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Indian cos manage to hold down salary costs

Indian cos manage to hold down salary costs
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First Published: Thu, Jun 07 2007. 12 36 AM IST
Updated: Thu, Jun 07 2007. 12 36 AM IST
Salaries may be shooting through the roof these days in many industries, but in the 14 years that India has liberalized its economy, wages and salaries across companies as a percentage of sales have continued to decline.
A Mint analysis of listed companies on the Bombay Stock Exchange between 1992—the first full year that the Indian economy began truly opening its doors—and 2006, shows that employee expenses as a percentage of sales have been going down.
Back then, companies spent 8.23% of their net sales on employees. In 2006, that fell to 6.61%. In 1992, listed companies spent 9.60% of total operating expenses on employees but, last year, that portion was down to 7.92%. The universe of listed companies now consists of 3,472 firms. In 1992, there were 1,631 listed firms.
The trend is very similar if one takes a look at the top 100 firms and 500 firms in terms of net sales. For the top 500 firms, the slide is from 8.33% to 6.39%. The trend becomes stronger with larger companies. The top 100 corporates spent 8.27% of their revenues on employees back in 1992, but in 2006, the figure came down to 6.11%.
One big caveat: there have been significant shifts in the composition of these top-tier firms, with a lot more services and information technology firms now taking the top slots. And salaries have generally galloped at a much faster pace in the last two years, at least anecdotally, than in any previous period. The study also did not look at the total number of employees then and now.
Still, the drop is not too surprising, says Sunil Sinha, senior economist at rating agency Crisil Ltd, who notes that competition has also intensified because of the liberalzation and companies have worked harder to cut all costs, including wage costs.
Indeed, this is especially true for companies in the manufacturing sector where increased automation and better efficiency have brought down costs. Steel companies, for instance, spent over 11% of sales on employees in 1992; this has now dropped to less than 7%. The trend remains the same across most manufacturing industries such as textiles, cement and pharmaceuticals.
Services industries, however, have seen wage bills rising. Telecom service providers spent about 13% of sales on salaries from just 8.5% in 1992.
Human resource consultants point out that many companies still don’t link compensation with the overall performance of the company. Salaries are typically adjusted based on inflation and changes in the market. Then, typically, there is some adjustment based on how well the employee performed.
“The ways companies approach compensation is a knee-jerk reaction,” says Anita Belani, country head at human resources consulting firm Watson Wyatt India. “There is not much analysis. Not a correlation between revenue or cost.”
But this is starting to change and “linkages to companies performance is increasing,” says Gangapriya Chakraverti of consulting firm Mercer HR India, pointing to profit sharing and stock options.
Rajiv Kumar, director and chief executive of Delhi-based think tank Indian Council for Research on International Economic Relations, says he isn’t surprised to see overall employee costs down because “the labour market was very flat”. But, he says, there has been a shift in the last six months as the labour market tightened. Watson Wyatt’s data supports his point. In 2006, salaries rose 7-18%. This year, the range has grown to 10-25%.
Still, employees are not always getting their fair share, concedes Prabal Banerji, group CFO, Hinduja Group. “I think there should be some better opportunities (for employees) because they are responsible for that (growth),” says Banerji. “The only way to do that is to make salaries more viable and more dependent on company performance.”
(rana.r@livemint.com)
Mobis Philipose contributed to this story.
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First Published: Thu, Jun 07 2007. 12 36 AM IST
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