Must Sebi clampdown on runaway executive pay?

India is not isolated, but only joining the global outrage on million dollar payouts that continue come boom or bust

The economy has been crushed by a protracted financial meltdown, company bottom-lines are looking uglier than ever and debt restructuring packages are piling up rapidly, but the high lords of corporate India, continue to laugh their way to the bank anyway, rewarded exorbitantly some might think, for navigating  their way through these tough times.
 
Consider these statistics –
 
CEOs are likely be paid double the salary than they would have been, around 5 years ago. The annual compensation packages of CEOs today can hit a whopping Rs 20 crore excluding stock options. 5 years ago that figure was roughly half, according to a study put out by Argus Partners in September.

 

The number of professional CEOs earning over Rs 5 crore has doubled in this recession – from 19 in 2010 to 48 this year, according to a survey. And estimates are that this exclusive club of fat cats could puff up by another 100 at least, if a wider spectrum of companies (PE firms, unlisted entities etc) is included in the calculations. This mind you, excludes CFOs, COOs and the likes.
 
For family owned businesses, which dominate the Indian landscape, differences in the pay levels of members of the promoter family and the next level of non-promoter executives is, for the lack of a more potent expression, stark. Promoter CEOs basically rake in big moolah (Navin Jindal’s salary was 25 times that of group vice chairman Vikrant Gujral’s in FY12) as compared to their second in command.

 
Finally a succinct analysis by Aon Hewitt done for Business Today sums up in a nutshell the point we are trying to get at through these statistics – despite being much smaller than their US peers, Indian CEOs earn a lot more for every dollar of revenue they bring to their companies. These figures look especially unpalatable in an economic slump when people in the lower rungs are losing jobs and shareholders the value of their investments.
 
So how about making it mandatory for companies to get their remuneration packages approved by a majority of minority shareholders?
 

Stock market regulator Sebi it seems is considering this option to rein in the fat pay cheques, according to a report in the Economic Times yesterday.  The new rules could also entail non-promoter driven companies to get pay packages passed through a special resolution and make it compulsory for a remuneration committee (to be mandatorily set up) to justify pay levels of promoter directors.
 
How reasonable is this stance by Sebi?
 
In India compensation is already capped under Section 309 of the Companies Act, at 5% of the net profit reported by a company, and Sebi isn’t suggesting any modification in that. It is only adding teeth to a myriad existing regulations that require among other things, authorization by shareholders, a range of disclosures, and maximum percentage caps on commissions etc to control compensation levels. The new set of rules will further empower shareholders by necessitating their consent. Approvals of a remuneration committee which is currently not a mandatory requirement, will also be considered necessary.

 
To the extent that the jarring, eye-popping compensation figures that make up executive remuneration these days call for a wider sanction, Sebi’s actions seem fully justified and are in fact far more placid than what’s happening overseas. It is also widely accepted is that remuneration structures need more transparency so that shareholders voting (for or against) know what exactly they are endorsing, and Sebi’s proposals could strengthen that process. Proxy advisory firms meanwhile, have also called for remuneration to benchmarked to key parameters (financial, non-financial – i.e. other staff costs, and comparative industry & peer salaries) in order to improve corporate governance practices.

 
While all of these are welcome steps, there are also persuasive arguments against any regulatory witch-hunt against CEOs, which many enraged denizens might be eager to propose. Here’s why -
 

• While some ‘fault lines’ (that need correction, no doubt) are visible according to IIAS, the average CEO remuneration for the BSE 500 companies has gone up in the last four years by 25%, which is largely in line with increase in profitability
• Most top promoters give themselves well below 1% of net profits as salaries, compared to the law that permits them to take away as much as 5% of profits.
• High executive compensation is an outcome of the demand - supply mismatch for talent. Companies fear any clampdown would drive out talent in what is already a crunched human resource scenario
• Globally, despite all the posturing and shareholder uprising against inflated executive pay, over 50% voters in Switzerland are unwilling to back the so-called 1:12 initiative, while the “say on pay” movement in the United States has failed according to reports which suggest that 97% of shareholders votes affirmed high executive pay packages  

 

This is not to say that Sebi shouldn’t raise its pitch for more transparency. Across the globe the noose is tightening around non-transparent compensation structures. Sebi’s proposal comes in the backdrop of Swiss voters backing strict controls on salaries earlier in 2013, giving shareholders more teeth in deciding executive compensation. In the US the Securities and Exchange Commission has recently proposed new rules that require the disclosure by public companies of the ratio of CEO pay to median employee pa as mandated by Dodd Frank regulations. In the UK shareholders will be given a binding annual vote on companies’ remuneration policies. And in Switzerland there will be a referendum this fortnight to take up a proposal to limit monthly executive pay of a CEO to the equivalent of the annual earnings of a company's lowest paid member of staff.

 
India is clearly not isolated, and only joining in the global outrage on million dollar payouts that continue come boom or bust.  While all efforts must be made to correct any outrageous practices in compensating executives, the level of exasperation against CEO pay ought to perhaps be tempered down a bit.