Business Today

CEO pay debate

Are Indian CEOs overpaid? Mercer's study of the CEOs of the Wall Street Journal 350 showed median levels of total direct compensation to be at $6.5 million.

     Print Edition: July 1, 2007

Are Indian CEOs overpaid? Mercer's study of the CEOs of the Wall Street Journal 350 showed median levels of total direct compensation to be at $6.5 million. Including elements such as pension values, tax gross ups etc., this figure was closer to $8.2 million. As against this, median pay for a sample of 45 leading Indian companies studied was Rs 2.2 crore (around $0.5 million). Even adjusted for value of equity pay including options, Indian CEO pay is still far below global levels, though growing at a faster pace.

R. Sankar
R. Sankar
So what is driving this growth? Global mobility, for one. Sunrise sectors such as aviation, real estate, retail, biotechnology have been bringing in expatriate talent with the experience and competence set necessary to build a new industry.

Sectors such as it and FMCG continue to woo their "global Indian" employees to return and build operations, while ensuring that the global corporate values and culture are preserved. Besides, the availability of high quality leadership talent has not kept pace with the demand in India.

Padmaja Alaganandan
Padmaja Alaganandan
Is this growth warranted? The Indian economy has grown at unprecedented rates in the last few years, and Corporate India has played a big role in job creation, infrastructure development and raising income levels. Shouldn't CEOs who drive this development and social reform be entitled to a fair share of the economic rewards? That is beyond argument; however, growth in CEO pay is not always correlated with improved performance. Of the 45 companies Mercer surveyed, median CEO pay grew significantly faster than revenue or earnings growth. The correlation between revenue growth and CEO pay was stronger among professional-managed companies than promoter-managed ones.

So do we need to exercise restraint? This is a good time to remember the tenet that wealth creation needs to precede wealth distribution. Growth in CEO pay sends a signal that rewards do follow hard work; it is also a powerful motivator for aspiring managers and business leaders. Some of our wealthiest CEOs are our greatest philanthropists. But unbridled growth in pay is not in the interest of India, or of shareholders. How can boards prevent some of the excesses we have seen in the West?

Pay for performance: The median revenue growth for the us 350 was 8.9 per cent; growth in median Total Direct Compensation was exactly the same figure. Stronger linkage of pay to measures such as revenue growth, EVA, Total Shareholder Return (TSR) will be required in India. Company performance relative to peers is also a good measure to determine performance pay to CEOs.

High proportion of performance pay: US CEOs earn just 16 per cent of their Total Direct Compensation through guaranteed salary; the rest is "at risk" and is earned through annual bonuses and Long Term Incentives (including equity pay). In India, the proportion of pay at risk is much lower and ranges between 25-50 per cent, though this number has been growing.

Ownership and Accountability: Institutional shareholder groups in the US have compulsory stock ownership guidelines for CEOs and their direct reports, where a value equal to a multiple of compensation needs to be held in stock of the company. This is considered necessary as a sign of commitment and ownership of the company's well being. We could look at adopting norms similar to this as a pre-requisite to institutional investment. Besides, Boards and Remuneration committees need to play a greater role to ensure pay is indeed commensurate with affordability and performance.

Greater transparency and standards of disclosure: Several elements of CEO pay such as value of stock grants, contribution to retirement benefits are rarely included while computing total pay. This is a great opportunity for India Inc. to set norms that will place it at par with the rest of the world on disclosure.

In short, boards and corporate India will need to work hard to ensure that while we integrate with the global economy and see rising pay levels, we do not veer away from the tenets of responsible executive remuneration.

An Expert Perspective By R. Sankar and Padmaja Alaganandan

(R. Sankar is Country Head and Padmaja Alaganandan Principal Consultant at Mercer Human Resource Consulting, India.)

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