Introduction –
The case examines the compensation management system
at TCS based on the EVA model. With the implementation of EVA based
compensation, the salary of employees comprised of two parts - fixed and
variable.
The variable part of
the salary was arrived after considering Corporate EVA, Business unit EVA and
also individual performance EVA. The new system was implemented successfully
and it helped the company identify the non-performers.
The company also benefited a great deal in
retaining talent. However, it also received criticism from several quarters for
'putting golden handcuffs on excellent performers.
Company Background –
TCS
started operations in 1968, as a division of Tata Sons Limited, one of Asia's
largest business conglomerates, with a wide range of interests in engineering,
telecommunications, energy, financial services and chemicals. The initial
journey in the IT business was not easy for TCS.
During the first two
decades of its operations, TCS faced many hurdles due to the rigid government
licensing system, which made it difficult to import computers. Describing the
difficulties in doing business during those times, "It would take us two
years in India and almost a year in the US to get all the clearances we needed
to import computers. By the time we got the approvals, the model of the
computer would have changed.
The EVA
Model
TCS adopted EVA
in 1999, when the company had a staff of around 15000, working at several locations
across the world. Through the EVA model, TCS aimed at creating economic value
by concentrating on long term continuous improvement.
VA measured operating
and financial performance of the organization and the compensation of all
employees was linked to it. TCS went in for the EVA as during that time, the
company was not a public limited company and hence could not have a stock
option plan. There were several people who played an important role in the
success of the organization, who needed to be recognized. As there was no
wealth sharing mechanism in place, EVA was adopted to focus on continuous
improvement rather than short term goals and also to motivate employees
The benefits of EVA were realized across all levels in the organization.
Employees became aware of their responsibilities and their share in increasing
the EVA of the unit and organization. All the units could determine how they
had fared against the targets.
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The bonus banks also
helped in sustaining performance from the individuals, with close
relationship between pay and performance. There was an increased sense of
belonging among the employees and the employees were motivated to increase
their contribution as they were also equally benefited by the increase in
EVA.
EVA was not just a performance metric but an integrated management process aimed at achieving long term goals. One of the major benefits of implementing EVA in TCS was increased transparency in the organization. The internal communication within a unit had increased considerably.
The Drawbacks
The
EVA-based compensation system received severe criticism during the initial
years of its implementation. Industry analysts commented that EVA
concentrated mainly on return on investments, due to which the growth of TCS could
be restricted. In 2003, TCS caused uproar in the IT industry when it reduced
the variable salaries of employees by 10%. This was the initial impact of EVA
which was implemented in the company from April 01, 2003.
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