The big salary debate

There are equally compelling arguments for and against high pay packages in C-suites

N R Narayana Murthy has a perfect sense of timing. Just days before a crucial board meeting of Infosys, the company’s founder went public with his favourite subject: Compassionate capitalism.

In a mail to a few media houses earlier this week, Murthy said that every senior management person of an Indian corporation has to show self-restraint in his or her compensation and perquisites and “has to fight for maintaining a reasonable ratio between the lowest salary and the highest salary in a poor country like India”. His comments were in response to Infosys’ decision to increase the salary of Chief Operating Officer Pravin Rao.

Murthy must have borrowed heavily from a speech of former prime minister Manmohan Singh in 2007. Singh had asked big companies to resist paying large salaries to their top executives as rising inequities between haves and have-nots could lead to social unrest. The former prime minister, who had once laid stress on unshackling individual enterprise to encourage wealth creation, asked industry to be moderate in emolument levels as higher salaries, unless matched by rising incomes across the nation, would stoke disaffection amongst those outside of the growth parabola. 

India Inc didn’t listen to the then prime minister’s advice. And Infosys clearly is in no mood to listen to its founder’s advice either. In a quick rebuttal, the company said the over 33 per cent pay hike for its COO followed a comprehensive survey of best practices and benchmarking of senior management compensation with key Indian and global companies. 

The point is that there is considerable merit in both the arguments. It is true that India Inc has been hugely generous in rewarding its top brass. In fact, compensation in the corner offices of Indian companies is inching closer to global executive pay, even though the size of Indian companies is still minuscule compared to global standards. 

Such impressions gain ground by revelations that India has the widest gap between salaries of CEOs and entry-level graduates. Aon Hewitt, for example, has shown that in India, a CEO’s compensation is on an average 675 times the minimum wage earned by an entry-level employee. The US comes second with a 423 times’ difference, while in China, the ratio is 268 times.

But India Inc isn’t losing sleep over the growing buzz against high salaries of CEOs mainly because promoters, who control most of the companies, treat shareholder activism as nothing more than a nuisance. A vast majority of India Inc’s best-paid top bosses are promoters. There are also many instances where several members of the promoter family double up as whole-time directors and earn a sizeable compensation package.

That’s one side of the argument. Supporters of big pay packages say the roadshows against high CEO pay are meaningless, as companies know best what to pay their top executives. Demand for CEO talent far outstrips supply in the country and the availability of leadership talent in India, especially that high up the ladder, is very low, compared with mature markets. Also, unlike earlier years, organisations now have no issues with professionals making money as long as they perform and give the desired results.

They also rubbish Murthy’s arguments on the ground that Rao’s variable pay is linked to a number of factors — his performance, meeting the company’s targets and also the company’s performance. If any one of this is missing, Rao’s variable will change. They have a point. The net hike for Rao came to just 1.4 per cent for 2017-18 after accounting for a four-year vesting period of stock, a 10.6 per cent drop in cash component and performance-based pay going up to 63 per cent from 45 per cent of total compensation. “This (hike) could go up to 33.4 per cent in year four, assuming similar grants are made in subsequent years based on company and individual performance,” Infosys said.

The point often made is that no one should grudge high CEO pay, as demand for top-class talent far outstrips supply and there is no case to take away the fundamental right of every board — that is, to determine the payment it wants to give to attract the best talent. Also, the risks CEOs take justify the rewards and there is a growing trend of Indian promoters seeking out global CEOs to head their operations.

Does “compassionate capitalism” have any place in the hard world of business? There are no easy answers.