Tuesday, August 7, 2012

Why Indian CEO pay needs policing

After Western banks and non-banking institutions brought the world economy to its knees through imprudent and indiscriminate lending corporate practices, there is widespread revulsion at the plus size pay their fatcats get. A say on pay movement is spreading like a prairie fire in the west. Shareholder spring is in the air.

Shareholders denied Citi bank CEO Vikram Pandit a $15 million pay hike. A revolt over salary increase forced UK insurer Aviva's CEO Andrew Moss to resign. Some of the other companies which had to face shareholders' anger include the retailer Marks & Spencer, advertising company WPP, and brewer SAB Miller. In most cases shareholders did not see any link between pay hike and the performance of the manager.

There are no cases of large public outrage over managerial pay in India. This does not mean that CEO pay in India is not outrageous.

Generous pay is justified on the group that it leads to strong long-term performance, and that great talent is scarce. However, as Vince Cable, UK's Business Secretary has highlighted, over the last ten years the link between median CEO pay and performance of the FTSE100 has been hard to discern. It is apparent from the table below that even in India there is no real relationship between managerial pay and performance of the company.

2009-10 (in Rs. Cr.)
2010-11 (in Rs. Cr.)

Pay (salary, benefit, commission, sitting fees)
Net Profit
Pay (salary, benefit, commission, sitting fees)
Net Profit
Increase in pay (%)
Increase in profit (%)
Jindal Steel & Power
Naveen Jindal
Bharti Airtel
Sunil Bharti Mittal
Nitin Paranjpe
Tata Steel
H.M. Nerurkar
Source: Annual Reports of Companies

Often top executives are given a pay hike regardless of performance of the company or its stock price. During 2011-12 when inflation was at its peak, stock markets were crashing and GDP number shrinking, no known changes were made to pay packets of top corporate honchos. In fact, it would be interesting to find out if pay hike was given to top executives even when pink slips were handed out to lower level employees. Research shows that in India, given the slowdown, senior executives are pushing for at least 75 per cent fixed pay and fewer performance linked benefits. Wage disparities are also significant. According to Aon-Hewitt, an average Indian CEO is paid 675 times that of the minimum wage earned by entry-level graduates.

Experts point out that such a trend is neither sustainable nor justifiable. Today we are standing at the crossroads of economic change, the aspirations of the masses are growing, however, their means remain limited. At the same time a group of select few is financially rewarded far beyond its needs. Not only does it increase social disparity, conspicuous consumption, its impact on the socio-economy is far reaching.

Veerappa Moily, Minister, Ministry Corporate Affairs, during an interview to CNBC-TV18, mentioned that India needs a proposition on executive pay like UK and that the government is working on it. The UK policy makes it mandatory for companies to disclose whether the top management was able to meet its targets. Companies also need to publish a comparison between company performance and chief executives' pay and data showing difference between executive pay and staff pay. The UK policy actually takes a cue from the amendments to the Dodd-Frank Act notified by United States of America in early 2011 and June 2012.

In January, 2012 the Reserve Bank of India (RBI) issued guidelines on compensation of bankers. RBI felt that employees were too often rewarded for increasing the short-term profit without adequate recognition of the risks and long-term consequences that their activities posed to the organisations. Today, private sector and foreign banks operating in India need RBI's approval for grant of remuneration to top executives. Variable pay of top bosses at banks has been restricted to 70 per cent of fixed pay.

As far as non-banking listed companies are concerned, in addition to SEBI guidelines, they also need to adhere to provisions of Companies Act of 1956 which caps total top management pay at 11 percent of net profits of a financial year. Indian companies must also set up a committee comprising of 3 non-executive independent directors to decide on matters related to managerial remuneration. In some cases approval of Central Govt. is needed for payment of executive salaries if a company is making inadequate profits.

It can be argued that India's case is slightly different from that of most developed, capitalist economies when it comes to managerial pay regulation. This is because there are already a number of statutory provisions that govern payment of executive pay in this country. However, the question remains that are the existing managerial pay computation and disclosure provisions sufficient especially in case of non-banking companies?

It is pertinent to note that there is no clear definition of what constitutes inadequate profits and eventually the board may be able to unduly reward itself even when the profits are low. Besides this the dismal number of effective participants during a general meeting renders the provision of voting during remuneration committee meetings almost ineffective. It is a known fact that boards of companies are packed with chums and cronies of controlling shareholders. Such deficiencies point towards the need to create shareholder awareness and bring in more transparency in matters related to executive pay. While such disclosure requirements are unlikely to have any significant impact on the cost of companies, it will definitely enhance accountability of the management.

- Umesh Shanmugam

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