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.
Company
|
CEO
|
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
|
48.9808
|
3,634.56
|
67.6251
|
3,804.01
|
38%
|
5%
|
Bharti
Airtel
|
Sunil Bharti Mittal
|
23.49
|
8976.8
|
27.51
|
6046.7
|
17%
|
-33%
|
HUL
|
Nitin Paranjpe
|
3.1893
|
2156.63
|
7.916
|
2296.05
|
148%
|
6%
|
Tata Steel
|
H.M. Nerurkar
|
3.01
|
-2120.84
|
4.15
|
8856.05
|
38%
|
518%
|
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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