From lean years to the bulge bracket

INDEPENDENCE SPECIAL/ EXECUTIVE LIFESTYLE

When M M Sabharwal joined Dunlop as a management trainee in early 1947, his salary was a princely Rs 75. Sent to England for training "" Dunlop was UK-owned in those days "" he returned a few months later when India was an independent country.

Later, his salary rose to Rs 700, which was considered decent in those days.

In 1961, P M Sinha started out in Esso, the oil company that was later nationalised to become HPCL, on a monthly salary of Rs 710. When he joined Levers seven years later, his monthly salary was Rs 2,410.

On the whole, executive pay and perks in the India imbued with socialist values nowhere matched the compensation packages of today at any level. For instance, a starting salary of Rs 75 for a management trainee then would have been equivalent to Rs 900 today "" way behind the Rs 20,000 that even a call centre rookie is paid.

The explosion in executive pay in India Inc is a mid-nineties/early-2000 trend, a product of the urgent need for talent in a rapidly growing economy. Much has been written about the humungous CEO pay packages today "" Rs 1 crore to Rs 3.5 crore a year, for instance, is considered par for the course.

But CEOs and directors in the days preceding liberalisation were, on the whole, an undercompensated tribe. This was because till 1986, CEO and directorial salaries were, like everything else in the economy, government-controlled. The unwritten reason was that the government did not want significant salary differentials between bureaucrats and corporate executives.

Thus, Sabharwal rose to become head of Dunlop. His salary?

Rs 7,500 a month, the maximum ceiling imposed by the government. This ceiling was relaxed in the mid-seventies to Rs 10,000 a month, but only for about a year after which the earlier ceiling was re-imposed.

There were limits on directorial salaries. For instance, when Sinha become a director on the Levers board in 1981, his salary was Rs 60,000 a year. This was higher than the Rs 48,000 a year that bureaucrats earned, but hardly qualified as bulge bracket.

High taxation rates "" at one time they touched the high nineties "" meant that the low salaries were compounded by low take-home pays. "Taxes were extremely high "" and they included wealth tax, income tax and surcharges," Sabharwal recalls.

As a result, corporations looked at various ways to compensate their senior managers. Many unlisted proprietary companies, aided by opaque accounting standards, simply paid their executives under the table. The larger listed companies offered lavish perquisites. These came in the form of large houses, company car and drivers, and a set of allowances "" servants' allowance, furnishing allowance, travel allowance "" that required armies of clerks to administer.

But perks were mostly tax-free so they allowed senior executives to enjoy living standards that were significantly above their means, so to speak. This was evident in the sharp diminution in CEO lifestyles once they retired. Both Sabharwal and Sinha say that there was little money to save or invest in homes as even junior executives do today.

Sinha recalls being unable to raise the money in 1972 for a house in New Delhi's Defence Colony that cost Rs 1,60,000 and was being offered in instalments. That was the year the government imposed price controls on commodities, so Levers wasn't doing well and couldn't offer loans.

Sinha also recalls that the controls on directorial salaries meant that direct reports were often paid more because there were no limits on their salaries.

The other (legal) way to get round the low-pay-high-tax trap was to alter designations. Thus, in the mid-eighties, Levers set up a "management committee" which basically did the same work as the board, only its members were designated vice-presidents. Being outside the purview of the Companies Act, vice presidents could be compensated more generously.

The catch was that the government stipulated that companies had to have a chairman and at least three directors, so membership to management committees was limited in that sense.

By the mid nineties, things had changed. "Salaries really started taking off from 1994-5," says Sinha, who was CEO of Pepsi India from 1992 to 2002 and says his compensation was significantly better than his Levers directorial salary.

Tax reforms started by Manmohan Singh in the early nineties swept many of yesterday's tax-free perks into the tax net, a process that reached its apogee with Chidambaram's fringe benefit tax. As a result, salaries today are consolidated and more transparent.

Second, with stock option schemes, companies are able to offer their senior managerial talent rewards that are tied to company performance and, although they are taxed, hold out a promise that is far more lucrative and lasting than the lavish perks of yesteryear.