Executive remuneration remains a sensitive issue. The latest report on the subject,
Executive Remuneration: Time to Rein in the Rewards, by Institutional investors Advisory Services (IiAS), again questions the bloated compensation packages promoter-executives give themselves in major Indian listed companies.
The report highlights the huge disparity in the compensation paid to professional CEOs and promoter CEOs. It also reveals that in most family-owned companies, family members on the Board are paid more than other directors. For instance, the total remuneration paid to the promoter family in Sun TV is as high as 69 per cent of overall staff costs.
Such criticism is heard more frequently when markets are slowing and company profitability is hit. Shareholders want executive remuneration to be linked to company profitability and believe fat pay packages are not justified when the company is not doing well.
The management usually maintains that remuneration levels in India are far lower than those in the rest of the world, and also point out that compensation in India is already capped under Section 309 of the Companies Act, which says, for a whole time director, this should not be more than 5 per cent of the net profit reported by a company.
In 2011/12, the average annual remuneration of managing directors in the 30 companies which comprise the Bombay Stock Exchange's Sensex was Rs 109 million. For BSE 100 and BSE 500 companies, the annual average remuneration was Rs 62 million and Rs 36 million respectively. In comparison the average remuneration of MDs in the Standard and Poor's 500 companies' list was $5.3 million (Rs 280 million).
There are, however, many ways of splicing the existing data on CEO compensation.
Another study by global human resources (HR) consulting and outsourcing firm Aon Hewitt for
Business Today on executive compensation for 2011/12 draws a different picture. It shows the Indian CEO's median salary that year was $3.5 million (Rs 185 million), versus $7 million in the US, about $6 million in Europe and $3.5 million in Australia. This despite the fact that Indian companies are much smaller than their US counterparts - the median revenue in
Business Today's
BT 500 listing of companies is Rs 23,350 million, while for Fortune 500 US corporations it is $10.5 billion (Rs 556,500 crore).
In other words,
Indian CEOs earn a lot more than their US peers for every dollar of revenue they bring to their companies. (The median is the mid-point of any distribution, not the same as the average.)
The latter view is also supported by the IiAS report. It notes that in BSE 100 companies in 2011/12, on average, promoter-executives earned Rs 121.7 million while professional CEOs (excluding PSU chiefs) got Rs 52.2 million. It has also observed that in the case of promoter-run companies there is a significant difference in the compensation of promoter-executives and professional-executives who have similar responsibilities. In case of Jindal Steel and Power, for instance, promoter-chairman Naveen Jindal's salary in 2011/12 was almost 25 times the remuneration of the group vice-chairman Vikrant Gujral.
The report further shows that 'average remuneration' does not reflect the real compensation scenario. There is a huge variation in the average and median remuneration levels. It points out that the executive remuneration is heavily skewed in favour of certain companies and their directors, mostly promoter/ promoter family executives. Even certain industries have far higher executive pay packages than others.
Data analysed by the report shows executives in health-care/pharmaceutical companies are better compensated compared with other industries, with an average annual remuneration close to two per cent of net profits.
The report also points out that executive compensation is not proportional to company size.
It reveals that the BSE Sensex companies, which are all large behemoths, pay 0.45 per cent of net profits as remuneration to executives. In comparison, BSE 100 and BSE 500 companies pay 0.63 per cent and 2.5 per cent respectively. So as the base widens and more mid-size companies are included, compensation as a percentage of net profit is seen to increase, which means many of the mid-size companies are paying out a greater proportion of their profits to their executives than the heavyweights.
Many big firms such as Reliance Industries and L&T which used to have the highest pay packages for their executives have been overtaken by smaller companies like Divis Laboratories.
The IiAS report also highlights the gap between executive compensation in public sector enterprises and private sector companies. In BSE 100 companies in 2010/11, executive directors of private sector companies were paid an average remuneration of Rs 68.9 million. The average remuneration for public sector executives in the same year was Rs 5.1 million. For all the perks PSU bosses may get, the difference remains stark.
"The remuneration paid is not just a price but acts primarily as a motivating tool aimed at incentivizing the entire workforce. In this context, it is important to maintain a balance between the remuneration paid to the senior management and the average employee in the organization," the IiAS report adds.
Management experts like Peter Drucker and Indian corporate mentors like N.R. Narayana Murthy have always advocated that CEO remuneration should always be 20 to 25 times the average employee's salary, no more.
CEOs in countries like US and Canada generally earn 200 to 300 times the average employee's salary. In the Sensex companies in 2011/12 the median salary paid to executives was 85 times the average employee remuneration.
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