The squeeze at the top

Rachna M. Koppikar        Print Edition: November 15, 2009

Take #1: Corporate Affairs Minister Salman Khurshid stirs a hornet’s nest when he blurts out that government should cap sky-rocketing— and “vulgar”—CEO pay-packets. Take #2: A few days later Khurshid clarifies that he was reacting to complaints from board members and shareholders about bloated pay packages to the top brass. In fact, rather than capping pays, the government was considering unshackling CEO pay—the Companies Act currently puts a lid of 11 per cent of a company’s annual profits as the remuneration for all directors put together.

Days after Khurshid made his stand clear, Mukesh Ambani, Chairman and MD, Reliance Industries (RIL), appeared to have got the message when he announced a whopping 66 per cent cut in his annual salary—from Rs 44 crore to Rs 15 crore. A company release also said that it will replace the existing compensation policy of pure percentage to net profits with a capped structure. Khurshid gave a vigorous nod of approval. “It is voluntary, sensitive and a significant gesture,” he is reported to have said.

The elder Ambani wasn’t the only one in such a “sensitive” state of mind. Younger brother Anil had a fortnight earlier told shareholders of one of his five listed group companies, Reliance Communications (R-Com), that he would not take home Rs 30 crore in commissions. R-Com is one of the biggest losers in the BT 500, down 9 places from the previous year’s #3 to #12.

Whilst Mukesh’s move is seen as voluntary, that isn’t quite the case for many other promoters and CEOs. For those whose commission income has dried up, the cut could have been unintentional. Reason: Commissions, which are a key component of salaries of the top brass, are linked to a company’s net profits. Top directors are allowed to draw commissions of up to 1-3 per cent of net profits. So, if the bottom line sags, commissions duly come down. Consider, for instance, Sajjan Jindal, Vice Chairman & Managing Director, JSW Steel, who saw a 60 per cent cut in his remuneration as his company’s profits fell from Rs 2,484 crore a year ago to Rs 677.63 crore in the year-ended March 31, 2009. His salary dipped a bit, but commission income plunged from Rs 12.56 crore to Rs 3.33 crore. The company has a policy of paying not more than 0.5 per cent of net profits in commission to the Vice Chairman.

Wockhardt Chairman Habil F. Khorakiwala took home just Rs 1.76 crore in fiscal 2008-09 against the previous year’s Rs 8.08 crore, which included a commission of Rs 7 crore. The company is currently in the trenches because of huge mark-tomarket losses in the forex market, which have necessitated a corporate debt restructuring (CDR) scheme. “I took a pay cut much before the company faced problems, in 2008; and, in 2009, there was a freeze on salary at all levels,” says Khorakhiwala.

Bharat Forge’s cMD Baba Kalyani’s salary went up from Rs 1.8 crore to Rs 2.5 crore. A 20 per cent cut that was reported a few months ago in sections of the media appears to be restricted to his commission income, which has more than halved from Rs 3.1 crore to Rs 1.5 crore in the financial year 2009, thereby bringing down his total remuneration by 14 per cent. The company didn’t respond as it’s in the silent period for fund raising.

In some large companies which are part of a conglomerate, senior directors have forgone their sitting fees or the commission income. For instance, Kumar Mangalam Birla’s income from UltraTech Cement and Grasim Industries remained at the previous year’s level. His commission income from Hindalco came down from Rs 8.89 crore to Rs 6.79 crore whilst in Aditya Birla Nuvo, he gave it a miss.

Cut? No way
However, for each CEO who took a cut, there are two who saw a sharp increase in their remuneration. Much of the increased compensation has to do with the performance of the top honchos’ respective sectors, too. Industries such as fast-moving consumer goods and telecom didn’t face as much of the heat of the slowdown as those like automobiles and commodities did. Unsurprisingly, then, Sunil Bharti Mittal, Chairman & MD, Bharti Airtel, saw a 17 per cent increase in his total remuneration, which stood at Rs 22.89 crore; this included a performance-linked incentive of Rs 13.2 crore.

Human resource consultants believe it may be too early to conclude that India Inc. is on an austerity mission as one needs to see it in context of the shareholding pattern of the companies. In India, most of the blue-chips are run by promoter-CEOs along with their managers; few have outside professionals at the top. “For a professional CEO, salary is the only main source of income and a salary cut could be a disincentive for him. On the other hand, if promoter CEOs forgo their commission or salary, they can still earn through dividends and price appreciation of the shares held by them,” points out E. Balaji, CEO and Director, Ma Foi Consultants.

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