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Who will decide CEO salaries?

The shareholders, of course. The government can help by enforcing greater disclosure on the part of companies and higher literacy among shareholders. It must not dictate the salary, though.

K.R. Balasubramanyam | Print Edition: November 1, 2009

Until recently, Union Corporate Affairs Minister Salman Khurshid made no bones about the fact that he wanted to end the practice of listed companies seeking government approval for a director’s pay. “Let the shareholders decide how much they want to pay someone, though there must be disclosure, to us, to the shareholder, to the public at large,’’ he had said.

But, if his comments provided cheer to corporate India, then the minister’s dramatic U-turn in the first week of October gave it a rude shock. Khurshid has now trained his guns on CEOs, dropping broad hints at tightening the law to rein in “vulgar salaries”. Under the present Companies Act, 1956, the remuneration of full-time directors cannot exceed 10 per cent of the company’s net profit as computed under Section 349 and 350 of the Act. One per cent of the net profit can be given away as commission to directors.

The new Companies Bill, tabled in the Lok Sabha, however, seeks to do away with these caps on pay and allows even loss-making companies to pay remuneration as approved by shareholders. This would practically end the need for government approvals on director salaries.

The minister now says that the Parliamentary Standing Committee is examining the provisions of the new Bill and will take a view on the CEO salary. He has, however, made it clear where he stands on the issue. The Congress Party is unlikely to gloss over the matter especially when the message of austerity has emanated from 10, Janpath.

Khurshid sounds convincing when he refers to annual salaries and perks to the tune of Rs 50 crore for an individual, which, he says, is “more than 12,500 times the per capita income in India’’. But the weapon he is likely to use to rein in the practice—a piece of legislation— may do more harm to India Inc. than good, feel observers. This is not to say he should wash his hands off the controversial subject, but he must limit himself to strengthening shareholders rather than taking over their role. His ministry can, for instance, force companies to display far greater transparency in the award of salary, perks, commissions etc. His government agencies, if resources permit, can initiate shareholder education programmes and teach investors how to read the fine print in a company’s documents that are in the public domain. Once enlightened, the shareholders will do what the minister intends.

Nonetheless, it is also true that India Inc. faces a huge shortage of competent managers who can take firms to greater levels of profitability. If the post-liberalisation era saw corporate India unleash phenomenal entrepreneurial development and explosive growth in GDP numbers, it was in no small measure spawned by these top guns, who are now, ironically, the subjects of attack. Corporate India can collectively respond to the outcry against obscene salaries. Men like N.R. Narayana Murthy are quite candid and admit that some form of salary corrections are needed.

How can it help matters, though?
One: by voluntarily tempering the compensation package of its top executives so that CEOs can hold their heads high and announce their salary to shareholders, rather than hide the figures in the tome called annual reports. Two: by encouraging its senior executives to do ISR— individual social responsibility— and return a part of their earnings to society and help those who are under eternal austerity.

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