Rewarding good work and recognising employees’ aspirations will drive performance and growth in the corporate world. The best example of this was set by the corporates in the U.S. in the post-Second World War era. Perhaps they went overboard and the after-effects are manifest now with income disparity becoming more acute. Practices such as huge increase in the ratio of variable pay to fixed salary, total reward, retention bonuses, joining bonuses, parachute clause for CEOs became the order of the day.
Indian corporates are greatly influenced by the American style of management, including compensation practices. The recent episodes in a couple of big and reputed corporates in India are prompting many to re-think the kind of compensation strategy that would be ideal for Indian corporates. Should it be more socialistic, as prevalent in Scandinavian, some European and Japanese companies? Should there be some law to govern the salary differentials? Why should different functions such as Finance be remunerated substantially higher for equivalent educational degree holders and similar efforts by individuals in other functions?
Bloomberg reports that in the U.S., the CEO-to-worker compensation ratio has increased almost 1000% since 1950. Today, Fortune 500 CEOs make 204 times the median regular worker on an average. The ratio is up from 120 to 1 in 2000, 42 to 1 in 1980 and 20 to 1 in 1950 according to this report.
In India, according to Business Standard (July 2017), CEOs earn up to 1,200 times more than the average employees. Securities and Exchange Board of India regulations require listed companies to annually disclose various remuneration levels to help investors know about compensation practices in the firms in which they have invested. The list of ‘fat-cats’ is growing every year in India despite the need for approval from company boards, remuneration committees and shareholders. However, in public sector companies it is a different scenario with their CEOs generally getting only three to four times of their median employees’ remuneration, according to the same publication.
Yet, corporate redundancy policies have the employees as the first victims and the top bosses continue to stay. Downsizing starts at the lower levels. In what could be a welcome change, the insolvency code could make it incumbent on defaulting industrialists to exit if their companies become financially sick and are declared insolvent.
Business is for profits and the spirit of entrepreneurship and driving high performance are encouraged in a capitalistic environment. Also, in a democratic country like India, perceived fairness in the distribution of earnings or wealth is crucial to hold the fabric of its society, be it the citizens of the country or employees of a corporation. The evolution of compensation practices in India over the last five decades demonstrates the changes that have taken place. Until three decades ago, salaries were capped and perks became the ‘hot’ items. The senior management of big companies had huge perks — palatial houses, bonuses, car with driver, club memberships, servant allowance, soft furnishing allowance, hard furnishing allowance, entertainment allowance, holiday homes and so on. However, taking salary alone minus the perks, the ratio was about 1 to 4 between the CEO and the worker. There was no concept called CTC (cost to company) or total reward.
Post-liberalisation, the scene started changing rapidly. From the early 1990s, salaries shot up, stock options were introduced, and variable pay and bonuses sky-rocketed for those in senior management. Businesses boomed and compensation management became a key function of the Human Resources Department. Like many other practices, all that was done in U.S. ‘yesterday’ was modified and adapted by the Indian corporates. Salary surveys and data appearing in leading media publications triggered a rat race. During their heyday, IT and ITES companies led the way, making it extremely tough for others especially, the ‘manufacturing’ sector, to match their salaries.
Compensation, like any other practice, is market-driven. Those who can pay will pay, to beat competition, and those who can’t will float or perish. Merely copying or using ‘cut and paste’ methodology will not work. India has a diverse population, a growing middle class, a large ratio of BPLs (those Below Poverty Line), growing unemployment and a fair pool of billionaires. Despite the inequities, many will have their own reasons for holding different views; like CEOs’ jobs are highly demanding with very high risks, salaries should be market- driven and so on.
Solutions?
Could there be a maximum limit based on factors such as revenue, profits, number of employees and so on, with a proviso for more share of profits to the CEOs? Some European countries including Germany have a concept called codetermination, to ensure the workers’ right to participate in the management of companies; mandating workers to elect and represent them on the board of directors. Will this work for us? In Japan, seniority is highly respected. A boss’s advice is supreme. The success of Japanese industries is driven by their quality products and processes and not by quarterly financial numbers and extravagant marketing; salary differentials are kept low.
A debate at the highest levels amongst the corporates under the aegis of the leading industry associations is needed and the recommendations should be made for a well-thought-through national compensation policy. The onus lies with the government, corporates and compensation experts. There is an old dictum in compensation, ‘pay enough to excite but never overpay’. This holds true even today.
