Mumbai, June 10: Competitive wage costs, a major strength of the domestic software services industry, may become difficult to sustain due to pay increases and thus affect profit margins in its wake, Wipro has warned.
In its annual filing with the US Securities and Exchange Commission (SEC), Wipro has said that while pay packets are being raised to bring in the best talent, increasing the efficiency and productivity of the employees should also be the focus.
“Unless we increase the efficiency and productivity of our employees, wage increases in the long term may reduce our profit margins,” the company said.
Wage costs in India have historically been lower than wage costs in the United States and Europe for comparably skilled professionals and this has worked to the advantage of Indian companies vis-a-vis their international counterparts.
Listing various other risk factors, the company said that its earnings might be adversely affected if it is required to change the accounting policies with respect to the ‘expensing’ of stock options.
Wipro does not currently deduct the expense of employee stock option grants from its income based on the fair value method.
The company noted that regulatory authorities, including the Financial Accounting Standards Board and the International Accounting Standards Board, want companies to change their accounting policies to record the fair value of stock options issued to employees as an expense.
While stock options are an important component of the company's employee compensation package, Wipro said, “If we change our accounting policy with respect to the treatment of employee stock option grants, our earnings could be adversely affected.”
On the present scenario, Wipro said that it continues to experience erosion in gross profit with significant pricing pressures in its core service offerings due of clients' needs to reduce their costs and the increased competitive environment.
In 2002-03, the company incurred higher selling and marketing expenses to increase brand awareness among target clients and promote client loyalty.