CEO compensation debates in India and abroad are always contentious and have grown more contentious over the past couple of decades as better reporting norms of executive pay have come into effect, as have newer ways of compensating CEOs. The general feeling among lesser mortals is that CEOs are vastly overpaid. There is some basis to that feeling - CEO salaries have gone up even in bad years for the economy and have gone up much faster than average compensation. According to a Bloomberg study, listed Indian company CEOs earn 229 times more than the average worker in their company. (The gap is even higher between the CEO salary and salary of the entry-level executive.) Similarly, another study shows that in the past few years, the wage bill of the top 500 companies have gone up sharply - but that rise has much to do with the rise in the salary and other compensation offered to its top managements than to the average worker.
The discussion should be a little more nuanced, in my opinion. An examination of CEO pay in India and globally shows that currently, much of the compensation offered to them consists of variable, performance-based pay. In India, the fixed component of the compensation of a CEO is generally no more than 40 per cent. The remaining come from bonuses and stock options, which are tied to revenue, profit and stock market value growth targets. There are also limits prescribed by the government. The Companies Act specifies that the total remuneration for the top management of a company (which includes the CEOs, directors, etc.) cannot cross 11 per cent of the net profits of the company, without express permission of the government. Of course, this only applies to listed companies. Recent news reports suggest that the government might even liberalise those ceilings. (Fun fact: Till about 1990, before the economic reforms, CEO and executive chairman salaries of listed companies in India were capped by the salary of the President of India, which ensured that most CEOs got less than `15,000 as overall compensation. This in turn was made up by offering them all sorts of perks, which were not very transparent.) But the point here is that CEO compensation is often dictated by the short-term performance target (through annual bonuses linked to revenue and profit growth) and long-term incentives (through stock options linked to tenure and market cap goals).
The other big issue that crops up in CEO pay discussions is the Principal (promoter CEO salaries) vs Agents (professional CEO compensation) debate. However, that is becoming less relevant as even professional CEO compensation is increasingly being linked to long-term stock performance through ESOPs and hence the original dichotomy is blurred.
Our special survey of highest-paid CEOs in India (research by Niti Kiran, and anchored by Ajita Shashidar and Sonal Khetarpal) shows some interesting facts. The top-paid professional CEOs in India derive much of their compensation for the long-term service in the company and their role in shaping its performance over the years. Almost 60 per cent of their pay is typically derived from risk-based pay. In 2013/14, it was not more than 40 per cent. And finally, the huge gap between salaries of top promoter CEOs and top professional CEOs is coming down.