It may be a coincidence, but just a day after the draft rules of the Companies Act mandated a stringent set of executive pay disclosure norms in India, the Securities and Exchange Commission came up with a proposal that US corporations will need to disclose how the pay checks of their chief executive officers (CEOs) compare with those of their workers.
The rules under the Companies Act propose, among other things, mandatory disclosure of the rationale behind salaries and hikes given to top management personnel in comparison with business performance and the ratio of remuneration of each director to the median compensation of the employees for each financial year.
The proposals have met with similar response in both the countries: while industry says the data will be costly to compile, will be of little use to investors and that the information will only be used as a political tool to attack managements, labour advocates say such disclosures will help investors identify top-heavy compensation models. They also argue that as companies offer the top management fatter pay packets and incentives every year, the reward-to-effort ratio has got skewed. As a result, while CEO pay is exploding, the wages of regular people have stayed somewhat stagnant.
It is easy to dismiss this argument as socialist rhetoric, but a close look at the data show this could indeed be broadly true. The real issue is that while the pay scales of one part of the skill set - the top management - is benchmarked to global standards, the other part is being paid disproportionately less. Interestingly, a report on executive compensation by HR consultancy Aon Hewitt says that average difference in salaries between Indian CEOs and entry-level employees is the highest in the world.
The study also says the average Indian CEO earns 156 times what the average entry-level executive makes. He earns 63 times more than the average entry-level manager and 3.2 times what other C-suite executives make. Moreover, after adjusting for purchasing power parity (PPP), the difference between Indian CEO salaries and those in the West isn't all that vast. Compared with $8.9 million in North America and $6.5 million in Europe, the PPP-adjusted pay for CEOs in India is $5.3 million (against $1.3 million otherwise).
Aon isn't alone. The latest report on the subject, Executive Remuneration: Time to Rein in the Rewards, by Institutional investors Advisory Services, questions the bloated compensation packages promoter-executives give themselves in major listed companies. The report highlights the huge disparity in the compensation paid to professional CEOs and promoter CEOs. For instance, the total remuneration paid to the promoter family in Sun TV is as high as 69 per cent of overall staff costs. In the case of Jindal Steel and Power, promoter-chairman Naveen Jindal's salary is almost 25 times the remuneration of the second man in the group.
The report reveals that the BSE Sensex companies pay 0.45 per cent of net profits as remuneration to executives. In comparison, BSE 100 and BSE 500 companies pay 0.63 per cent and 2.5 per cent respectively. So, as the base widens and more mid-size companies are included, compensation as a percentage of net profit is seen to increase, which means many of the mid-size companies are paying out a greater proportion of their profits to their executives than the heavyweights.
India Inc argues that the top management needs to be paid well because of the talent shortage in the country. No quarrel with that, except that while the quantum of compensation has grown significantly, the accompanying focus on governance and sophistication in how it is delivered has not kept pace.
The India Board Report by AZB, Hunt Partners and PricewaterhouseCoopers reveals in several Indian companies there is no real governance around how top managers were paid. It also stated, "Interestingly, the link between performance and pay was found to be non-existent or weak (at best). In many instances, performance criteria were not merely lacking in transparency, but designed to be obscure or unnecessarily complex." Others say in less than a third of the organisations, the remuneration committee has any role to play in executive compensation decisions.
In this context, HR consultancies say while it is nobody's case that management salaries need to be capped by law, companies have no option but to come to terms with the fact that they need to make transparent disclosures for all forms of executive compensation - stock options, pension benefits, use of company assets such as airplanes and severance allowances, including golden handshake payments. In short, shareholders need to know the reasons that lead to the choices a company makes.
A majority of Indian companies, which are still believers of secrecy in executive compensation, needs to realise that their corner room occupants can no longer afford to be dismissive of the growing impressions about opaque compensation practices. Apart from the regulatory mandate, the "Say on Pay" movement, whereby a firm's shareholders have the right to vote on the remuneration of executives, is catching up in India with proxy advisory firms such as Stakeholder Empowerment Services, Institutional Investor Advisory Services India and Ingovern actively assisting investors with research and data on corporate governance issues as well as voting recommendations on shareholder resolutions.
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
