The rumble over CEO pay

Eicher Motors board must resolve the crisis quickly

Shareholder activism was in full display last week when three companies faced public embarrassment for failing to show enough accountability for major decisions. While institutional shareholders of pharmaceutical major Lupin rejected a proposal to grant six million stock options to employees, Vedanta’s shareholders voted against the reappointment of a director for three years and the proposal sailed through only on the backing of the promoter group. The third example of shareholders asking for enough justification before they supported annual general meeting resolutions came when institutional shareholders of Eicher Motors rejected a special resolution to reappoint Siddhartha Lal as managing director (MD). What was interesting was that Eicher’s shareholders were not against Mr Lal’s continuance as director (that proposal was passed by an overwhelming majority), and the main reason for their angst was the proposed 10 per cent increase in his compensation at a time when the median salary moved up by just 1 per cent. Sales of Eicher Motors’ Royal Enfield motorcycles have remained subdued in the last three financial years. Due to softening sales and an increase in input costs, the company’s operating performance has also taken a beating in the past few quarters.
 

An increase in the MD’s salary at this point was thus a bad idea — at least optically, and it was strange that the company’s board of directors ignored the negative perception of such a proposal. The board, specially the compensation committee, should have been mindful of the fact that several such proposals by other companies in the past had been rejected by shareholders. For example, in 2018, Neeraj Kanwar, promoter of Apollo Tyres, was forced to take a salary cut of around 30 per cent after minority shareholders rejected his appointment as MD as a result of a subdued financial performance of the company. Before that, Tata Motors had to drop salary hike proposals of three of its executive directors because of the company’s indifferent financial performance. There have been many other such instances.

The issue of high chief executive officer (CEO) pay has remained a highly emotive issue all over the world and particularly in countries like India, where the divergent fortunes of CEOs and everyday workers have often been cited to illustrate the sharp divides in a nation racked by steep income inequality. The pandemic has aggravated these disparities. In such a scenario, it’s quite natural for shareholders to want executive remuneration to be linked to company profitability. While corporate leaders such as N R Narayana Murthy have always advocated that CEO remuneration should not exceed 20 to 25 times the average employee’s salary, the fact is that the average Indian CEO earns almost 150 times what the average entry-level executive makes. While it is nobody’s case that management salaries need to be further restricted by law, companies must come to terms with the fact that they need to make transparent disclosures for all forms of executive compensation. In short, shareholders need to know the reasons that lead to the choices a company makes. The voting pattern in Mr Lal’s case suggested that shareholders were not against his continuance as MD but voted down the resolution because of the remuneration hike proposal. Eicher’s board of directors must quickly meet to review the compensation increase in order to resolve the self-inflicted crisis. After all, in most cases, CEO pay is a question not of what is legal but of what is right.