High executive pay was at the centre of the recent standoff between the founders and the management of Infosys Technologies. To middle-income earners who are also shareholders in listed firms, any nine-digit pay packet may appear sky high. But how do they gauge if the CEO of their company is overpaid in relation to his peers? What are the benchmarks?
Indian laws require listed companies to make elaborate disclosures on top executive pay in their annual reports. These include details of the remuneration paid to every director on the Board, and a comparative analysis of their pay against employees, in the Director’s Report. The annual return (MGT 9) that follows the director’s report, presents a detailed breakdown of remuneration to each of the top managers.
We scanned hot, off-the-press annual reports for FY17 to unearth executive compensation trends for India’s leading companies.
Sector matters
It was the dollar-denominated remuneration package to Infosys Technologies’ CEO Vishal Sikka that drew the ire of the firm’s founders. In FY16, Mr. Sikka’s pay packet of ₹48.6 crore was lofty, no doubt, when seen in relation to peers. In FY16, TCS’ CEO and managing director N. Chandrasekaran earned a remuneration of ₹25.6 crore, HCL Technologies’ CEO Anant Gupta received ₹38.3 crore and Tech Mahindra’s C.P. Gurnani drew ₹45.2 crore as remuneration.
Mr. Sikka however took a sharp cut in his remuneration in FY17 which bridged this divide. He earned ₹16 crore, compared with ₹30.1 crore earned by the TCS top executive, the ₹150 crore package for Tech Mahindra’s CEO and the ₹13.5 crore paid to Wipro’s top boss. All the pay packages mentioned here include base pay, variable pay, commission and perks, as well as stock options cashed during the year.
IT firms as a class seem to be quite generous with managerial pay compared to other sectors, probably due to their sizeable global operations. Domestic consumer firms are equally profitable, but ITC’s CEO Sanjiv Puri earned ₹2.3 crore, Maruti Suzuki’s expat CEO Kenichi Ayukawa received ₹4.2 crore and Hindustan Unilever’s CEO drew ₹14.2 crore in FY17. Globally, banks are notorious for over-the-top managerial pay. But in FY17, ICICI Bank’s Chanda Kocchar drew ₹7.6 crore and HDFC Bank’s Aditya Puri received ₹10 crore.
How companies structured their top management also mattered. Firms that rolled their chairman, MD and CEO roles into one paid exceptionally high compensation to that individual, but those that split the roles divided up the largesse. For instance, Reliance Industries’ CMD Mukesh Ambani drew a modest ₹15 crore, but was supported by three executive directors drawing ₹53-80 crore each.
Wide pay gap
India was one of the earliest regimes (in 2015) to mandate listed companies to disclose pay gap ratios, a gauge of corporate income inequality. The pay gap ratio measures the ratio of a top executive’s pay to that of the median (average) worker in the firm.
Management guru Peter Drucker advocated a pay gap of 20 times between the CEO and the average worker and these were indeed the pay gap ratios prevailing globally in the sixties. But global corporations have since strayed miles away from this prescription. A recent study by the Economic Policy Institute noted that CEOs of large U.S. corporations pocketed 271 times the pay of the average worker in 2016.
But recent disclosures show that many Indian companies can give U.S. firms a run for their money. In FY17, TCS disclosed a CEO-worker pay ratio of 514 times, Infosys sported a ratio of 283 times and Wipro, 259 times. However, with exercised stock options sharply bumping up CEO compensation, it was Tech Mahindra which proved the outlier, with its pay gap at more than 3,500 times this particular year.
But high pay gap ratios weren’t restricted to the tech sector. Hero Motocorp’s CMD Pawan Munjal earned 731 times the compensation of the average worker and Cipla’s CEO was paid 416 times the remuneration of the median worker. The ₹78 crore compensation to L&T’s executive chairman A.M. Naik in FY17 included ₹38 crore in retirement benefits. But even stripping this out, the ratio exceeded 550.
But lest these numbers make you despair, there are some heartening trends too in executive compensation. One is the increasing tendency of listed firms to link their executive pay to profits or stock market performance. Pay packages for top managers are increasingly featuring a sizeable performance bonus or stock option component, with only modest base (or guaranteed) pay.
Mr. Sikka’s package for FY16, for instance, included a variable component of ₹29 crore ($4.3 million) that was linked to the achievement of financial targets. In FY17, as the company fell short, it was slashed to $0.82 million. As much as ₹25 crore of the ₹30 crore compensation to the TCS CEO consisted of a commission pegged to the company’s profits. And the Tech Mahindra CEO’s ₹150 crore package for FY17 included enchased stock options worth ₹147 crore, while his base pay was just ₹2.4 crore. L&T’s ₹40 crore remuneration to its chief featured ₹18 crore in profit-based commission.
Then, there are the legal limits to Board-level compensation set out by the Companies Act. A company cannot pay more than 5% of net profits to its MD or wholetime director and more than 10% of profits to all the executive directors put together. Companies which breach these limits need to obtain Central Government approval to make the payout. In FY17, the Nifty50 companies mentioned above, including the high-paying ones, used up only a fraction of these limits.
