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The CEO Pay Conundrum

Prosenjit Datta     April 29, 2019

The great executive pay debate started many decades ago and it has become more heated over the years. One reason is that despite all the discussions and noise, the gap between the CEO's (and other top management) compensation and that of the average worker has only widened over time. The late management guru Peter Drucker, in his writings and speeches - in the 1970s and 1980s - had advocated no more than a 25:1 or 20:1 ratio between the top executive's compensation package and what the average worker drew.

Today's remuneration committee members would probably laugh at Drucker's naivety. A 2017 Economic Policy Institute report suggested that the average compensation of the US CEO was 271 times that of the annual average wage earned by a typical worker. Averages hide a lot - there are CEOs today globally (and in India), who draw over 1,000 or 1,500 times the median pay in their companies.

But the striking numbers often overshadow the nuances. For instance, the three highest-paid CEOs in our list are reaping the benefits of building their respective organisations over several decades. Much of their compensation comes from stock options that were granted years ago and are now being exer- cised at the end of their tenures. Those stock grants have become valu- able, because of the way they have increased the value of the company itself.

Then again, there are plenty who have seen their pay rise despite mediocre performance by their companies. This despite the fact that the bulk of their compensation is supposed to be variable and tied to their company achieving certain targets. These bonuses, though, have often been granted despite less than desired results. And there are still others who get enormous pay quite out of proportion of the size of their companies or their market standing.

Nobody should grudge a CEO the big compensation s/he takes home, if s/he has grown the company commensurately. The angst often comes when there is little correlation between the executive pay and the company performance. The angst also comes because in search of more efficiency and profits, the CEOs often focus on building leaner, meaner organisations where the average worker often feels underpaid and overworked - or there is downsizing taking place even as the CEO's pay keeps rising.

In theory, there are regulations to keep top management pay from growing excessively - one being that the total compensation to the top executives should not cross 11 per cent of the net profit of a company. That is of little use in big companies with net profits in hundreds or thousands of crores. Since last year, the RBI has been closely monitoring bonuses and compensation packages of private sector bank chiefs. It has come out with a draft guidelines prescribing norms and ceilings and also making provisions for taking back bonuses already given if the performance has not been up to the mark. The government could look for similar guidelines for other sectors.

But finally, it is the remuneration committee and the board that needs to ensure that pay and performance is more tightly correlated in the case of top management. In practice, though, few boards in India (and abroad) actually do so. And that is why, more heated debate continues year after year.


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