Sikka's good reason clause global practice; Infy disclosure norms not good

Officially, out of Sikka's $11 million salary, $8 million is variable pay

Infosys Chief Executive Officer Vishal Sikka will be able to take 90 per cent of his annual compensation, or nearly $10 million, if he wishes to exercise a clause in his employment contract. This clause is a global practice, analysts say. However, Infosys' selective disclosure about this clause to the US Securities and Exchanges Commission and Indian stock exchanges last year, according to analysts, violates good corporate governance practice.

Though Infosys has notified to the stock exchanges that Sikka’s salary might fall to $3 million from $11 million if performance targets set by the board are not met, the “good reason” clause permits him to terminate his job if the salary reduces by more than 10 per cent or goes below $10 million. Officially, out of Sikka’s $11 million salary, $8 million is variable.  

“As far as he (Sikka) is concerned, the company has something like a watertight contract. Such compensation clauses are not prevalent in India and may be common globally. But the disclosure on this was made to USSEC and not Indian exchanges,” says Shriram Subramaniam, founder and managing director of InGovern Research, a proxy advisory firm.

“Clauses are in favour of Vishal Sikka, irrespective of Infosys performance. So, (founder N R Narayana) Murthy has his angst and some of it is valid,” he said.

The Mint newspaper reported this development first on Tuesday.

Murthy has accused the company of poor corporate governance practice -- in the light of Sikka’s employment contract being selectively disclosed -- saying the board should be accountable for lapses in disclosure norms. 

Last week, Murthy had raised concerns over a substantial pay hike being given to chief operating officer Pravin Rao, at a time when both the company and the IT services industry were performing poorly. Murthy had asked Rao, part of the company for three decades, to re-consider before accepting a “steep” hike when the company was not seeing adequate growth. 

Analysts say even if such clauses are not prevalent in the Indian context, they are common globally and in the US.

“A good reason clause is common globally. Some Indian IT services firms usually give assurance of compensation through a bonus component. For Infosys, Sikka is the first non-founder CEO, so the company has made employment agreement with globally comparable benefits,” said Kris Lakshmikanth, chairman & managing director, The Head Hunters India.

He believes it may not be right to put Sikka in the same league as founders, since they were happy with lower pay and dividends, unlike a professional chief executive.

Sikka claimed that he improved the performance of India’s second-largest software exporter and brought it on a par with industry peers during his two-and-a-half years at the helm.

“Despite the challenging environment in last nine months, we have maintained (our) operating margins (near 24 per cent). We had a relative revenue performance compared to broad industry in the past 2.5 years and it was relatively below when I took over. In the past seven quarters, our utilisation has gone up by 80 per cent,” said Sikka at a recent press conference.

A former Infosys employee, who declined to be named, said he was not surprised to know about such a clause. “Employment contracts with CEOs usually have certain additional benefits and flexible clauses. While some of the benefits are variable and performance-linked, companies often offer a CEO different assurance for wealth creation. Therefore, the good reason clause for Sikka is not unusual.”

In fact, Sikka’s agreement with Infosys assures him of 24 months’ base pay as severance package.