New Labour Codes Unlikely to Reduce Salary Hikes, Say HR Experts
A majority of companies are not expected to reduce salary hikes, even as they face higher wage bills following the implementation of new labour codes in November 2025, according to insights from HR heads and compensation experts. However, increments may be moderated in specific sectors, particularly information technology, where cost pressures are more pronounced.
Increased Costs from Revised Wage Definitions
Costs for employee benefits such as gratuity, overtime, bonus, and leave encashment have risen significantly after the new labour codes came into effect. This increase is due to these benefits now being calculated using a revised wage definition, which expands the base for computation. Many companies, especially in the IT sector with large workforces, reported lower profits in the past quarter due to one-time provisions and implementation-related expenses tied to these changes.
"Wage growth is driven more by labour demand, skills, and productivity than compliance expenses," said industry sources. They emphasized that lowering pay in a competitive market could risk higher attrition, which might ultimately prove more costly for organisations.
Varied Approaches to Handling Compliance Costs
Amit Otwani, associate partner at Talent Solutions-India at Aon, highlighted that organisations are adopting diverse strategies to manage these increased costs. "Some are carving out a separate budget for these costs, while others are absorbing them within the overall salary pool," he explained. Otwani added that Aon has projected salary increments of around 9% for 2026, noting that many companies had anticipated rising costs and had already factored in a buffer, even if the exact timing was uncertain.
Selective Moderation in Salary Increments
Rajkamal Vempati, head of HR at Axis Bank, stated that any moderation in salary increases will be selective rather than broad-based. "Companies are expected to protect pay-outs for high performers and business-critical roles, where talent remains scarce. In-demand and specialised skills will continue to command premiums, even as overall increment cycles turn more cautious," she said.
Nevertheless, margin-sensitive sectors such as IT services and parts of the non-banking financing segment may experience softer salary hikes. Anustup Chattopadhyay, associate partner at Talent Solutions-India, explained that organisations where employee costs constitute a large share of revenue are less likely to stretch compensation budgets. In such cases, even standard increases of 8-9% can be challenging, particularly for companies operating on thin margins.
Impact on Employee Engagement and HR Strategies
Arvind Usretay, head of Human Capital Consulting-Asia at Lockton, stressed that labour code costs should not directly dictate pay hikes. "These need to be in line with the market and talent requirements of employers. Muted increments can negatively impact employee engagement," he cautioned. Usretay also pointed out that the labour codes have several moving parts and may lead to wide-ranging interpretations by different employers, adding complexity to compliance and planning.
Transition Period and Long-Term Planning
Companies will require time to recalibrate compensation structures after analysing the finer details of the labour codes. Rajorshi Ganguli, president and global HR head at Alkem Laboratories, remarked, "Companies will not penalise employees just because there is a rejig; on the contrary, it will benefit employees." He added that the transition may take 2-3 months for the changes to stabilise across organisations.
Otwani noted that the new labour codes could trigger a broader rethink of workforce planning, including headcount mix, outsourcing, automation, and the role of artificial intelligence. "This is not a short-term accounting adjustment. It is a long-term reset of how organisations think about compensation, talent, and cost structures," he concluded, highlighting the strategic implications for businesses moving forward.
