India has been a successful destination for knowledge based services. It wouldn’t be incorrect to say that it was the cheap but good talent that attracted many Multi National Companies (MNCs) to setup their operations in India. Over the years, this cost advantage of the India operations is slowly disappearing. I wouldn’t be surprised if the MNCs go to other countries that are cheaper than India. We already see the BPOs moving to Philippines, chip design moving to Singapore & China etc. If we analyse the root cause, it will be very evident that the steady, double-digit, year on year pay raises has minimized the cost advantage. Employee’s Cost to Company is only part of the overall cost. The rising infrastructure costs in India, coupled with energy costs further shrink the cost advantage. I restrict this blog to the potential impacts of ever increasing pay raises
India still has some cost advantage because of the pyramid structure of the organization. At the bottom of the pyramid are the new college graduates (NCG) who get the lowest pay in the company. At the top of the pyramid are the senior most managers of the company who would be paid, the most. In between, there are multiple layers or ranks. As we go up the pyramid, the pay increases but the number of people at each layer become lesser in number. The average cost to the company is still low, as there are more employees at the bottom of the pyramid. However, as an organization ages, it will have more senior people and thus the average pay moves up. Add to this, the ever increasing starting salaries of the NCG. The NCG’s pay has grown at a CAGR of 15% over the last 17 years. The pay in USA has not increased that drastically. The ratio of US NCG salary to India NCG salary has dropped from 20 to 4 in the last 17 years. Today, a few of the middle level managers in India get salaries that are in the similar ball park, as their colleagues in USA. While the cost competitiveness has been eroding, the talent pool with critical skills has been growing. This will be the saving grace for the MNCs in order to survive in India. However the rate of growth will slow down. The pay raises will drop. At senior levels it could stay flat or in some cases even decrease.
The number of critical high-impact positions, that justify higher pay, are limited. This means that not all experienced (# of years) employees can occupy these positions. Such experienced employees could be getting higher salaries based on their years of experience but their current position may not justify the same. In some sense, career stagnation happens. Sooner or later, these employees become overheads. The salaries of such employees could stay flat or even decrease. As the pay and benefits could possibly be linked to the job rank or the grades, even demotion of job ranks can happen. They may also be retrenched. Employees would prefer not to be in such situations, but it would be futile to ignore the possibility that it could happen to them.
There are choices that people can make. If they do not want to get into such a situation, then they should work proactively to enhance their careers and add greater value than their current role demands. Take up bigger challenges and deliver results. This requires employees to get out of their comfort zone and take risks. It also requires employees to broaden their repertoire. They should constantly look at upgrading their skill set and ensure that it is relevant, in the ever changing market environment. If they are not ready to face these challenges then they should also be ready to accept that their career and pay may get stagnant.
The unsustainable pay increase also impacts a person’s social life. With more salary, people tend to spend more and get used to a higher standard of living. Spending beyond the means, in anticipation of ever-increasing salaries can create liabilities. It also creates secondary effects in the society by increasing the cost of living.
Continuously upgrading ones skill and living within means can help in long term sustenance of a person’s life and work.
Happy Reading,
Ram
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6 comments:
If the govt can control inflation,corruption and keep prices under control, who needs marked increase in pay?
I learnt the price of a gallon of milk went up by just 40 cents in 5 years in USA.Can you think its possible in India?Its a Catch 22 situation and rich guys are richer and Poor ones poorer by the day !!
"Rich getting richer and poor getting poorer & more in debt" - Ranga echoed my thoughts. I see this during every visit to India.
Because of the inflation due to IT boom, the regular folks( who are not even poor actually) are not able to afford things. And, IMHO the talent and service is over hyped and overpaid.
I agree that any set of people, senior or junior should continuously work on improving skill set according to the market place demands.
As for pay increases, a lot, in fact almost all, companies have indulged in vulgar poaching and counter poaching practices in order to cash in on the outsourcing boom instead of coming up with a nice organic growth with vision plan. To blame it on "crazy expectations" of the employee would be unfair.
My own employer has "bubbled" close to 5 times since I joined her. To blame individuals would be unfair. People coming into the job market today would feel as if their seniors have literally made hay while the sun shone and left nothing on the table for the upcoming generations.
One can find the annual income distribution on earth at the URL below http://www.globalrichlist.com/how.html
Please plan to upgrade skills exponentially to justify pay raises. Not going to happen I think.
IT jobs are unlikely to be responsible for increasing costs (I think IT people delude themselves thinking it is indeed so). A fair analysis will show that Govt schemes like the NREGA has a lot more to do with rising costs in India. I'd imagine that it is one of the reasons why the govt is unable to do much about price levels or its rise.
What made us think that anything dependent primarily on "cost advantage" will sustain forever ?
Even if we would have remained at previous income levels with single digit increments I doubt these "MNC" firms will stop searching for upcoming cheaper destinations.
The model itself is unsustainable regardless of whether there are astronomical pay increases or we distribute peanut increases.
If water flows in a pipe from top to lower level, after sometime, flow reduces due to increased head. The cost advantage is not everlasting if we expect work in only one direction. We need multiple ways to get people prefer us (creating more pipes). Finding new ways to engage with the west might sustain such growth. However, I am unsure if the internal talent growth is significant to create such options, esp. with production kind of graduation process.
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