Is India Inc guilty of overpaying itself?

Two issues arise from the PM's remarks "" is there a system to check the abuse in executive pay and is this behind the country's rising inequality?

Subir Gokarn
Executive Director
& Chief Economist,
CRISIL Ltd

There are enough governance structures in place to deal with executive compensation, and in general, they are working well

A debate about the sources and consequences of income inequality in India is legitimate, but given the breadth and complexity of the phenomenon, placing the issue of unreasonably high corporate salaries in this context is a bit of a stretch. The Prime Minister's views on this issue, articulated in his address at the annual meeting of the CII, should be looked at through the much narrower lens of corporate governance. A significant responsibility of the governance mechanism, reflected in the mandate of the compensation committee of the board of directors, is to ensure that managers are paid what they are worth. This is the best way to align the incentives of managers with the broader interests of the shareholders.

From this perspective, Singh's assessments can be taken to mean that he does not have much faith in the governance processes that companies have in place to deal with the issue of executive compensation. His reference to "promoters" suggests a perception that even when companies have all the external trappings of good governance, the process cannot stand up to the whims of individuals or families. The perception may be entirely legitimate but if it is to provide a basis for regulatory intervention, it needs to be backed up by evidence. For years now, we have been told repeatedly about the progress that we have made in enforcing good governance practices in listed companies. If there is evidence to support the view that these are not working as well as they should, it should enter the debate prior to discussing potential solutions.

In any event, the best judges of whether governance mechanisms are working or not are the shareholders, whose interests they are supposed to protect. If there is a widely-held view among this very diverse constituency that salaries are too high, to the detriment of their interests, it should be relatively easy to identify it and use it as an input into designing possible interventions. However, I doubt that such a universal view exists; shareholders are far more likely to differentiate between managers in the companies that they have invested in, in terms of whether they deserve what they are being paid or not. Do they have the power to challenge the board's decisions on compensation packages? On paper, certainly they do.

In short, from the standpoint of good policy and regulation, the focus should shift from generalisations about the appropriateness of salary levels to an examination of whether the processes by which these levels are determined are transparent, fair, robust and working in practice as they are supposed to in theory. The received wisdom with respect to good management in both private and public spheres is that desirable outcomes are more likely to emerge from sound processes. To the extent that managers have more control over processes than over outcomes, they should concentrate on putting the right processes in place; similarly for regulators.

To come back to the Prime Minister's statements, they could very well have gone beyond the general entreaty to corporate managers to exercise self-restraint to articulate far more concrete positions. If he does trust the governance process, then he should accept the overall outcome is reasonable, that is, corporate salaries, in general, are not inappropriate. There is no case, then, for the concerns that he expressed. This is not to underemphasise the more general concern about widening inequalities but the solutions to that problem, to my mind, lie in a hundred other places. On the other hand, if he thinks the process is dysfunctional, as might appear from his statements, then he should lay out a plan to reform it, which does not depend at all on the altruism of corporate managers.

Having had some opportunity to observe the governance process up close, my view is that it does quite effectively check unreasonable outcomes. There are always going to be exceptions, but these do not require systemic change, only better enforcement. I think the process deserves our trust.

(The views are personal)

Arun Maira
Senior Advisor,
Boston Consultancy Group

As this paper's story on executive pay showed, CEOs in firms that do better get paid less than those in ones than do worse

The good doctor has been thanked repeatedly for getting Indian industry on to its feet when it was becoming comatose. The patient is doing fine and asks the doctor for an annual health-check. The doctor says, "You are doing well but exercise some more and guzzle a little less." "Party-pooper," cries the patient! CII had invited the PM to address it on the subject of the role of corporate India on inclusive development. With his observations about CEOs salaries and ostentation, the PM drew attention to the finery of some peacocks in the midst of pigeons and sparrows scrambling for grain. He suggested voluntary restraint in ostentatious expenditure by business promoters and CEOs when there was so much poverty in the country.

Manmohan Singh, who industry leaders never fail to thank for giving them the freedoms they are now enjoying""freedoms to produce what they want, sell where they want, and at prices they choose""was appealing to them to exercise their freedom to lead in other matters also. One of which is the tone of our democratic society. He spelled out ten points, the thrust of which was that business leaders must step up and consider the broader role they must play in India's evolving economy. However the media and most commentators have picked up one point""his comments on CEOs salaries. Therefore, let me address this first before returning to the larger issue.

Let's be clear: the PM did not say the government would regulate salaries. He asked industry leaders for voluntary restraints on excess. This is not an unusual request for the leader of a free-market democracy to make. George Bush and Tony Blair have also commented on the excessive salaries of CEOs in their countries. To them, as well as to Singh, some market fundamentalists would say that salary levels are determined purely by market forces. Moreover, they add, those who create wealth must be rewarded with wealth also.

However, these are abstract and ideological arguments. Facts do not support them. Even in the US, to which we often turn for ideas about how free markets should operate, mainline business journals have begun to comment on the inappropriate and iniquitous increase in CEO salaries. A report on top salaries in India of executives in steel, pharma, two-wheeler and IT industries published by Business Standard on May 28 should open eyes. CEOs in the better performing companies in all these industries are paid much less than those in the poorer performing ones. Surely the explanation cannot be that poorer performing companies need better executives and therefore they are paying their CEOs more because they are better and deserve more than their counterparts in the higher performing companies!

It is up to business leaders to determine the 'reasonable' salaries they want to be paid. The market does not fix what is reasonable, only what is possible. This brings up the broader issue of the condition of the society in which businesses operate. Surveys report the very low and declining levels of public trust in the west in CEOs of large companies. A recent poll in the UK reports that CEOs are trusted less than union leaders and plumbers!

Trust is earned. In democratic societies, leaders are permitted to lead and set their own standards provided they are sensitive to the aspirations and conditions of people around them. Whereas political leaders get thrown out if they do not make the connection, controls are imposed on business if society perceives business leaders as not behaving responsibly. Sarbanes-Oxley, which US industry is chafing under, was a reaction by society to the irresponsibility of CEOs. If they had voluntarily governed themselves differently, there would not have been a need for such onerous regulation.

No doubt the government must improve its own performance to retain support. But business leaders must also play their role to win broader public trust to enable the reforms they demand from the government.