TCS Slashes Variable Pay For Employees Citing “Muted” Third Quarter

TCS management strikes confident note but employees face cuts in variable pay and bonus.

Employees gather in a rest area at the TCS campus in the State Industries Promotion Corporation of Tamil Nadu Ltd.(Photographer: Dhiraj Singh/Bloomberg)
Employees gather in a rest area at the TCS campus in the State Industries Promotion Corporation of Tamil Nadu Ltd.(Photographer: Dhiraj Singh/Bloomberg)

The management of Tata Consultancy Services Ltd. (TCS) may have struck a confident note when announcing its October to December quarter earnings on January 12, but that same day the company also substantially cut the quarterly variable allowance (QVA) payable to its employees.

In an email communication to all employees, Ajoy Mukherjee, executive vice president and global head, human resources at TCS, announced an upto 50 percent cut in QVA citing dull growth.

“The performance of the company this quarter has been muted.”
Ajoy Mukherjee, Executive Vice President and Global Head - Human Resources, TCS

The cuts apply to employees on the India payroll and will be reflected in the February payout, said the email, a copy of which is with BloombergQuint and has been confirmed as accurate by TCS.

  • 100 percent of QVA to all employees in Y or equivalent grades
  • 50 percent of QVA to all employees in C1 or equivalent grades
  • Unit performance will determine QVA payout for C2 and above grades and it will vary between 0 - 50 percent

In that internal communication to employees Mukherjee said the non-India payroll will also be impacted.

Considering our performance this quarter and the current visibility for the rest of the year, the discretionary bonus component of our employees on non-India payroll will also get impacted.
Ajoy Mukherjee, Executive Vice President and Global Head - Human Resources, TCS

The cuts in variable pay strike a sharp contrast to the TCS management’s commentary on Q3 earnings. At the media conference following the Q3 earnings announcement, Chief Executive Officer and Managing Director N Chandrasekaran described the company’s performance as “very good”.

It has been a very good quarter, both from the point of view of the numbers and also from the point of view of the metrics footprint. We had indicated during the last earnings call that our Q3 performance will be better than last year Q3 and possible will be better than our Q2 performance. We have delivered that.
N Chandrasekaran, CEO and Managing Director, TCS

To be sure, TCS turned in a stable performance for the third quarter with constant currency growth at 2 percent quarter-on-quarter, beating most analyst estimates by up to 50 basis points. Revenue in dollar terms grew 0.3 percent sequentially, whereas operating margin was flat at 26 percent, just meeting the company’s targeted range of 26 - 28 percent. Net profit, at Rs 6,778 crore, was higher than the consensus estimate of Rs 6,485 crore.

The quarter marks the first in which TCS crossed $1 billion in net profit.

Incidentally, on the day TCS announced its Q3 earnings and the pay cuts, N Chandrasekaran was named as chairman of Tata Sons Ltd., the holding company of the Tata Group.

Chief Financial Officer Rajesh Gopinathan, designated to be the next chief executive officer and managing director, sounded upbeat when quoted in the company’s media statement.

We have shown great discipline and control at all levels to deliver another credible quarter. Alongside a good growth performance, we have been able to keep profitability stable in our desired range and deliver over $1 billion in free cash flow during the quarter.
Rajesh Gopinathan, Chief Financial Officer, TCS

Was Gopinathan referring to the pay cuts when speaking of “great discipline”?

The TCS spokesperson did not comment on whether the pay cuts were undertaken to help TCS achieve an operating margin within the targeted range.

He confirmed that the ‘Y grade’ of employees, the only ones to be spared a cut, referred to trainees. That suggests the rest of TCS’ 3,78,497 employees may be facing a salary cut. But he declined to disclose the number of employees impacted and the amounts involved.

The spokesperson added, in a conversation on the phone, that on average, total variable pay is between 10 to 35 percent of total remuneration paid to a TCS employee.

There is a monthly variable component based on performance and there is another component, QVA, which is about 20 percent of the total variable component, and depends on business performance and profitability of the unit.
TCS Spokesperson

Per that comment, the proportion of remuneration paid out as QVA, and hence the cuts, may not be substantial from an overall cost point of view, the actual numbers though will be evident only in the fourth quarter earnings.

The spokesperson pointed out that this is not the first time the company has cut variable pay. It reportedly did the same at the end of the second quarter of the financial year 2015-16. It has also in the past increased variable pay, depending on the business performance, he added.

Interestingly, Chandrasekaran, in the company’s earnings related press conference, characterised TCS’ performance as “on the rise”.

Broadly, we believe that all our industries, all our services, and all our geography markets are doing well. There will always be some one-offs, which are unexpected, which we cannot discount - especially emerging markets, whether it is India or Latin America, have always shown volatility. So we should expect that volatility. But on a yearly basis the curve is going to be on the rise.
N Chandrasekaran, CEO and Managing Director, TCS