Valid objection, bad timing

Concerns over the Infosys CxO pay hikes are justified

Infosys founder N R Narayana Murthy’s second salvo in two months against the company’s predilection for generously rewarding its top management holds a significant message for India Inc. This time, Mr Murthy, whose pay and lifestyle in his heyday at Infosys attracted attention for their relatively ascetic quality, has raised concerns about the compensation to the company’s chief operating officer, Pravin Rao. Shareholders approved a hefty 35 per cent increase of Mr Rao’s annual salary to Rs 8.5 crore — which Mr Murthy says works out to a 60-70 per cent increase (if variable pay is included) as against a 6-8 per cent increase for most other employees. In February, he and other founders had raised similar objections to the hefty increase in CEO Vishal Sikka’s salary to Rs 73.4 crore. Although this figure is tied to board-approved targets — which means he could earn as little as Rs 20 crore if the targets are not met — the founders took exception to the deviation from the Infosys rule that the highest salary should not exceed 50-60 times the company’s median salary. Mr Sikka was already one of India’s highest-paid executives — in fact, his 2015-16 salary was over 900 times the company’s median wage. Coming as it did after a generous severance pay to a departing CFO, the founders had sought changes in Infosys’ remuneration committee.

Increasingly generous CxO pay packages have been a simmering global issue since 2008. Though generous compensation is considered both a reward and incentive for CxOs to enhance shareholder value, there has been a growing notion that they contribute to widening inequality and bear little relation to meeting corporate targets or serving the interest of corporate governance. The American economist, J K Galbraith, once described salaries to CEOs of large corporations as a “warm personal gesture by the individual to himself”. 

Ironically, India Inc appears to be a global leader in this regard. In 2015, a UK government green paper on corporate governance showed that not only had salaries of CEOs of FTSE 100 companies quadrupled in the 18 years to 2015, but these were 128 times their companies’ median salaries. In the US, the ratio was 300 times. In India, the figure for the top 10 Nifty companies in 2015-16 ranged from over 900 times (Mr Sikka) to 312 times (G V Prasad of Dr Reddy’s Labs). Mr Murthy raises a valid point that governance standards are just as necessary to meeting stiff revenue targets; the company aims to double its 2016-17 revenue by 2020 to $20 billion. 

The quibble with Mr Murthy’s objections perhaps is the timing of this missive. He has chosen to put the information in the public domain after shareholders, including some promoters, had approved of Mr Rao’s compensation by a two-thirds majority. It is difficult to see what Mr Murthy has achieved by publicly raising the issue after the fact, barring ratcheting up tension between promoters and the board at a uniquely challenging time for the industry. Though Mr Murthy’s objections are valid, shareholder activism demands a degree of restraint as well.