By guest author Tony Scott
The IT Pyramid in the United States and India
Tony: People don’t like to be changed or face change – it’s a scary proposition for many – but the technology sector is built on the fundamental concept that change must happen – ever better, ever faster, ever more capable technological capabilities that can transform the rest of the world.
Peter: Plus, the scale of these markets is so vast. The common fallacy of our market of course is that arbitrage will be a three- to five-year phenomenon; that is, or in three to five years from now everything will all look like Canada [laughing]. Somehow salaries are going to go through the roof, and Bangalore will look just like Silicon Valley West – or East – or whatever you call it.
People who think that really just don’t understand the sheer scale of those markets, just how big they are, and actually how fantastically slowly they are converging.
Tony: Tell me a little bit more about your perspective on that. What do you see as the biggest hindrances to the kind of convergence many dream about becoming a reality, that is, that we all look like Canada in a few years’ time? Not that it’s such a bad thing, looking like Canada [laughing].
Peter: I say Canada because people think about of it as 10% cheaper than the United States. The common perception is that India is experiencing 15% to 20% salary inflation every year which, if true, would lead one to believe that four or five years from now Indian workers’ salaries surely will be very close to U.S. salaries. How can they not converge and become closer to U.S. levels?
Tony: Especially if U.S. salaries are going down.
Peter: Right, especially if U.S. salaries are going down or flat. What people don’t understand is that there’s a huge difference between wage hikes and wage inflation. In the United States, there’s not a big difference. In the U.S., because of the shape of the IT pyramid, the number of people with one year of experience and the number of people with ten years of experience are essentially the same.
But in India, the number of people with one year of experience versus the number of people with ten years of experience is fantastically different.
Tony: Absolutely – that’s why so many companies have such a hard time finding middle and senior management talent in India. China has the same problem – lots of great talent at levels up to about ten years out from university, but far less talent – and not nearly enough to meet demand – at more senior levels. But that is changing over time as more people gain experience.
Peter: So, the shape of that pyramid is very different from the one we have in the U.S., which means that there is a substantial increase each year that people get just on the merit of experience.
But all of a sudden, instead of everyone being one to three years out of school, you have a cadre of people who have some meaningful hands-on experience. You keep going up the chain, and one of the biggest challenges, obviously, in any converging market like that is, how do you find talent at the most senior levels? You see, it’s one thing to hire talent at the university level, but if you’re looking for people who have management experience it becomes malicious, and those wages become unbelievably inflated because of the shortage of supply. Indeed, if you look at more senior levels, the higher you get to the apex of that pyramid, the more pronounced the wage inflation.
Tony: Absolutely – my clients are often shocked that they have to pay U.S. equivalent salaries for experienced management talent in China and India because they are accustomed to the idea that they a fraction of U.S. rates for junior people.
Peter: In fact, things are converging with the U.S. to a point where people on the level of fifteen years of experience or more may actually be paid more in some cases.
Tony: In India and China for people with, say, fifteen to twenty-plus years of experience, for example the equivalent of a country manager or country president – their compensation is easily as high if not higher than the typical compensation here in Silicon Valley for someone with that number of years of experience, and often with lower quality of experience.
Peter: But then if you look at the salaries of the top graduates coming straight out of university, you can see that over the past five to six years there’s been substantially no change. Our cost to hire fresh grads is substantially no different over that period.
Tony: Interesting. Do you see that changing at the entry level over the next few years?
Peter: I think we can maintain similar compensation levels as long as the total population of college grads is growing each year – that’s total population growth of 30% a year – which is pretty much what we’ve done in terms of growth as a company.
So, let’s say we average six years of experience across our company, and we hire, on average, people with four years of experience. We focus on sustaining an average of six years of experience across the entire company.
If we do that, then our average salary hasn’t changed substantially in five years. So even though we’re doing 10%–15% hikes each year, our average salary per year of experience year hasn’t changed in four years.