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Are Indian CEOs overpaid?

Are Indian CEOs overpaid?

With new industries and businesses taking off, the war for top management talent has pushed CEO salaries to record levels. But the fact is, not every CEO is getting paid obscenely and certainly not as much as what some CEOs in the US take home.

It's not what an honoured guest, notwithstanding his erudition and stature, was expected to do, and certainly not to an audience that could, with some justification, claim to have helped make his coalition government's three years in office look good. Yet, on May 24, when Prime Minister Manmohan Singh arrived at industry association CII's conference in Delhi to "share his thoughts" on Inclusive Growth-Challenges for Corporate India, it was a virtual rap on the knuckles that he delivered to the who's who of India Inc. gathered there to hear him speak.

Delivered with an earnestness that is now the hallmark of Singh, the speech set out to talk about a 10-point social charter for inclusive growth that could be the result of a "new partnership" with industry.

Mukesh Ambani
Mukesh Ambani: Rs 24.2 crore

After dwelling, points one to three, on issues such as caring for workers, corporate social responsibility, and employment for the less privileged, Singh went for the jugular. "Resist," he urged, "excessive remuneration to promoters and senior executives, and discourage conspicuous consumption.

In a country with extreme poverty, industry needs to be moderate in the emolument levels it adopts.

Rising income and wealth inequalities," he continued, "if not matched by a corresponding rise (in) incomes across the nation, can lead to social unrest."

This was not something the CII had expected to hear. Caught off guard, the chamber's new President and telecom czar, Sunil Bharti Mittal, decided to junk his prepared speech and speak impromptu.

B. L Munjal
B. L Munjal: Rs 15.58 crore 
Describing the pm's speech as "unusual" but "landmark", Mittal quickly went on the offensive stating that CEO salaries could not be legislated and business profitability, curbed. Instead, market forces and shareholders, Mittal added subsequently, should determine how much CEOs and other executives get paid. Says Rahul Bajaj, Chairman, Bajaj Auto and India Inc.'s eminence grise: "I think the Prime Minister was referring to the emoluments of the promoters, and I share his view that promoters should voluntarily exercise self-restraint."

A universal sore point

The debate over executive compensation is hardly new. In the US, it has been on for decades, and was reignited recently when it emerged that Home Depot's unsuccessful CEO, Bob Nardelli, would be walking out with $210 million as part of his golden handshake.

Sunil Bharti Mittal
Sunil Bharti Mittal Rs 12.67 crore

It's a bit unfair that the American media and investors decided to single out Nardelli for the roasting, because there are other American executives who've walked out with much more.

GE's Jack Welch, to whom Nardelli was one of the three short-listed successors, was a billionaire when he hung up his boots in 2001 at the conglomerate, which until then was the most valuable company in the US by market cap. Lee Raymond of ExxonMobil got $400 million, and even Hank McKinnell, who was ousted end-2006 from the CEO's job at the beleaguered pharma giant, Pfizer, got more than Nardelli ($213 million by some estimates).

In India, the situation is nowhere as, well, obscene. Yet, the fact that the government thinks CEO pay may be out of control puts the subject centre stage.

Y.K. Hamied
Y.K. Hamied:
Rs 7.88 crore
According to a Business Today analysis of CEO salaries at BSE (Bombay Stock Exchange) 100 companies, the highest compensation in the country is paid to Reliance Industries' Chairman and Managing Director, Mukesh Ambani. He took home Rs 24.52 crore for the year ended March 31, 2006.

The smallest pay packages in the BSE 100 companies went to public sector bank chairmen-Bank of Baroda's Anil K. Khandelwal, State Bank of India's A.K. Purwar (he retired on May 31, 2006), and Canara Bank's M.B.N. Rao. Each of these gentlemen took home a measly Rs 5 lakh in annual salary.

The average remuneration of CEOs of the BSE 100 companies works out to Rs 2.45 crore-that's about $600,000. Certainly not a king's ransom when your job is to create hundreds of crore in shareholder value.

Sajjan Jindal
Sajjan Jindal
Rs 13.25 crore

Another thing that our analysis reveals is that the highest paid CEOs tend to be the promoters themselves. The top seven are all promoters, and had pay packets ranging from Rs 24.52 crore (Ambani) to Rs 6.41 crore (Kumar Mangalam Birla from four companies-Aditya Birla Nuvo, Grasim Industries, Hindalco and UltraTech Cement).

The highest paid professional on our list is Hindalco's Managing Director, Debu Bhattacharya, who got paid Rs 4.69 crore. According to another analysis done by Mercer Human Resource Consulting of 45 mid-to-large listed companies with Rs 200 crore and upwards in revenue, the median salary (that is, the most frequent number) is a not-so-obscene Rs 2.2 crore.

Malvinder Mohan Singh
Malvinder Mohan Singh
Rs 6.57 crore

Again, the difference between promoter-CEO salaries and professional-CEO salaries was stark. While promoter salaries jumped 133 per cent in 2006 over 2005, the Mercer analysis reveals, those of professional head honchos rose less than 12 per cent.

In a separate analysis done by Business Today of two-year CEO pay and revenue growth of BSE 100 companies (of these, relevant data was available for only 40 companies), it emerges that CEO salaries have grown slower than top lines: 76 per cent versus 86 per cent.

Crunch the numbers some more, and you find that CEO salaries, as a percentage of profits have remained more or less steady at 0.33 per cent over 2003-04 to 2005-06.

More importantly, what a CEO takes home is not a guaranteed salary. Almost all of them depend on commissions from profits (which, in turn, depend on the company's performance).

Kumar Mangalam Birla
Kumar Mangalam Birla
Rs 6.41 crore
Guess what is the base salary of India's highest paid CEO, Ambani? It's just Rs 60 lakh. In contrast, his commission in 2005-06 was Rs 23.43 crore. That's true of professional CEOs as well.

Tata Steel's Managing Director, B. Muthuraman, was paid Rs 62.80 lakh in base salary in 2005-06, but made Rs 1.20 crore in commission. L&T's Chairman and Managing Director, A. M. Naik, too, had a guaranteed salary of Rs 60 lakh, but ended up making four times as much in commission.

"Without doubt, the performance pay component is going up at large companies, and commission is what inflates CEO salaries," says Padmaja Alaganandan, a Principal Consultant at Mercer.

Adds Preety Kumar, Managing Partner, Amrop International, an executive search firm: "Increasingly we find that as CEO salaries go higher than the Rs 1-crore mark, the variable component goes up and at very high numbers, the fixed component could be just half the total compensation."

Behind the numbers

Expectedly, there's a story behind rising CEO salaries. And the story is one of an economy expanding at a furious pace and Indian and foreign investors scrambling to get into new sunrise sectors such as retail, infrastructure, and real estate, but not finding enough CEOs to run those businesses.

Debu Bhattacharya
Debu Bhattacharya
Rs 4.69 crore

Says Amit Mitra, Secretary General of FICCI: "Several of the new industries are hungry for talent across management levels.

But there is an acute shortage of managers who can lead companies in these, and other, industries." Therefore, when Reliance's Ambani embarked on his gargantuan retail plans, he didn't mind throwing unheard-of money at the professionals he wanted to win over.

Thanks to Ambani, the million-dollar pay cheque became an Indian phenomenon. Some of his retail heads such as Raghu Pillai were said to be hired at fantastic salaries that touched or topped $1 million. "Salary levels have increased on account of scarcity of resources. There is a visible shortage of human capital.

Douglas Baillie
Douglas Baillie
Rs 4.59# crore
Fundamentally, there is a demand-supply mismatch," notes Gautam Singhania, Chairman & Managing Director of Raymond.

The shortage is particularly acute in the sectors that are just opening up. Take infrastructure, for example.

There are two major airport revamps happening in Delhi and Mumbai, and neither of the investors (GMR and GVK, respectively) has been able to find an appropriate CEO so far.

GMR appointed a Greek expat, Ioannis Papastefanou as coo in June last year, but he quit this April. Why should finding a CEO for an airport project be so difficult? Simply because few CEOs in India have set up an airport from scratch, and fewer still have the unique skills that the job demands.

Narottam Sekhsaria
Narottam Sekhsaria
4.63 crore

The air side of an airport, for instance, is all engineering and technical stuff, while the land side, which houses retail businesses, demands a good marketer. Then, there are multiple stakeholders with whom the CEO must interface: governments, local populace, NGOs, partners, and vendors. Says Arun Shankar Das Mahapatra, Managing Partner, Heidrick & Struggles India, a search firm: "Infrastructure is one area where there is not enough right talent in the country.

Therefore, expats, especially in specialist fields such as mining, real estate, oil & gas, are in great demand."

Some of the highest-paid expats (of BSE 100 companies) in the country are FMCG bosses such as Douglas Baillie of Hindustan Unilever (Rs 4.59 crore, pro-rated for 10 months of 2005-06) and Nestle India's Martial Rolland (Rs 4.36 crore).

Rahul Bajaj
Rahul Bajaj
Chairman/Bajaj Auto:
"I share the Prime Minister's view that promoters should voluntarily exercise self-restraint" 
The fact that there are just a handful-say, a hundred or so-of high-quality CEOs to tap means that winning them over isn't just difficult but expensive. "Today, CEOs and most top management people are sitting with at least two offers in hand at any given time," says Deepak Gupta, Country Head and MD, Korn/Ferry International, another search firm.

Ergo, expectations have soared. "Many people are led by the media reports on sky-rocketing compensation and tend to expect huge, and often unrealistic increase," says Sonal Agrawal, CEO, Accord Group (India). "For instance, when we were looking for a CEO for a retail firm that is seeking to get listed, one of the candidates demanded a share in equity that was completely out of whack," she adds.

The overall boom in business has driven up salaries down the line as well. According to the Business Today-Omam Consultants salary surveys for junior to senior managers, salaries have been rising at anything upwards of 15 per cent year-on-year. While the gap between the CEO's salary and a young executive's can be quite wide, Mercer data shows that a sales trainee in 2006 entered the job at Rs 2,66,169 a year, compared to Rs 2,00,966 the year before. An assistant buyer in a purchase department made 35 per cent more at Rs 3,39,389, while an it executive was almost equally better off, getting a 33 per cent raise over 2005.

At the general manager level, the hike for this Mercer sample (all India survey of 460 companies in 2006) was more than 50 per cent, with the total annual compensation going up from Rs 74.70 lakh to Rs 1.12 crore. Says Girish Tanti, Director, Suzlon Energy: "We could say that the increased salaries and improved remuneration packages overall in India are an indirect result of the Indian economy going global." Agrees E. Balaji, coo of Ma Foi Management Consultants: "India remained an underpaid market for a long time, and salaries accelerated starting only 2000."

Legislation, a bad idea

At present, legislating salaries isn't something that seems to be on the government's mind. However, even if it did, it wouldn't be the first to do so-and neither the first to fail. Back in the early 90s in the US, when Bill Clinton took over as the President, he brought in a tax rule, known as 162(m), which sought to curb excessive executive pay by linking it to performance. Therefore, to deduct executive compensation of more than $1 million, companies had to prove that the executive had met certain performance goals. For companies, it turned out to be a sitting duck: they simply lowered the performance goals, and executive pay continued to be determined by market forces.

In India, where CEO pay in general is clearly not out of control, any new legislation aimed at restricting executive salaries will end up disrupting market dynamics. Says Sanjiv Goenka, Vice Chairman, RPG Enterprises: "Salaries are a factor of the market. India is operating in an international environment today. We have Indians going abroad and expats coming to India. It means that if you want the best talent, you will have to pay market rates."

Kishore Biyani
Kishore Biyani
CEO/Future Group:
"Rising CEO salaries cannot "Rising CEO salaries cannot It's not creating wealth and sharing that wealth that lead to disparities" 

Others such as Amar Lulla, Joint Managing Director of Cipla, say that the issue of salaries is best left to shareholders, since they have the most to lose if a CEO is overpaid and underperforms.

But this controversy, industry watchers say, will hasten a nascent trend visible in the case of professional CEOs: promoters fighting back on fantastic demands. Says Venkatesh Shastry, Partner, Stanton Chase India: "Yes, promoters are pushing the numbers (read: demand for higher salaries) to get consensus within the shareholder group, but they are doing it reluctantly." Others in the search business confirm the trend at other mid-to-senior levels as well. "Companies are beginning to question unreasonable demand from prospective or current employees. If they notice a jump of 100 per cent within a year and the candidate expects a similar jump in two years, then they are questioning the justification of such an expectation," says Mahapatra of Heidrick & Struggles.

The issue really, though, as Prime Minister Singh said and others such as Venugopal Dhoot, Chairman of Videocon Group and President of industry chamber Assocham, agree with, is of self-regulation-at least where the board is not strong enough to do the job. "There are two ways to look at the issue," says Dhoot. "One is from a talent perspective, which means if you want to have talent, you will have to pay a price for it.

The other way to look at it is that those who are talented should contribute to society. Between a philosophical angle and a materialistic angle, we may have to look for the right combination." (Videocon plans to set up a board sub-committee to examine executive salaries periodically.)

Sanjiv Goenka
Sanjiv Goenka
Vice Chairman/ RPG Enterprises:
"India is operating in an international environment today. If you want the best talent, you will have to pay market rates" 
It's not as if some CEOs haven't been able to strike this balance. Azim Premji of Wipro, N.R. Narayana Murthy of Infosys, Ratan Tata of Tata Group all lead simple lives despite being fabulously rich (okay, maybe Tata isn't as rich as the other two, but he more than matches their simplicity).

Bharti's Mittal, too, despite his S-class Merc and multi million-dollar home in the heart of Delhi, has established the Bharti Foundation with an initial corpus of Rs 200 crore to set up primary schools in rural India. Others like Anji Reddy of Dr Reddy's Labs have voluntarily taken pay cuts in response to poor company performance.

Yet others, like Glenn Saldhana of Glenmark Pharmaceuticals and Shishir Bajaj of Bajaj Hindusthan, have done so despite their companies performing well. Says Glenn Saldhana, Managing Director & CEO, Glenmark Pharmaceuticals: "My salary is linked to my performance. What is important is that the company should achieve its sales and EBITDA targets. If that does not take place, my compensation comes down." It's that simple.

Therefore, encouraging the increasingly prosperous executives to give back to the underprivileged in the society may be a good way of dealing with the growing creamy layer.

Telling them that they ought not to be making so much money won't help anyone.

(With Krishna Gopalan, and Shamni Pande)

Published on: Aug 31, 2007, 5:18 AM IST
Posted by: AtMigration, Aug 31, 2007, 5:18 AM IST