Salaries rise for promoters of auto firms even as business faces headwinds

Experts suggest that promoter executives should take compensation as dividend to share risk and reward of the business with other shareholders

Despite a forgettable year for the automobile industry, promoters, who act as top executives in their companies, gave themselves a healthy raise in FY21.

The promoter-executives took home a fatter paycheque despite their companies’ fortunes dwindling due to the impact of the Coronavirus (Covid-19) pandemic which also led to lower growth or stagnant salaries of other employees.

In FY21, the automobile industry saw significant disruptions triggered by Covid-19 which restricted production and customer movement. Despite resumption of business, vehicle sales are facing challenges due to rampant job losses and increase in raw material cost.

Last week, institutional shareholders of Eicher Motors voted against the re-appointment of Siddhartha Lal as the managing director protesting the proposal to raise his salary by 10 per cent.

Shareholders were against the quantum of salary hike for Lal, considering that the company's revenues and profit growth had been hit by the Covid-19 pandemic.

“Ideally promoters should take their compensation in the form of dividend and not as a cash component, as they should be ready to share the risk or rewards with other shareholders,” said Sriram Subramanian, managing director of proxy advisory firm InGovern.

The salary gap between the top paid promoter-executives and other employees also increased significantly as seen from the median remuneration-indicating that the average salary paid to the employees of these companies was either lower, or remained stagnant in FY21 as compared to FY20.

Median remuneration means that half the employees in the organisation make less than the amount, while the other half makes more.

Pawan Munjal, chairman and managing director of Hero MotoCorp, leads the pack among automobile CEOs. Munjal, who is also the promoter of India’s largest two-wheeler maker, saw his pay package rise 2.77 per cent in FY21 to Rs 86.93 crore, making him one of the top paid CEOs in India Inc.

The gap between Munjal’s salary and that of an average Hero employee also increased as his salary was 826 times higher than the median salary as compared to 752 times in FY20.

While Munjal remains one of the highest-paid executives in corporate India, his company, Hero MotoCorp, recorded a drop in profit like most of its peers due to the impact of Covid-19. The company’s Profit Before Tax (PBT) in FY21 fell by 14.72 per cent year-on-year.

Promoter CEOs are not only paid a salary, but also get crores of rupees every year in the form of dividends. Take the case of the Munjal family. With a 34.76 per cent stake, they received over Rs 700 crore in dividend last fiscal.

Similarly, Rajiv Bajaj-who acts as managing director of Bajaj Auto-also saw his pay package grow in FY21. The 54-year-old’s remuneration grew 1.62 per cent to Rs 40.5 crore last year from Rs 39.86 crore in FY20.

Bajaj, who holds 754,200 shares of the company, also earned around Rs 10.55 crore from dividend which was fixed at Rs 140 per share for FY21.

Other top executives of the firm - Executive Director Rakesh Sharma and CFO Soumen Ray  - also saw their salaries rise significantly by 10.6 per cent and 26 per cent, respectively.

For an average Bajaj employee, the salary increased by 1.36 per cent in FY21. Heavily impacted by the lockdown, the company saw its profitability decrease by 9.7 per cent, but decided against a salary cut despite announcing a pay cut of 10 per cent in April 2020.

Venu Srinivasan of TVS Motors has been an outlier whose salary was reduced by 2 per cent in FY21 while average salary of an employee of the company went up by 2 per cent. The 67-year-old patriarch of the TVS Group in FY20 too, had taken a voluntary pay cut with his remuneration going down by 22 per cent.

In contrast to promoter driven companies, management-led companies in the automobile sector were more mindful about pay hikes to top bosses. For instance, the managing director of India’s largest carmaker, Maruti Suzuki, Kenichi Ayukawa, got paid 10 per cent less than what he got in FY20. The median salary for Ayukawa and an average Maruti employee is also healthier than the company’s peers at around 1:34.

In 2019, Maruti Chairman RC Bhargava in an interview said that companies should desist from paying obscene salaries to MDs or CEOs. He said that an MD should be paid a maximum of 15-20 times the salary of an ordinary worker who has spent the same number of years in the company.

Proxy advisory firms have been vocal about high salary payouts to top executives which is not in line with the business performance of those companies. This has reflected in the voting pattern of institutional investors in recent annual general meetings.

More than 61 per cent of institutional shareholders on April 12, voted against a resolution to grant stock options to IndiGo CEO Ronojoy Dutta. However, the resolution was passed due to support from promoters who hold a 75 per cent stake in the company. IndiGo, India’s largest airline, has been severely hit by the Covid-19 pandemic and reported its highest-ever quarterly loss of Rs 3,180.2 crore during Q1FY22.

Similarly on August 4, 77 per cent institutional investors voted against an ordinary resolution for fixing Pawan Munjal’s remuneration for the next five years.

In another case of big shareholders pushing back against remuneration to a promoter executive, more than half of Bajaj Auto's institutional shareholders voted against an ordinary resolution to provide housing, gas, electricity, car driver, cost of medical treatment up to Rs 3 crore per year to Rahul Bajaj who resigned as chairman, but was appointed as chairman emeritus of the company for five years.

Amit Tandon, founder and managing director of IiAS, which had advised to vote against all these resolutions, said that institutional investors were becoming more focused about remuneration issues as they realised that they had stewardship responsibilities which should be fulfilled through voting.

“Such outcomes show that investors are not voting with their eyes closed anymore and investor votes have the potential to become a deterrent and act as a check,” Tandon said.