Why companies cut wages when profits soared

by Mahesh Vyas

Over a month past the deadline to release quarterly financial statements, we have what may be considered to be the full set of listed companies that provided financial statements for the quarter ended September 2020. This comprises 4,234 companies.

This full set tells us the same story that we gleaned from a smaller set two months ago, which is that listed companies have made their highest ever profits in the midst of a severe lockdown. They did so by cutting costs a lot more sharply than they suffered the fall in sales because of the lockdown. The cost cutting was essentially in raw material and other operating costs enabled largely by a favourable terms of trade for manufacturing companies.

Total income declined by 6.9 per cent. But, costs on raw materials and purchase of finished goods, the biggest expense head declined by a much bigger 18.9 per cent, expenses on salaries grew by 3.4 per cent and other expenses fell by 9 per cent.

Net profit increased by 568.5 per cent. Year-on-year growth in profits is volatile. In the recent past it has varied from -98 per cent in the March 2018 quarter to 356 per cent in the March 2019 quarter and down again to -90 per cent in the September 2019 quarter. Even by these standards, a 569 per cent increase in profits is extraordinary. Much of this can be explained by the extraordinarily low base of telecom companies in the previous year.

Wages account for a relatively small proportion of the total expenses of corporates in India. Its average share before the lockdown was 10 per cent with a range of 7.5-13 per cent in the past 15 years. As a result, the small 3.4 per cent increase in the wage bill during the September 2020 quarter did not have a significant bearing on the overall growth in profits.

However, what is worth noting and is somewhat intriguing is that firms considered it fit to cut and substantially contain their wage bill although they were making huge profits in the quarter. A cut in the wage bill could mean a combination of layoffs and wage rate cuts. It is likely that the wage bill was contained largely through a cut in the wage rate for the permanent staff rather than a slashing of headcount of permanent staff.

The axe on headcount is more likely to be through a slashing of contractual labour. Payments made to contractual labour do not show up as wages on the company’s financial statements since these payments are made to contractors much like other vendor payments. Hiring of labour through contractors has been on the rise in recent years. Given this trend, the modest increase in the wage bill may not fully reflect the cut in labour costs of the listed companies under study.

Of the 4,234 companies in the sample, 2,150 companies, or 50 per cent of the companies, cut their wage bill in the September 2020 quarter compared to their levels a year ago. Another 463 did not show any increase in the wage bill. And, another 339 grew their wage bill by less than 6.92 per cent, which was the inflation rate in the quarter ended September 2020. Therefore a total of 2,952 companies, or 70 per cent of all listed companies recorded a fall in wages in real, inflation-adjusted terms.

While on the whole, companies made a lot of profit during the second quarter, many industries suffered severely debilitating loss of business. Hotels and tourism companies, automobile manufacturers, transport services companies, real estate and mining companies suffered deep losses because of the lockdown. Given that most of these are also labour-intensive, wage cuts in these industries perhaps, was necessary for survival.

Hotels and tourism companies saw the sharpest year-on-year fall in wages at -37.9 per cent. Transport services companies which include all airlines, road transport services saw its wage bill fall by 32.3 per cent. Real estate saw an 18.2 per cent fall in its wage bill. None of these declines include the cut in payments made to labour through contractors.

But, these were not the only companies that cut wages. Of the 2,952 companies that cut real wages, 1,113 companies recorded a more than doubling of their profits during the quarter. 37.7 per cent of the companies doubled their profits but cut wages during the quarter. Another 117 companies saw their profits grow between 50 and 100 per cent and yet another 224 companies saw their profits grow between 10 and 50 per cent. Therefore, 1,454 companies or nearly 50 per cent of the companies that cut wages in real terms saw their profits grow by 10 per cent or more.

Save for the industries that were directly and severely impacted by the lockdown, the lockdown did not threaten the profits of companies at large as they reaped the benefits of a fall in commodity prices.

The cut in wages by companies whose operations were not shut by the lockdown therefore, was more likely opportunistic than out of business compulsions to survive the lockdown. If this is true, then it is perhaps, worth wondering what kind of opportunism was this? Was it to make a quick buck or was it to use a crisis to engineer a structural change that was necessary? It is unlikely that businesses would make a quick buck by cutting wages when they could make money elsewhere, such as by cutting other operational costs.

Although India is a labour surplus economy, it is difficult to get and retain good quality labour. It is therefore not wise to short-change them in difficult times. Business leaders understand this.

The cut in wages therefore is more likely to be structural. The crisis of the lockdown is likely to have been used to shed excess labour. If this is true then the lost jobs are unlikely to come back or, much of the wage cuts will not be fully restored.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.9 -3.6
Consumer Sentiments Index
Base September-December 2015
53.2 0.0
Consumer Expectations Index
Base September-December 2015
54.8 0.0
Current Economic Conditions Index
Base September-December 2015
50.7 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Mar 20 Jun 20 Sep 20 Dec 20
New projects 3.80 0.83 1.05 0.86
Completed projects 1.76 0.25 0.72 0.51
Stalled projects 0.73 0.11 0.08 0.30
Revived projects 0.42 0.68 0.36 0.08
Implementation stalled projects 10.18 0.09 0.07 0.12
Updated on: 17 Jan 2021 9:28AM
Quarterly Financials of Listed Companies
(% change) Mar 20 Jun 20 Sep 20 Dec 20
All listed Companies
 Income -5.0 -27.6 -6.2 6.0
 Expenses -1.9 -27.9 -10.1 2.1
 Net profit -48.9 -40.2 45.2 24.3
 PAT margin (%) 2.3 5.3 8.3 21.9
 Count of Cos. 4,355 4,347 4,310 75
Non-financial Companies
 Income -9.0 -37.4 -10.4 6.9
 Expenses -4.9 -37.6 -14.0 2.8
 Net profit -50.1 -55.8 29.9 26.9
 PAT margin (%) 3.2 4.5 8.1 21.6
 Net fixed assets 13.3 5.9
 Current assets 3.6 0.8
 Current liabilities 6.2 -2.8
 Borrowings 15.9 8.1
 Reserves & surplus 1.3 4.5
 Count of Cos. 3,239 3,235 3,213 54
Numbers are net of P&E
Updated on: 17 Jan 2021 9:28AM
Annual Financials of All Companies
(% change) FY18 FY19 FY20
All Companies
 Income 8.4 13.5 0.2
 Expenses 9.9 13.8 0.5
 Net profit -41.0 17.9 -11.9
 PAT margin (%) 2.0 2.2 3.9
 Assets 10.9 9.5 9.2
 Net worth 7.4 8.6 4.8
 RONW (%) 3.4 4.0 5.7
 Count of Cos. 29,264 28,548 9,649
Non-financial Companies
 Income 8.6 14.1 -2.6
 Expenses 8.8 14.3 -1.8
 Net profit -9.5 22.0 -23.7
 PAT margin (%) 2.7 3.0 4.1
 Net fixed assets 7.2 5.4 13.0
 Net worth 6.1 8.3 2.1
 RONW (%) 5.6 6.7 7.2
 Debt / Equity (times) 1.0 1.0 0.8
 Interest cover (times) 2.1 2.3 2.6
 Net working capital cycle (days) 77 70 60
 Count of Cos. 23,680 23,061 7,171
Numbers are net of P&E
Updated on: 14 Jan 2021 10:28AM