Companies keep salary outgo in check to protect margins

Bakul Chugan Tongia, ET Bureau Jun 11, 2013, 04.15AM IST

Tags: salary| S&P BSE 500| Indian corporates| fmcg| Financial Services| BSE

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Indian corporates have managed to contain their average employee compensation as a proportion of sales over the past two fiscal years as they battle to protect margins and deal with a sluggish revenue growth in a slowing economy. An ETIG analysis of the employee cost to sales ratio of companies listed on the S&P BSE 500 index shows that Indian corporates have, on an average, paid 8.3% of their revenue as salaries to employees in FY13, which is just about 20 basis points higher over FY12. The employee cost trend indicates that the average employee compensation as a proportion of sales in FY12 and FY13 is the lowest for BSE 500 companies in the past six years. While FY10 was one of the better years for employees with the average wage cost to sales ratio over 9%, it was close to 9% in FY11 and FY09 and about 8.6% in FY08.
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According to officials in recruitment firms, the average increments given by Indian firms to employees in FY13 ranged from 10% to 12% - in line with the trend in FY12, but much lower than the traditional wage hikes of 14-15% on an average seen until a couple of years ago. Corporates have managed to contain costs thanks to the fact that pay packages are now skewed with the variable component of the salary being higher. Says Sangeeta Lala, co-founder and senior VP of staffing firm Team Leas: "Increments have been progressively declining. As the budgets are getting crunched, companies are focusing of performance-linked incentives by apportioning more weightage to the variable payouts over fixed component of the salary." The tightening of employee compensation is directly linked to slowing sales growth and contracting margins owing to pricing pressures. The average growth in net sales of the BSE 500 companies in FY13 over FY12 was just about 11.4%, which is the lowest year-on-year growth during the past three years. The ripple impact of a slowdown in industrial investment, especially in the capital goods, construction, power and infrastructure sectors, is now being felt. The financial services sector has been one of the worst impacted in the current downturn, along with the industrial sector, as reflected in the employee cost trend for this industries. At 11.7%, the employee cost to sales ratio of banks in FY13 was it's lowest since at least FY07. Similarly, for financial services too, this ratio was 4.9% in FY13 - the lowest since FY08. According to Saket Jain, partner at head hunting firm Vito India, the compensation in the financial services industry was just about 0-10% in FY13 and hiring continues to be slow and selective so far in the current fiscal though it is expected to pick up marginally in the second half of the year. Interestingly, even for the sectors perceived to be doing well despite the slowdown, such as FMCG, there has been hardly any growth in the employee cost to sales ratio over the past couple of years. However, one sector which has reported a progressive increase in employee cost to sales ratio over the past few years has been the pharmaceutical industry. The outlook for FY14 hardly looks promising. Says Sangeeta Lala of Team Lease: "The job market is likely to stay stagnant for some more time though we do expect to see some pick-up in the hiring activity in July and August months of the current fiscal. We expect managements to continue to think twice before filling up replacements for the mid and senior-level positions."