Amidst the Indian IT industry’s promises of wage hikes in FY25, data indicates that the impact of furloughs, primarily in Q3, is temporary, and with the anticipated increase in projects in Q4 and early FY26, companies may still have enough room to implement wage hikes to maintain their competitive edge in the talent market.

According to TeamLease Digital, mid-year wage hikes, particularly in the Indian IT sector, are usually a reflection of immediate market conditions like high attrition, demand for critical skills, and macroeconomic factors.

“In the past, large IT companies have implemented wage hikes in the third quarter of the financial year to offset attrition, which has been in the 18-22 per cent range, and drive salary corrections for high-skilled employees or those with niche skills. This anticipatory move may maintain a competitive advantage and prevent talent leaks at the end of the performance cycle. The percentage of these hikes on average is between 6-9 per cent,” said Neeti Sharma, CEO, TeamLease Digital.

Companies may move away from blanket salary hikes and focus on a more selective approach. Employees with high-demand skills, such as AI, cybersecurity, and cloud expertise, will likely see bigger raises, while average performers might receive smaller increments or none.

“This allows businesses to keep wage bills in check while still rewarding their top talent and retaining key employees without putting too much pressure on margins,” she added.

Compensation trends

At the same time, companies are increasingly shifting toward high-margin digital transformation services like cloud, AI, cybersecurity, and data analytics. These areas offer better pricing power than traditional IT services, allowing firms to boost profitability and balance out the impact of any wage increases.

Pre-Pandemic, i.e., between 2015 and 2019, companies maintained steady salary hikes of 6-10 per cent, with performance-based increments driving rewards. High performers typically received raises in the 9-12 per cent range.

However, during the pandemic season, in FY21, wage freezes were followed by sharp increases as demand for tech talent skyrocketed. Increments ranged from 10-13 per cent for niche skills, with a notable rise in retention bonuses. Mid-year hikes were introduced to offset the earlier wage freezes. While average hikes hovered around 6-7 per cent, niche skill sets saw a significant jump.

In the post-pandemic surge in FY23, talent competition intensified, leading to wage hikes of 12-15 per cent or more for high-demand roles. Companies like TCS, Wipro, and Infosys implemented two rounds of salary increases to combat attrition, which had climbed above 23 per cent. During this time, many professionals shifted to start-ups and GCCs, pushing companies facing attrition rates of 25-27 per cent to roll out double-digit raises.

In FY24, wage hikes moderated to around 6-8 per cent, with selective increases focused on digital and niche skills. Companies are prioritizing margin protection by delaying or carefully moderating wage hikes, Teamlease Digital noted.

The tech sector’s compensation spending and increments are tightly linked to revenue performance and outlook for revenue growth, specialist staffing company Xpheno echoed.

Wage outlook

“The well-oiled financial machinery of the sector does not allow margins to be eroded through mistimed wage hikes. The stretch and flex levels are tightly controlled to keep costs in control to protect margins and returns for investors,” said Sundar Eshwar, Business Head - IT Staffing.

The current outlook for compensation hikes and increments might gain from the relatively better performance top IT service players reported for Q2, he added. 

The collective top seven IT Services companies registered a 6.2 per cent collective annual revenue growth in the quarter ending September 2024, compared to the same quarter last fiscal. The 12-month period ending June 2024 saw a 3.4 per cent revenue growth with a compensation cost growth of 2.8 per cent. At the peak of buoyancy, the 12-month ending June 2022 saw a 19.2 per cent revenue growth driven by a compensation cost growth peak of 24.3 per cent.

“Individually, top IT service players have recorded YoY growth between 3and 8 per cent. Their compensation spend revisions will be impacted accordingly, along with moderations based on new orders pipeline and bill-rate revisions. Furloughs are a known seasonal occurrence in the sector and the revenue recognition and spend plans are all proactively tuned to deal with it. Overall, based on current performance contexts and past patterns, a 6-10 per cent performance-based increment will be a comfortable placement from this cohort for the season,” he said.

Debashis Chatterjee, the CEO and MD of LTIMindtree, said in a conversation with businessline, “We have taken a call to offer wage hikes because of which there will be around 200 basis points of impact on Q3 margin. Some of that impact can be recovered through the operational efficiency we will gain.”

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