Infosys vs founders: Vishal Sikka's 'good reason' clause is global practice

Infosys Chief Executive Officer (CEOs) Vishal Sikka may be able to protect up to 90 per cent of his annual compensation package, or nearly $10 million, if he exercises the ‘good reason’ clause in his employment contract but not many CEOs in India Inc have that option. 

HR experts and head hunters say the ‘good reason’ clause is a global practice that Indian companies are just about opening up to while scouting for top talent internationally. Most companies still prefer to offer up to six months of severance pay to departing senior executives.

‘Good reason’ defines the circumstances under which an executive can quit without losing out on severance and other benefits. The clause generally covers a material breach of any provision of the employment agreement by the company, failure of the company to pay compensation when due, a reduction in base salary or any other change in employment condition – without written consent of the employee. 

Though Infosys has notified to the stock exchanges in India that Sikka’s annual salary might fall to $3 million from $11 million if performance targets set by the board are not met, the ‘good reason’ clause permits him to terminate his job if the salary reduces by more than 10 per cent or goes below $10 million. Officially, of Sikka’s $11-million salary, $8 million is variable.  

According to Achal Khanna, chief executive, Society of Human Resource Management (SHRM) India, the ‘good reason’ clause is more in favour of the employee than the employer. “It is a safeguard in the interest of employees,” adds Khanna.  

“A good reason clause is common globally. Some Indian IT services firms usually give assurance of compensation through a bonus component. For Infosys, Sikka is the first non-founder CEO, so the company has made employment agreement with globally comparable benefits,” explains Kris Lakshmikanth, chairman & managing director, The Head Hunters India.

HR experts claim the “good reason” clause is an evolution from usual severance pay packages. “In any top management appointment, there are risks for both sides — the employer and the employee. Without checks and balances, the risk for a company can be considered higher than an individual,” says K Sudarshan, managing partner, EMA Partners International, an executive search firm. It is however common in contracts to protect the employee from unintended downsides, he adds.

HR experts say typically most top-level employment agreements in India do not go to that level of detailing as seen in severance packages of global CEOs. “Three to six months of severance pay is the general industry norm,” says Khanna. Sikka’s agreement with Infosys reportedly assures him of 24 months base pay as severance package. 

Lakshmikanth says it may not be right to put Sikka in the same league as founders, since the former were happy with lower pay and dividends, unlike a professional chief executive. Sikka claimed that he improved the performance of India’s second-largest software exporter and brought it on a par with industry peers during his two-and-a-half years at the helm.

Corporate governance and HR experts are, however, divided over the level of public disclosures needed in CEO packages. Shriram Subramaniam, founder and managing director of InGovern Research, a proxy advisory firm, is not happy about the fact that the disclosure (on Sikka’s good reason clause) was made to United States SEC and not the Indian exchanges.