In today's Finshots we see why IT firms are hiking salaries for fresh graduates

Also, a quick sidenote before we begin the story. At Finshots we have strived to keep the newsletter free for everyone. And we’ve managed to do it in large parts thanks to Ditto — our insurance advisory service where we simplify health and term insurance and make it easy for people to purchase the product. So if you want to keep supporting us, please check out the website and maybe tell your friends about it too. It will go a long way in keeping the lights on here :)

The Story

₹3.6 lakhs

That was the typical salary paid out to a fresher in 2010 when they entered one of India’s top IT companies. Think — TCS, Infosys, HCL, and Wipro.

A decade later, they were still being paid roughly the same sum.

So technically, if you were to take into account inflation, freshers in 2020 were far worse than their counterparts back in 2010. And the salary hikes weren’t particularly enticing too.

It was weird, to say the least. But insiders attributed this anomaly to a whole host of factors. Some said the problem could be summarized in just 2 words — excess supply.

You see, India produces roughly 1.5 million engineering graduates every year. And IT firms hire around 200,000 people every year. This means the effective pool of applicants remains sizeable and IT companies continue to be spoilt for choice. Even others attributed it to cartelization, alleging that IT companies banded together to deliberately suppress salaries. But despite what you want to believe, the bottom line remains the same — Entry-level salaries simply did not budge a lot in the past decade and IT graduates were getting a bit angsty.

But now it’s changing. At least on the salaries front. HCL Technologies recently hiked the salaries of freshers to ₹4.25 lakhs from the industry standard of ₹3.6 lakhs. Even the yearly salary hikes might have been the highest ever on record for India’s IT industry.


So, why the sudden change of heart? Especially since the pool of candidates still, remains large?

Well, the short answer is that the IT giants are battling attrition. Employees are leaving their jobs like there’s no tomorrow. In fact, the attrition rate for some IT firms is at a whopping 25% — that means, 1 in 4 employees are leaving every year. And the pandemic may have had a role to play in all of this. You see, burnout became a real thing when people’s lives were upended these past couple of years. Last year, Microsoft India’s first annual Work Trend Index reported that over 62% of employees felt their companies were demanding too much. Another 32% felt exhausted with the whole work-from-home trend. But the ones who suffered the most? Well, the “freshers”. Nearly 71% of the Gen-Z cohort (below the age of 25) said they were merely surviving or flat-out struggling.

And so even if you have a massive pool to choose from, the pool won’t pick you if you’re paying them such measly salaries. They are better off elsewhere — freelancing, gig economy, or just studying some more. There was no way IT companies were going to get away with this. And it seems now is the moment of reckoning.

Then there’s the bit about competition. You see, IT firms aren’t the only game in town anymore. As potential employers, they’re competing with a burgeoning startup ecosystem that has money to burn. India is the third-largest startup ecosystem after the US and China and the country has over 10,000 technology-led startups who have gone on to create nearly 6.5 lakh jobs. Flush with funds, these companies are ready to pay top dollar to hire good talent. Sure they may not always be hiring freshers, but they’re having an effect across the board.

For instance, some reports indicate that IT companies are now increasingly resorting to differential hiring. Meaning they’re hiring a bunch of students from the same college, but they’re choosing to pay some graduates more than they would normally do. They’re also having a hard time retaining those with niche skillsets.

For example, the pandemic triggered a new wave of digitisation. Companies have had to accelerate the adoption of new technologies and as such, have been allocating a higher budget towards IT spending.

A report from Quess IT Staffing shows a huge surge in demand for niche skills — Artificial Intelligence, Data Science, Cloud Computing, Information Security and Blockchain. In fact, demand for new IT security professionals shot up by 166%, demand for full stack developers is up 110%, demand for Android developers has risen by 80%, while demand for data analytics professionals is up by a respectable 44.7%. Even Microsoft (a company that already pays its employees well) was forced to double its merit budget in a bid to retain early to mid-level employees.

Needless to say, all this is great news for IT employees. The only caveat is that IT companies are having to make slight adjustments. For instance, a decade ago, employee costs contributed about 43% to the total expenses at TCS. Last year, however, the company’s wage bill rose to 53% of its total expenses. So at some level, the rise in salaries may remove some of the labour arbitrage that exists between the developed economies and the developing companies. Meaning, while TCS could once undercut other global IT providers quite comfortably, that may not be the case going forward.

There’s also the fact that an economic slowdown seems to be precipitating on the horizon. And if things don’t change quickly, the salary trends may once again flatline. So if you’re an IT graduate waiting to enter the workforce, things are definitely on the up and you should be happy about it. But like always, it’s recommended that you exercise some degree of caution.

Until then…

Don't forget to share this article on WhatsApp, LinkedIn and Twitter