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Why Do Indian IT Companies pay less

When I graduated from college in 2004, the average salary offered by top 4 Indian IT companies was around Rs. 3.0 lakhs p.a for a fresher. Nothing changed in the last 12 years to suggest that indeed the salaries of those who are starting career in Indian Information Technology (IT) companies improved drastically. Last year, the average salaries offered by top Indian companies were around Rs. 3.6 lakhs p.a showing a paltry CAGR of 1.50% in contrast to the inflation which was averaging above 5.0% for the similar period. I tried to understand the business model to solve the anomaly.

Indian IT sector typically operates on a pyramid model.

At the bottom of the pyramid you have Freshers with experienced people at the above levels. At the top, you have the client facing team/Deliver Manager who interacts with the customer at business level and assumes responsibility for project success or failure.

So, for the business model to work, IT companies recruit as many freshers as possible and train them to do the basic coding, testing and other related activities. At level 2 you have experienced personnel who will be coding the key modules or will be monitoring the development of code on regular level. At higher levels, you have experienced people whose salary is higher than lower levels and take care of system level design/Testing design etc. At the top you have the delivery manager and above who are responsible for P&L of their department/team.

So, the business model works as long as the the pyramid cost structure is not disturbed. This is the same reason companies pay very low salaries for those at the bottom of the pyramid and the same goes up as they mover to higher levels.

What happens when there are more experienced people

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The pyramid becomes bulge at the middle leading to reduction of profit margin or making business model not viable. The result is layoffs at the middle level management. In most of the cases, freshers wont be sacked but higher level staff face the brunt. Some examples last year:

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At the end of the day what really matters is whether employees are upgrading themselves with the technology or not. If not, they will become obsolete to the company just like the technology.