Most chief executives of mutual funds (MF) are said to be unhappy with the latest diktat from the market regulator that they have to disclose the salaries of all those earning more than Rs 60 lakh a year. The differential ratio between their pay and median employee remuneration, the Securities and Exchange Board of India (Sebi) said, should also be a part of the disclosure.
One fails to understand why mutual fund CEOs are so unhappy. The rest of India Inc was asked to make this disclosure in the last financial year itself and there is no reason why MFs should escape this diktat. Transparency in the form of higher disclosures shouldn't be a problem, particularly when there is considerable concern over the growing gap between the earnings of C-suite executives and rank and file employees.
While data on MF salaries are not available, here is an example of the pay-gap ratios in India Inc. The top brass of Nifty companies, on an average, earned 170 times what an average staff member earned in these companies in FY15. Of the 95 directors belonging to 34 private sector firms in the Nifty, 11 had remuneration in excess of 400 times the median average staff pay. In quite a few cases, the top executive earned more than 500 times what the average worker took home. Aon Hewitt, for example, has shown that in India, the pay gap is the highest in the world. The pay gap issue has been raised in the run-up to the US Presidential elections as well, with Hillary Clinton recently pointing out that the average CEO makes about 300 times what the average worker makes. India Inc also has to take cognisance of the huge wage differential at a time when there is growing activism around high CEO salaries.
Sebi's concern that high salaries to a few are hurting the profitability of MFs is debatable, as the pay packages come directly from their profit and loss account and any reduction in pay will only help the promoters and not the investors. But that's beside the point.
Many say 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. Those who defend CEO compensation also point to the stiff targets and the way packages are structured today - 50 per cent comes from variable pay. Some say the pay ratio rule will effectively provide overzealous advisory firms with a potent new weapon to shame individual companies.
There is some merit in this argument, but there is none in favour of opaque compensation practices. The point is that MFs and the rest of India Inc should not have any problem in more disclosures regarding pay, since no one can argue in favour of a non-transparent remuneration process.
Stakeholders, including investors, ought to know why a senior executive is getting fancy sums and they are entitled to information on the specifics of the major perks. That's the reason why the US Securities and Exchange Commission is pushing ahead with the toughest set of pay disclosure rules. The rules now require companies to organise executive compensation disclosure into three broad categories: compensation over the last three years; holdings of outstanding equity-related interests received as compensation that are the source of future gains; and retirement plans and other post-employment payments and benefits. Under the final rule, companies will get to determine the methodology to find the median employee salary.
In comparison, India Inc has been rather innovative in its approach. Here is one example from an Indian company's annual report: "Our compensation strategy is to ensure that the senior executives of the company are compensated effectively in a manner consistent with our stated compensation strategy, competitive practices and the requirements of appropriate regulatory bodies."
Despite the length of the sentence, no one would actually learn anything from it about the company's compensation strategy.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
