Promoter-CEOs take it all

C-suite salaries need to take a governance test

India Inc has been generous in rewarding its top managers. In 2015-16, C-suite remuneration of the top 115 private sector companies went up by 30 per cent, growing at the fastest pace in the last nine years. These companies paid one per cent of their reported net profit as remuneration to board members, up from 0.84 per cent in 2014-15. And in the last five years, the pay at the board level has grown at a compounded annual rate of nearly 16 per cent, which is two-and-a-half times more than the net profit growth of 6.2 per cent. India Inc has often argued that the high salary at the top is because the demand for CEO talent far outstrips supply and the availability of leadership talent in India is very low compared with mature markets.

But this argument does not inspire much confidence, as data show that there were only two professional CEOs among the 10 highest-paid executives in 2015-16. Promoter-CEOs taking home much larger pay cheques than their professional counterparts does not speak for good corporate governance, as it has been argued that promoters should largely earn through equity dividends from their companies so that their financial interest is fully aligned with that of minority shareholders. A disproportionately large pay cheque for promoter-CEOs and their family members who sit on the boards eats into the surplus available for distribution (by way of dividend) to shareholders. This is more rampant in mid-size firms. Several of these companies paid more to their promoter-CEOs or directors by way of salary and perquisites than what they earned as equity dividends. Back of the envelope calculations show that some promoters walked away with nearly two-thirds of the distributable surplus last year, leaving that much less for minority shareholders.

The big gulf between top management salaries and the financial performance of companies is yet another problem area. Corporate governance firms have been vocal about linking pay to the performance of the CEOs or directors rather than to the pedigree. In several instances, they have opposed higher pay packages to promoters, their children and relatives, often discriminating against much more qualified professionals. Also, most of them recommend that remuneration packages of directors should have a higher variable component. There is enough evidence on how top executives still insist on at least 70 per cent fixed pay and fewer performance-linked benefits. And companies are giving in to these demands.

Though disclosure requirements have improved with the new Companies Act mandating disclosure of the ratio of directors' pay to the median employee salary, there is scope for further granularity in disclosures. For example, companies in the developed countries elaborately discuss the milestones achieved in filings about the remuneration of top managers. The moot point is that India Inc should not have any problem in more disclosures regarding pay since no one can argue in favour of a skewed and non-transparent remuneration process. Impressions about unfair compensation practices by India Inc are also gaining ground thanks to recent revelations that India has the widest gap between salaries of CEOs and entry-level graduates. Research studies have shown that in India, a CEO's compensation is on an average 600 times the minimum wage earned by an entry-level employee. The US comes second with a 423 times difference, while in China, the ratio is 268 times. It may be time for some introspection.