"The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself" - J.K. Galbraith, US economist and author of American Capitalism
Throw this quote at a corporate honcho and he might just retort, borrowing a line from Hollywood actor Michelle Pfeiffer: "I act for free, but I demand a huge salary as compensation for all the annoyance of being a public personality. In that sense, I earn every dime I make."
So, are our CEOs overpaid and happily self-awarding themselves, or do they earn and deserve every rupee they make?
And conversely, the differential ratios are high for some professional CEOs as well. For instance, TCS CEO N. Chandrasekaran took home Rs 21.2 crore, a pay hike of nearly 14 per cent over last year that is in line with TCS' topline growth of 14 per cent. Chandrasekaran's ratio of remuneration to median remuneration is 416.5 times - surprising for a services company where the middle rung gets paid better than in manufacturing. Now look at Chandrasekaran's salary from another parameter - the salary he earns for every Rs 100 of profits earned by the company. It is a mere 11 paise.
Almost similar is the differential ratio of Yogi Deveshwar, Chairman, ITC, who gets 416 times the median pay at the tobacco-to-hotels giant, even though his salary is just Rs 13.8 crore. Though if you include the company shares that Deveshwar gets every year (he has offloaded nearly Rs 50 crore worth shares that he had accumulated over a period) then the wealth he has created for himself as a salaried individual is enormous.
"The logic of CEOs drawing higher salaries is to match with the revenue targets they have for their business. A CEO will not be willing to draw a salary of Rs 50 lakh per annum if revenue target for the business is Rs 2,500 crore per annum. The salary has to be commensurate," points out Kamal Karanth, MD-India at Kelly Services, a recruitment consultancy. "From an accountability standpoint, a CEO's role is extremely demanding and requires him to perform at all times," he says.
Shekhar Bajaj, Chairman and Managing Director, Bajaj Electricals, too defends the payout to CEOs: "A good CEO or a department head can make a lot of difference. There is no harm in paying Rs 5 crore or Rs 10 crore to a CEO of a company making Rs100 crore profit a year. That money makes no difference. He or she can lift the profitability and that is what managements want."
Anandorup Ghose, who leads the Performance and Rewards consulting practice for Aon Hewitt, says one should also look at some of the seemingly high CEO salaries in a wider context. "Many Indian CEOs are managing businesses that are not just Indian but global," he says. A case in point may be Hindalco's Debu Bhattacharya, who tirelessly works seven days a week and has steered the Aditya Birla Group company from a Rs 6,400-crore entity to a nearly Rs 1 lakh crore business and led it through a $6-billion acquisition of Novelis. Net profit of Hindalco has been growing at a CAGR of 16.4 per cent over 10 years.
"You cannot compare pay of an Indian CEO managing a business with global reach with that of an MNC CEO managing only India operations," says Ghose.
Inching Towards Global Pay
Indeed, the reason why many of our CEO salaries are now moving northwards is to bring them on a par with global pay scales. "The salary levels of top talent in India are now similar to those in Europe or the US, which was not the case earlier," points out Venugopal Dhoot, Chairman and MD, Videocon. He says compensation structures for CEOs started changing when Indian companies began global forays.
If you want to do an apples-to-apples comparison, contrast the pay that Reliance Industries' Mukesh Ambani gets versus what Ryan Lance, CEO of ConocoPhillips, an American multinational energy corporation, takes home. Lance earns $27.5 million (Rs 174 crore) while Reliance rewards its promoter head just Rs 15 crore. But then the promoter family earned dividends of Rs 1,390 crore in 2014/15.
Pothen Jacob, Director-People Success (Compensation & Benefits), Sapient India and APAC, sums it up when he points out how difficult it is to compare Indian salaries with counterparts across the world. "The salaries of people at senior levels are much lower if you compare the absolute value without taking into account purchasing power parity. The pay will be relatively much lower than their counterparts in other developed economies. However, this balance is difficult to maintain because of the globally mobile nature of the talent at the senior levels, making it difficult to ascertain how over or underpaid is our top management."
Even as salaries of most Indian CEOs have been shooting up, Kewal Handa, former MD, Pfizer India and Wyeth, points out that there are some anomalies. "Salaries have gone up exponentially in the last five years across sectors for Indian CEOs, but interestingly, it has not happened in the case of the pharmaceutical sector, which is a high-growth industry," he says. This could be because most CEOs in the sector are promoters and would be taking payouts as dividends rather than salaries. Handa also says that this is because the salaries of multinational companies in India are governed by their global benchmarks and HR systems. "A country head in Thailand or Brazil or Mexico may be drawing the same salary an Indian multinational pharma CEO is getting. In the case of many fast-growing domestic companies, CEOs have come from abroad at a very high price," he says.
EMA Partners' Sudarshan endorses this, saying there is a growing trend of Indian promoters seeking out global CEOs to head their operations. "The way Indian companies are thinking, if we have to fork out $1.5 million for an Indian CEO, you might as well get a global candidate," he says. An example is the way Indian Hotels (that runs Taj Hotels) has recently hired former Hyatt Corporation's development head Rakesh Sarna at a package of $2.51 million (Rs 15.82 crore), making him the second highest-paid CEO within the Tata Group. Similarly, Infosys headhunted former SAP executive Vishal Sikka and offered compensation of $5.08 million (Rs 32.5 crore at current exchange rates) besides a stock option of $2 million.
It's All Variable
Those who defend CEO compensation also point to the stiff targets and the way packages are structured today. For most CEOs, only 40 to 50 per cent of the pay is fixed cost, 50 per cent comes through variable pay. Which means targets - often stiff ones - have to be met to earn the performance bonus.
So if everyone is batting for the CEOs to be paid as much as they are getting, why is there such a feeling of resentment? Why the activism about CEO salaries?
It's got a lot to do with entry-level pays, and the unequal distribution of wealth.
Stagnant at the Bottom
The bigger discussion should be around the fact that entry-level pay is low, says Ghose of Aon Hewitt. He shares a popular joke among consultants that it's been decided in the IT sector that entry-level salaries will stay stuck at Rs 3.5 lakh for 30 years. "Almost no growth is happening at the basic level. The real growth is happening at mid and senior levels," he says. According to him wage differentials are really common across the board among all companies. CEOs draw Rs 3.5 crore while entry-level salary remains stagnant at Rs 3.5 lakh. Aon Hewitt conducts an annual compensation study across IT companies and the data shows the CAGR in pay increases at the entry level has been less than 1.5 per cent over the last four years.
And he sees this trend continuing. As he says, "Companies find it difficult to increase at the junior levels, because that has a significant impact on their cost equations." So while the base remains enormous, they also end up being underpaid.
"Entry-level salaries are low in India and there is a huge gap between top-level and low-level salaries. There needs to be a collaborative effort in bridging the gap," admits M.V.S. Seshagiri Rao, Joint Managing Director and Group CFO, JSW Steel.
Globally, the differential between CEO pay and average worker pay has come into focus ever since the 2008 economic crisis, says Shriram Subramanian, Managing Director of InGovern, an institutional advisory that acts as a watchdog for shareholder interests.
But in India, he says, shareholders have always had a vote on CEO salaries as the Companies Act has always placed restrictions on payouts to directors. It cannot exceed 10 per cent of net profit for executive directors and one per cent of net profit is what non-executive directors collectively can get.
"It is important to factor in individual productivity at employee level before comparing the differential with other developed economies like the US and Europe. Also, the risk pay components in C-suite officers are substantial compared to lower-level employees and a historical generic differential calculation does not reflect this fact appropriately," says Hinduja Group's Tripathi.
Anurag Shrivastava of HRNext, however, says, "Inequality is part of the corporate game. The leadership quality and acumen you are looking for in CEOs is pretty rare."
Sapient's Jacob says: "The higher differential is a function of multiple structural factors of our economy and the labour situation. The higher average pay increase is driven by macroeconomic factors like high inflation, labour demand and supply imbalance in particular, in comparison to low-inflation economies with a much-balanced labour demand-supply. The higher average increase has a direct impact on the slope of the pay line, which in turn translates into a higher differential."
Y.M. Deosthalee, CMD, L&T Finance Holdings, says the concept of median pay is a little misleading. "In the financial services sector, demand is very high for quality management people. As a result. their compensations are also high. When average compensation grows at 10 per cent annually at lower levels, at the management level the increase is 15 to 30 per cent. Quality is rare and there is demand for quality," he says.
Promoter vs Professional
While most analysts do not grudge the professional CEO his or her salary, strangely it's the promoter's take-home pay that is actually getting a vote of no confidence.
Ghose of Aon Hewitt agrees that promoter compensation in India rarely follows a defined structure, and it's rare for a board member to object to promoter pay. Unlike developed economies where there are compensation committees that look at salaries seriously, here it is a lot more arbitrary. "Globally, disclosure levels and shareholder activism drives discipline. While it was absent so far, things are changing in India with the new Companies Act and increasing presence of shareholder advisory groups."
Moreover, as Tandon, says: "If you look at the pay structure, there is a variable component. That is why investors are usually okay with CEO compensation. If a company performs, the CEO gets rewarded. But when we looked at the data, it was difficult to say if the CEO salary is going up faster than company profits. You don't get a straightforward answer."
Subramanian of InGovern says shareholders in India have always had the right to vote on CEO compensation, but few have the awareness to vote against. He says advisories like his are advocating that if promoters want payouts, it should be in the form of dividends rather than salary. Dividends make the distribution proportionate among shareholders. "The compensation paid to promoter directors should not be more than the highest compensation paid to professional employees," he says.
Tandon says that as an individual the promoter may not get paid a lot, but what shareholders need to watch out is how much the directors of a company are taking out as a family. A case in point is the Sun Group's Marans and Balkrishna Industries' Poddars. In many companies, wives, children, mothers seem to be executive directors with fat salaries even as their contribution to the company is not evident.
Going forward, a global compensation norm that we might soon start seeing in India is a greater focus around separation clauses, and joining bonuses. For instance, when L&T Finance Holdings was formed, Deosthalee, who was then CFO of parent company Larsen & Toubro, had been appointed as the CMD of the new subsidiary and given retiral benefits while moving to the subsidiary as compensation.
Sudarshan of EMA Partners says, "At the senior level, a joining bonus is a given, as invariably at the senior level, you have to leave behind something when you quit a job. Companies don't pay it for fun. There is a good reason for it, as someone is losing an assured sum of money, one year down the line." According to Sudarshan, this is either paid through stocks, or cash up front.
Ghose of Aon Hewitt says CEOs themselves are driving the conversation around joining bonuses and separation clauses. "Today, individuals are becoming far more careful. What if the business closes down? All these eventualities are getting factored into the contract," he says.
Companies are also being far more sensitive to retiring top management by providing housing support and facilities like usage of clubs for a period after retirement.
"We see a lot of forward-looking companies bringing in schemes like paid maternity leave, sponsoring educational programmes for C-suite employees outside the country, and helping with admissions of their children in good schools," says Karanth of Kelly.
In the future, CEO salaries will continue to rise. Experts say that is not a bad thing but companies must find a way to reduce the disparity.
A survey early this year found that, globally, women CEOs are outpacing their male counterparts when it comes to median pay, and in some cases year-on-year growth. Marissa Mayer, the head of Yahoo!, was the highest paid female CEO in a study by compensation data firm Equilar and Associated Press.
The salary of ICICI Bank's MD and CEO Chanda Kochhar grew a meager 12 per cent. But it's the promoters who have got the highest pay hikes. The salary of Nisaba Godrej, Executive Director, Godrej Consumer Products, grew 83.5 per cent from Rs 2.4 crore to Rs 4.49 crore, while Balkrishna Industries' Executive Director Vijaylaxmi Poddar got a 51 per cent hike, taking her salary from Rs 8.3 crore to Rs 12.6 crore. Clearly, the disquieting trend of promoters and their family members taking home the bacon is seen among women as well.
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