
case of senior management. The decision came as a shock to many employees and the media
gave wide coverage to TCS' decision.
The employees' fears were compounded when TCS showed some 500 of its employees the door
in February 2008 on performance grounds.
The HR Policies
TCS gave utmost importance to its human resource function. The company viewed its
employees as assets, which had to be utilized efficiently. The TCS senior management
constantly kept track of the vast intellectual assets, their skill sets, the status of projects on which
they were working, and the number of people available for being placed in other projects.
Performance-Linked Salary Structure
Despite being rated as one of the top IT employers in India, however, TCS had drawn criticism for
its compensation structure.
According to the employees the salaries were not on a par with the industry standards. TCS
was also under pressure to follow the Employee Stock Options (ESOP) schemes followed by
its competitors. ESOPs had emerged as one of the most powerful tools for retaining employees.
TCS Announces Pay Cuts
In January 2008, the management of TCS gave a jolt to its employees by announcing its plans to
cut 1.5 percent of the variable component of the total compensation of its employees. The reason
cited for this was the company's inability to meet the EVA target for the third quarter of the FY
2007-2008.
Background Note
TCS was established in 1968 with its headquarters in Mumbai. It was formed as a division of
Tata Sons Limited (TSL), one of India's largest business conglomerates, and was called 'Tata
Computer centre.' F C Kohli (Kohli) was appointed as the first General Manager in 1969.
Soon after, the division was renamed Tata Consultancy Services (TCS). During its early days,
TCS, with a staff of 10 consultants and 200 operators, undertook IT consulting assignments with
other Tata Group companies. For instance, it managed the punch card operations of Tata Iron
and Steel Company (TISCO).