Salary demands are big business

India Dispatch: Coal India illustrates how wage inflation is blunting the country's corporate boom - with gallery.
Coal India dominates India's energy-starved market, has the world's largest coal reserves, is a debt-free company and has a strong balance sheet. Anupam Nath / AP Photo
Coal India dominates India's energy-starved market, has the world's largest coal reserves, is a debt-free company and has a strong balance sheet. Anupam Nath / AP Photo

Coal India, a 2.5 trillion rupee (Dh199.06 billion) state-owned enterprise, briefly became India's most valuable company this month, supplanting the giant Reliance Industries after its four year reign at the top of market valuation charts.

The Coal India stock, a darling of share traders, has shown a remarkable surge since the company's public listing in November. Its US$3.4bn (Dh12.48bn) initial public offering for its 600 million-plus shares were oversubscribed 15 times, attracting bids worth $48.7bn - more than the combined GDP of Iceland and Latvia.

The mining behemoth has everything going for it: it dominates India's energy-starved market;has large coal reserves; is a debt-free company; and has a strong balance sheet.

But just a couple of days after it dethroned Reliance, the company stock curiously fell 5 per cent, relegating Coal India to second position.

The stock was pulled down by some sobering news coming out of the company's mines: workers demanded that their salaries be doubled.

Coal India paid 48.72bn rupees as wages in the three months to June, while its profit after tax stood at 41.30bn rupees. The company's net profit would be erased if wages for its 400,000 workers - which account for 42 per cent of its expenditure - are doubled.

The Japanese investment bank Nomura Holdings estimates that a 1 per cent hike in employee costs for Coal India will diminish earnings per share by an equal proportion.

JPMorgan said in a research note the company was unlikely to accede to the entire demand, but was expected to boost wages by at least 20 per cent in a last-ditch effort to avoid damaging industrial action.

Coal India is not the only company facing pressure to hike wages. The Confederation of Indian Industry, a lobby group, says that in the June quarter employee costs for the 500 firms listed on the Bombay Stock Exchange grew 19 per cent while profits rose only 4.6 per cent. In the previous quarter, salaries grew 22 per cent, while profits increased 13.5 per cent.

Indian companies are struggling to retain scarce talent amid growing incidents of talent poaching by rivals, high attrition and clamorous demands for wage hikes amid sky-high inflation.

India's management schools have produced some of world's brightest intellectual talent to occupy the highest offices, but there remains an intractable shortage of skilled foot soldiers to man factory floors and office cubicles.

It is a problem that bedevils multiple sectors in the country. Hospitals struggle to find paramedics, car makers struggle to find welders, technology firms struggle to find software programmers.

The labour shortage is baffling in a country blessed with a demographic dividend - two-thirds of India's 1.21 billion people are below the age of 35.

But the problem is finding the right people for the right job, reflective of a woeful paucity of skilled labour.

The National Sample Survey Organisation says that amid India's "jobless growth", the country's workforce grew by only 2 million between 2005 and last year.

The central government has more than 1 million unfilled vacancies, despite the high demand for government jobs, which are considered secure and are valued for their inflation-adjusted wages and pension schemes.

The Grant Thornton International Business Report, a quarterly survey of global companies released in April, said 64 per cent of Indian businesses expected to increase their workforce this year, the highest among the 39 economies surveyed. But 51 per cent said the shortage of skilled labour would retard their growth this year - a 30 per cent increase from last year.

In a bid to lure - or retain - talent, many companies are raising salaries like never before.

The global human resources consultancy firm Aon Hewitt said in March that employees in India would see a 12.9 per cent increase in salaries this year, higher than last year's increase of 11.7 per cent, despite looming headwinds of high inflation and the growing fears of economic slowdown. This growth rate, which is led by the engineering services sector, is the highest in the Asia-Pacific region, followed by China (9 per cent) and the Philippines (7 per cent).

"The rate of India's salary rise is likely to be among the highest in the world as companies grow fast and domestic consumption rises due to good economic growth," says Nitin Sethi, an executive at Aon Hewitt in India. "Investment in infrastructure, continued momentum in services and efforts towards fiscal consolidation are adding to the optimism."

With wage inflation, Indian outsourcing companies are facing stiff competition from other low-cost markets such as Mexico, the Philippines and Ireland.

Jeff Immelt, the chairman of the US engineering company General Electric, said recently the cost difference between running an outsourcing operation in the US and India had narrowed to just 10 per cent from a high of 40 per cent at the start of the outsourcing boom a decade ago.

At the heart of the problem for the industry, analysts say, is India's education system, which emphasises and rewards rote learning rather than encouraging students to acquire practical and job-oriented knowledge.

A survey of 150 companies conducted jointly by the World Bank and the Federation of Indian Chambers of Commerce and Industry in 2008 revealed that 64 per cent of all employers were "somewhat to not-at-all" satisfied with the skills that engineering graduates brought to the table.

"Graduates have to learn to formulate, analyse and solve real-life problems using standard engineering techniques," Hiroshi Saeki, a World Bank analyst who conducted the survey, said at the time.

Most companies in recent years have hired workers who lack adequate skills but are trainable.

The National Association of Software and Services Companies (Nasscom) says an average technology company invests 16 weeks in training one employee - in technical and job management skills - which costs 2 per cent of all industry revenues. In 2009, Nasscom estimated that about half a dozen top companies spent $450 million to train about 130,000 engineers they had recruited.

The Associated Chambers of Commerce and Industry says the IT sector is struggling with a high rate of attrition, which peaked at 65 per cent over the past two years, as employees frequently switch jobs even for more lucrative pay packages.

One in two Indian employees is considering changing his present job, said a survey titled "What's Working", released this month by the consulting firm Mercer.

"A clear understanding of what's inside employees' minds represents an important step in developing a blueprint that skilfully combines existing approaches with innovative ideas to improve engagement, performance and productivity," says Nishchae Suri, the managing director of Mercer.

Out of the 2,000 workers who took part in Mercer's survey, 54 per cent are "seriously considering" leaving their organisation - a 28 per cent jump from 2004.

"As the economy improves further and new job opportunities emerge, employers risk losing valued talent and also face productivity and morale issues among workers who continue to be with the organisation," Mr Suri says. "The business consequences of this erosion in employee sentiment are significant, and clearly the issue goes far beyond retention."


Published: August 28, 2011 04:00 AM


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