Compensating a CEO excessively is not a great idea: Narayana Murthy

Infosys has been a trendsetter for Indian companies when it comes to executive compensation. N.R. Narayana Murthy, the software giant's co-founder and Chairman Emeritus, shared his views on the topic with Chaitanya Kalbag in an email interview.

Q: Are Indian CEOs overpaid, or have they earned it?
A: I would not say they are overpaid in general but there is definitely a need for introspection by them whether their pay is fair in the context of India.
 
Q: When you look back to your early days at Infosys, could you have expected that one day CEO salaries would reach today's levels? What about compensation fundamentals worries you today?
A: Given that I took 10 per cent of what I was earning before starting Infosys and that salary was very low even by the standards of 1981, I did not expect that the CEO salaries would reach what they are today.

On the other hand, those days, the government restricted senior management salaries to such low levels, I am happy that we have moved to a market-driven and competency-driven compensation scheme today. In the current scenario, I do worry about the greed of some of the senior management staff and even entrepreneurs.   

Q: Many salaries that get talked about these days are paid to CEOs who are also promoters. How should boards and shareholders approach this subject?
A: We, the founders at Infosys, decided right from the beginning that we would set an example for the entire Indian industry in the compensation of the founders. We decided that no founder would use any corporate resources for any personal benefits. We decided that our salaries would be lower than the senior management staff who did not own stocks like we did. Even today, the salaries of Kris (S. Gopalakrishnan, co-founder and executive co-chairman) and Shibu (S.D. Shibulal, co-founder, CEO and Managing Director) are less than 40 per cent of the salary of the people that report to them. No Infoscion has any company car. We also eschewed any granting of options to the founders.

Let me get to the second part of your question. The board should decide the compensation of the CEO of a corporation based on three factors: fairness, transparency and accountability. Fairness in deciding the compensation of the CEO with respect to the compensation of the lowest level professional is very important.

After all, no leader can succeed in a vacuum. He or she will need the co-operation, hard work and commitment of his or her people to achieve anything worthwhile. Therefore, compensating a CEO excessively is not a great idea. At Infosys, the salary of the CEO is about 20 to 22 times that of the salary of the lowest professional.

Secondly, there should be full transparency to the shareholders regarding every item of compensation and the basis for awarding that item in the CEO compensation. The shareholders must approve every item of the CEO compensation. There should be no hidden items and there should be no opportunity for the CEO to use corporate resources for his personal benefit.

Thirdly, a large part of the CEO salary must be variable and must be awarded only based on his or her performance over a certain period of time, say three to five years. This is particularly true of stock options and bonuses. Such options and bonuses must be awarded only based on a portfolio of performance indicators including TSR - Total Shareholder Return over three to five years. Such awards must also have a claw-back clause and such claw-back clauses must be exercised if there is any violation of ethics under the CEO during the period of TSR.

Q: Do professional CEOs deserve more as they are, after all, expected to be entrepreneurial and take risks and also be answerable to shareholder concerns?
A: Well, a CEO has to achieve his or her targets. He has to be entrepreneurial, has to think big, has to take risks and be answerable to shareholders. This is part of the job and comes with the territory. In fact, everybody in the organisation has to exhibit these characteristics if the organisation has to achieve its results.

Q: How do you see the gap between the top salaries in a company and the pay at the bottom? Is it too wide or is it fine? Have you been mindful of this gap at Infosys? How have you handled it?
A: I have answered this in my answer to the third question. The important thing to remember is that no CEO can achieve his or her results unless people below him or her commit to his or her vision and work hard and smart to achieve that. Therefore, any success comes not just because of CEO alone but also because of every employee in the organisation. Therefore, the issue of fairness with respect to the compensation awarded to the lowest level of employee is very important in determining the compensation of the CEO.

Q: Do you think Indian companies are paying a legacy cost in the way compensation is heavily tilted in favor of fixed versus variable component?
A: I believe that the variable component of the compensation has to be higher as we move up the corporate hierarchy. This is necessary if CEOs have to be paid huge compensation, else we may be delinking compensation from performance.

Q: Many feel compensation committees on Indian boards "rubber stamp" the chairman's or board's decisions. Is there room for them to be more proactive? Any best practices that Indian companies could emulate from global peers or from India given your own experience with HSBC etc?
A: It is very important to induct high-quality independent directors who can form the Compensation Committee. Such eminent and independent-minded people will not operate as rubber stamps of the promoter-chairman. Most well-known international companies try and induct such eminent and independent people on their boards and ensure that such independent directors are in all board committees.
 
Q: Do you feel that compensation costs are sucking out competitive advantage from Indian companies?
A: As long as senior management salaries are a small part of the total revenues, it is not an issue.

Q: Given the talent shortage do you think Indian companies that are in a very competitive space can afford to hold back on increments in a situation where growth is a challenge?
A: If the senior management is committed to their companies and have a desire to lead by example, then such holding back of salary increases should not be an issue.

Q: What has your experience with ESOPs been? Infosys was an early mover in this area.
A: Most Infoscions who received huge stock options left the company once the options got vested. I am disappointed by the lack of gratitude of most of them. Therefore, there is need for increasing the vesting period to 15 to 20 years. Else, they may not be useful as retaining instruments.

Q: Do you think companies are really not being proactive in structuring compensation structures, as they should be? For instance, a young person really does not care for insurance, but would rather want some other perks?

A: Yes, there is a desire among youngsters to ignore the various perks that companies provide like health care, transportation facilities, good training, food courts and recreation facilities. They just want cash and do not value perks in kind. This is not good in the long run.