Corporate Affairs Minister Salman Khurshid’s exhortation to the corporate sector to eschew large compensation packages to the chief executives and other members of the top management has to be seen in perspective. The appeal is certainly not the first by a minister, nor will it be the last asking companies to exercise restraint in an area that has come under international scrutiny. The Prime Minister had made a similar appeal two years ago. Perceptions, though not necessarily hard facts, have from time to time driven many observers to ask for a check on “lavish” salaries and perquisites in the top echelons of the corporate sector. In an earlier era when the Indian private sector depended heavily on the government, the practice was to dictate norms on matters that are elsewhere left to the domain of the shareholders. The legacy has however continued in the post-reform era. There are provisions in the Companies Act that subject executive compensation to legislative guidelines: the objective is to link it to the net profits of the company. The managing director’s compensation cannot exceed five per cent of the net profits and for directors including non-executive directors the limit is 11 per cent. Loss-making companies too are subject to specific guidelines. Besides, companies will have to disclose in their balance sheets full details of compensation packages above a certain level.
In the financial sector internationally, large compensation and bonus packages tied with short-term results led to excessive risk taking and an inordinate focus on short-term performance. Mr. Khurshid’s appeal has less to do with extra-large compensation packages endangering long-term corporate health and more with the flaunting of wealth by a few of the beneficiaries. The issue is not really whether the CEOs and other top managers deserve them or whether they would leave if they are not so compensated. In the context of mass poverty and at a time when the government has embarked on an austerity drive, compensation packages that seem so totally lopsided in relation to the average level of wages and the vulgar flaunting of wealth by a few at the top of the corporate pyramid do seem invidious. The corporate sector as a whole needs to be sensitive to these concerns. Some of the highest compensation packages are paid to the CEOs who are also promoters of the company. For the promoter-CEOs, dividend income is a bigger source of wealth creation. They, more than the professional executives, must heed the call to exercise restraint.