It's great time to be a CEO! Compensation outpaces profits, total wage bill

Corporate chiefs have seen their earnings rise at an annualised 18.3% against net profit growth of 13% over the past three years, while overall salaries have gone up 10%

It’s a great time to be a chief executive officer in India. The compensation for top management in corporate India is now growing in high-double digits, and is now the fastest growing cost head for most companies. 

The combined compensation of corporate India’s top CEOs, including promoter directors and professional board level executives, was up 20.4 per cent year-on-year (YoY) in FY18, against a 13 per cent growth in the previous year. 

In comparison, companies’ combined salary and wage bill was up just 7.8 per cent in FY18, growing at the slowest pace in the last three years. The other big cost head — interest on corporate borrowings — was up 15.8 per cent YoY (excluding banks and financials) last fiscal year.

In the last three years, CEOs’ combined compensation has expanded at a compound annual growth rate (CAGR) of 18.3 per cent, against 13.3 per cent growth in corporate earnings, 4.8 per cent CAGR in net sales and 10.1 per cent annual rise in the total salary and wages bill. 

A disproportionate growth in executive compensation has raised eyebrows in the analyst community. “Our study shows that executive compensation is running ahead of profits and companies should bring it in line with their other financial parameters,” said Amit Tandon, founder and MD, Institutional Investor Advisory Services (IiAS), a proxy advisory firm. 

He said there was some justification for a hike in CEOs’ compensation in line with improvement in corporate profitability, but the top management seems to be walking away with the biggest pie, leaving little for others. “The numbers show ‘winner-takes-it-all’ in executive compensation against the collegial system in the past where responsibility and rewards were shared across a wider base,” added Tandon. 

Quick facts

• 8 out of ten 10 earners in 2018 are promoter CEOs
   
• Mid-sized and small companies more generous in rewarding CEOs vs big companies
   
• Commodity producers and manufacturers saw a faster growth in CEO salaries than tech and financials 
   
• Among major industrial groups Mahindra tops the charts, thanks to big ESOPs granted to Tech Mahindra's top management
   
• Top-dollar CEO salary could be a drag for many mid and small size companies, which was 10 per cent or more of their profits in FY18

The analysis is based on financial data of a common sample of 172 listed companies, where the compensation of executives or board members was Rs 10 million or more in FY18. 

The combined net profit (adjusted for exceptional gains and losses) of the sample companies was up 17.8 per cent in FY18, against 12.2 per cent a year before.

Experts also attribute the recent surge in CEO compensation to dominance of family and promoter-driven companies in India. “As promoters have few avenues to make big money other than their companies, they seem to maximise their earnings by taking a significant portion of companies’ profits as commissions,” said an analyst on condition of anonymity.

There is some merit in this argument. Eight of the top ten earnings CEOs in 2018 were promoters, and that too of mid-sized firms. 

Critics also say many promoters take credit (or earn rewards) for profitable events where they play no role. “Most commodity companies have witnessed a big jump in their profits in last two years due to spike in their product prices, with no additional effort by their CEOs. 

But their CEOs have seen a big jump in compensation for the period,” said G Chokkalingam, founder and MD of Equinomics Research & Advisory Services.

There was no noticeable improvement in the quality of corporate earnings last year either. Companies earned 14.7 per cent on their net worth or shareholder’s equity in the last fiscal, marginally up from 14.5 per cent a year ago but down from 15.3 per cent in FY15. 

CEOs don’t seem to be taking big bets on new projects either. The combined fixed assets (excluding banks and financials) for the sample companies are up 10 per cent YoY last fiscal, down from 13.6 per cent growth a year ago.

Not surprisingly, analysts question the way firms and their board of directors reward the top management. 

“Variable pay is a significant part of CEOs’ compensation and it moves with changes in companies’ profits, but every few years CEOs get their basic salary (or fixed component) revised upwards. As a result, their compensation is always running ahead of corporate profitability,” says Tandon.

According to him, the numbers also raises red flags over the growing inequality in corporate India. “The ratio of CEOs’ compensation to median salary continues to grow for most companies in India, highlighting the issue of growing inequality in corporate India,” he adds.

In all, the companies in the Business Standard sample spent Rs 32.5 billion on CEO compensation in FY18, up from Rs 27 billion a year ago. The amount was equivalent to 1.1 per cent of companies’ total net profits last year, up from 1 per cent a year and a four-year high. Many mid and small-sized companies spend a much larger proportion of their profits on rewarding their leadership. 

For example, CEOs’ salary was equivalent to 15.7 per cent of Sun TV Network’s net profit last year. Other big payers include Apollo Tyres (12.1 per cent of net profit), Amara Raja Batteries (13.4 per cent) and Balkrishna Industries (9.1 per cent). 

Among large companies, Tech Mahindra was the most generous with its leadership and its CEO’s salary was equivalent to 5.1 per cent of the company’s net profit in FY18, followed by Larsen & Toubro at 2.4 per cent and Hero MotoCorp at 2.3 per cent. Reliance Industries — the country’s top company in the private sector by revenues — was at the bottom of the list as it spent only 0.2 per cent of its profits on CEO compensation in the last fiscal year.