Total Rewards Quarterly

The Transience of Tenor: How the IT Industry can Cope

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As the Indian economy continues to grow, with a projected GDP growth rate at 7% and above for the next few years, India’s demographic dividend is also expected to increase with the population growing from 1 billion in 2001 to 1.4 billion in 2026. 83% of that increase is estimated to be in the age group of 15-59 age groups. If the projections were to go by, India will have 25% of the world’s total workforce by 2025.* Also, as the fourth largest base for young businesses in the world and home to 3,000 tech start-ups, India is set to increase its base to 11,500 tech start-ups by 2020, as per a report by NASSCOM and Zinnov Management Consulting Pvt. Ltd. All these signs point to the growing opportunities for the Indian workforce and the multitude of job choices as the Modi light burns bright. However, one side effect of this plethora of choices has been the changing definition of a ‘career’. Gone are the days when an employee joined a firm as an entry level associate and retired from the same place amongst familiar faces. The workforce today is looking for quick returns and faster growth opportunities. However, employee turnover is a costly issue. With every employee leaving, a company loses both its financial investment in recruitment, onboarding and training costs, as well as its non-financial investment that can sometimes weigh harder in knowledge, workplace collaboration and competitiveness. HR leaders are coming to realize that and, hopefully, are coming up with ways to address this challenge.

Average Life Span of Employees in IT and BPO Industry

The average life span of employees across the IT & BPO industry ranges from 2-4 years, which means that the organizations are changing its employee base every 2-5 years with a majority of firms lying in the bracket of 2-3 years of average tenure. According to another survey by SHRM on employee tenure, the tech industry had a volatile three years average tenure, which is the lowest average in the last five years. Employees in these industry do not stay at their organizations particularly long and seem to have little connection to or investment in their jobs. The attrition of the organization has a huge bearing on the overall people cost of the organization apart from the cost incurred on recruiting fresh talent from the market. The below analysis showcase the cost per FTE for different industries for employees which are with homegrown as compared to employees hired fresh out of market.

The above charts showcase, that irrespective of the industry, if employees stay longer in the organization, they are more cost-effective as compared to talent hired from the market. If an employee stays longer than three years in the organization and progresses up to a level of senior management, the employee is cost-effective as well as helps the organization to retain the knowledge built over the years within the firm. Hence, from a cost perspective, promoting leaders coming from within DNA of an organization looks like a more favorable option than to hire talent from outside. This is only possible if companies start investing in learning & development initiatives at the entry level bands in the organizations. This also ties in with the fact that large and mature organizations have started leadership development programs for campus recruits and give them the opportunities across all the major functions to help them develop a holistic understanding of the organization.

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The above charts showcase, that irrespective of the industry, if employees stay longer in the organization, they are more cost-effective as compared to talent hired from the market. If an employee stays longer than three years in the organization and progresses up to a level of senior management, the employee is cost-effective as well as helps the organization to retain the knowledge built over the years within the firm. Hence, from a cost perspective, promoting leaders coming from within DNA of an organization looks like a more favorable option than to hire talent from outside. This is only possible if companies start investing in learning & development initiatives at the entry level bands in the organizations. This also ties in with the fact that large and mature organizations have started leadership development programs for campus recruits and give them the opportunities across all the major functions to help them develop a holistic understanding of the organization. 

Looking at Tier 2 & Tier 3 Cities Differently

HR leaders and business leaders today are trying to find new and innovative ways to tackle the high attrition rates by exploring solutions which have a long-term impact on business. For this very reason, organizations today are shifting some percentage of employee bases to Tier 2 and Tier 3 cities. Apart from the obvious cost factor, it is presumed that Tier 2 and Tier 3 cities have more stickiness as compared to Tier 1 cities. Primary research within the Aon database throws light on the validity of this assumption. 

Interestingly and not to our surprise we found that across different sectors (IT services, IT products, thirdparty service providers and banking GICs) covered as a part of our primary research, attrition rates are lower in Tier 2 and Tier 3 cities with overall average tenure higher as compared to Tier 1 cities. Moving to Tier 2 and Tier 3 city helps management control attrition but more importantly reduce cost as the talent available is prepared to work closer to hometown at much lesser cost as compared to any Tier 1 city. 

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Reward Mechanism to Increase Employee Tenure in the Organization

Maintaining the right balance between Tier 2 & 3 and Tier 1 cities is the newest solution to de-risk attrition rate and control cost. This change however, requires some prerequisites such as – assessment of the potential cities for availability of relevant talent; cost of setting up operations in the city; political and economic stability of the chosen city. 

However, moving people across different cities is not the only solution to address the issue of controlling attrition and increasing employee tenure. There are other rewards and non-rewards aspects that organizations need to look at as well to offer a complete package to the employees.

 

Moving to Tier 2 and Tier 3 city helps management control attrition but more importantly reduce cost as the talent available is prepared to work closer to hometown at much lesser cost as compared to any Tier 1 city

Looking only from a rewards perspective, organizations offer different components of rewards which are tenurelinked. This can act as a motivating factor for employees and encourage contribution to business growth. Some of these key rewards elements are mentioned below:

  1. Long-term incentive/Deferred cash plans: This is a major incentive used by all start-ups and new age firms as well as firms competing for talent with start-ups. Majority if not all start-ups/e-Commerce organizations offer long-term incentives or deferred cash plans at campuses to promote longevity and encouraging students to stay longer in the organization

  2. Long service awards: While not a new age reward benefit, long service awards has been an integral rewards and recognition benefit in most organizations for years and continues to be relevant even today. The change noticed however, is that the years for which the long service awards were granted have reduced. This can be attributed to the dynamic talent landscape and more companies introducing long-term service for three years completion and in some cases, even two years completion in the organization. These are considered as more of motivational awards than retention awards

  3. Retention awards: This award is special and given only key talent or top performers of the organization to ensure that critical talent stays within in the firm and the knowledge base remains within the organization. This is also linked to identification of key and critical talent which may not be managed through a robust assessment and can bring in subjectivity

  4. New age benefits: There are newer benefits and privileges that organizations have started offering which are linked to tenure in the organization. Some of these benefits include awarding employees with gifts ranging from vacation homes in exotic locations to super bike setcon completion of a certain number of years in the organizations. Such benefits can act as a major incentive for the Gen Y and millennial population to stay longer in the organizations, as they cater to the changing employee demographic

  5. Learning & development opportunities: Tenure linked learning & development opportunities are not so common but few organizations also give preference in L&D opportunities to employees who have been loyal to the firm. Depending on the L&D program organization have different tenure criteria/eligibility for employees

Best Way Forward

With this article, we attempted to shed light on the importance of tenure in organization both from the financial as well as non-financial perspective and share some of the new age practices companies are adopting to incentivise employees to stay. Achieving this objective requires firms to look at rewards and other HR elements from a new lens to understand the issues faced by the changing workforce and provide new solutions which best address the new age demographic.

Data Source:
*UNDP India, NSDC India

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Lalit Gurnani
Consultant,Aon Hewitt
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Manasi Jain
Consultant, Aon Hewitt
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