• Customers expect excellence and innovation
• Employees seek fair compensation and meaningful work
• Owners demand profitability and lean operations

a. Business Growth - Accuracy in Estimating Incremental Employee Cost

Robust sales planning and workforce forecasting at the start of the year set the direction for affordability. The key considerations:

• New Headcount Demand
  Incremental revenue translates into workforce requirements. Net new hiring should be carefully estimated after accounting for fulfilment through internal training, redeployment, and promotions.
• Attrition and Replacement Hiring
  Organizations track voluntary attrition by business segment and also plan involuntary exits as part of cost optimization. The replacement strategy typically involves:
• Backfills at the entry level to optimize the pyramid structure
• Lateral hires only for niche or unplanned demand, usually costing 10-20% above median salaries
• Onsite/Offshore Mix Optimization
  Balancing delivery models provides cost arbitrage. Movements between onsite and offshore locations must be factored into cost planning.
• Promotions and Salary Rationalization
  Typically, 15-20% of employees move up each year, carrying associated salary increases. Rationalization of pay gaps also adds to the increment pool.
• Salary Increment Kitty
  HR benchmarks market data and proposes the salary increment budget (say, X). Promotion-linked increases and rationalizations add an additional Y. The affordability of X+Y must be tested before approval.

b. Affordability Test

The final budget must pass an affordability test.

• Use the prior year's employee cost as a percentage of revenue as the baseline.
• Ensure the new increment pool (X+Y) stays within that threshold for the coming year.

This approach provides a structured and data-backed method to balance employee expectations with financial sustainability.

Illustrative view of employee cost planning:

Key Insights

• The salary increment (including promotions and rationalization) is estimated at $4M on a $55M baseline, about 7.2% average increment affordability.
• With 7% YOY revenue growth, the increment is affordable under the modelled assumptions.
• Crucially, levers like pyramid optimization, location mix shifts, and attrition-driven churn are only feasible in a growth scenario. In downturns, attrition falls, involuntary exits are harder, and flexibility narrows.

Planning Discipline vs. Reality

While the illustration appears straightforward, the reality requires rigorous planning, data, and constant calibration.

Best practice suggests holding back 3-5% of the increment pool as a contingency for grievances, unplanned attrition, or market shocks.

In practice, many mid- and smaller firms skip this rigor, fixing a salary budget based on hope of growth. But salary increments precede growth. If growth slows, costs cannot be rolled-back creating a real risk of eroding shareholder returns. Cutting quality of talent to bridge the gap only worsens customer dissatisfaction, leading to a destructive spiral.

This is why salary decisions are among the most strategic bets leadership makes.

Additional Levers in Employee Cost Management

• Rebadging of Resources
  In rebadging deals, optimization and churn must be tightly managed to prevent overruns. Any deviation should trigger immediate mitigation with all stakeholders.
• Productivity & Automation
  Many client contracts embed productivity commitments (e.g., 20% post-year-one). These hinge on offshore shifts and automation. Any lag in execution erodes cost savings and inflates employee cost.
• Currency Movements
  While local earn-and-spend models offer protection, exposures remain-particularly in India. Favourable swings should be treated as reserves, not immediately spent, to cover future shocks.
• Strategic Investments
  Hiring practice leaders, innovators, or researchers is largely an employee-cost-driven investment. Keep this spend capped at x% of the annual revenue as budget and track separately. Affordability is key - overspending here can quickly dilute margins.

Current Industry Reality

Growth forecasts for IT services firms have narrowed to marginal levels. Yet many organizations continue granting 7-10% base increments without adequate offsetting measures.

Adding to the challenge, companies have already hired and trained talent in anticipation of higher growth. With top-line momentum slowing, this overcapacity has become a pressing issue, demanding swift rebalancing of resources.

If left unchecked, the result is predictable-shareholder dissatisfaction, margin dilution, and market-cap erosion.

In today's environment, leadership must perform a delicate balancing act: meeting employee expectations while safeguarding financial sustainability.

Food for Thought - Hard but Necessary Levers

While unpopular, certain measures may be necessary to safeguard the enterprise. Leaders should sequence actions by impact and sustainability:

1. Link Variable Pay to Performance
   Ensure payouts reflect company performance, not entitlement. This preserves affordability and reinforces accountability.
2. Restructure Increments
• Provide fixed-amount increments (absolute $ value) to support lower bands while rationalizing extremes.
• Apply lower percentage hikes at managerial/leadership levels, protecting junior employees.
• If increments are constrained, compensate with ESOPs or long-term incentives, aligning employees to the growth story and addressing attrition.
3. Recalibrate Timing
   Delay the increment cycle by 3-6 months if affordability is under pressure.
4. Resource Optimization
• Rotate resources into roles with the right realization when client pricing stagnates.
• Avoid benching onsite; if employees remain non-billable for extended periods, trigger structured affordability reviews.
• Enforce hiring freezes selectively to trim flab and reset baselines.
5. Segment-Specific Measures
   In BPO operations, actively manage churn to prevent average salary inflation and safeguard margins.
6. Invest in Upskilling with a Purpose
   Continue to fund training and development, but only to make people billable and market ready.

Closing Note

We have drawn these insights from real-world experience managing wage neutrality under challenging conditions.

The employee cost conundrum is one of leadership's most delicate challenges. In today's climate, where workforce decisions dominate headlines, a CEO is not merely a decision-maker but a diplomat between ambition and reality-balancing the C-E-O triangle of Customers, Employees, and Owners.

What's your take? Share your perspectives, challenges, or success stories with us on LinkedIn or connect directly.

At CFO Bridge and CHRO Bridge, we stand ready to support leaders in navigating this balance.