In the 1970s, legendary chief executive of the car-maker Chrysler, Lee A. Iacocca, cut his annual salary to $1 as he looked to turn around the debt-laden company. Have top executives at India’s indebted companies done similarly as they struggled with their debt problems?
A Mint analysis of 313 firms based on data from Prime Database shows that top executive compensation growth was indeed slower for more indebted firms than they have been overall but the thrust of cost-cutting has fallen more on professional managers and rank-and-file workers than on owner-managers.
Top executive compensation refers to managing director and chief executive compensation in this analysis. Prime data was available over the last four years. The companies were divided into four quartiles based on their indebtedness. Banks and other financial companies were excluded.
Executives at the most indebted firms were paid between 1.28 basis points to 1.7 basis points of company net sales over the past four years. One basis point is one hundredth of a percentage point. The equivalent figures for the overall sample was significantly higher and ranged between 3.52 basis points to 5.06 points over the same period. The growth in compensation packages was lower for the more indebted firms over this period.
Pranav Haldea, managing director of Prime Database, said that the impact of the debt hangover has been felt more by professional managers than by owner-managers. The data bears this out.
The top debt quartile was further divided into companies headed by professionals, and those headed by promoters. The growth rate of professionals’ compensation lagged that of promoters’ even in the most indebted firms. Promoter salaries have risen 41.57% since 2013, compared to 32.75% for non-promoters.
Nirupama V. G.; managing director at recruitment firm Ad Astra Consultants, said that companies are looking at retention mechanisms to make sure they don’t lose key personnel. They are also making use of stock options and milestone–based variable payments. This makes sure that top executives have an incentive to achieve company goals, while not spending too much cash on compensation when the company is stressed.
“Obviously, the first thing you want to control is costs,” she said.
The compensation considered for this analysis includes basic pay, variable pay, benefits, perks, allowances, contribution to provident fund and gratuity, superannuation, leave encashment etc. For standardizing the remuneration data across different financial years/accounting periods of companies, remuneration figures for years other than an ‘April-March’ financial year have been adjusted on a pro-rata basis. The compensation data does not account for mergers, demergers, acquisitions or cross-holdings. Total remuneration earned by directors have been considered which comprise of salary, sitting fees, commission and any other payment (except remuneration earned from exercise of stock options since this is available only as number of shares, rather than an actual value).
The data show that the compensation of top executives have outpaced the overall employee compensation growth for the most indebted firms, suggesting that the top management of these companies was kinder on itself than on rank-and-file employees.
Nonetheless, both top employees and the rank-and-file employees at indebted firms saw slower compensation growth compared to peers. Sectors with low leverage ratios such as consumer and IT firms witnessed steadier pay rise compared to sectors with high leverage ratios such as real estate and materials. For instance, top executive compensation grew at a compounded annual growth rate of 28.01% and 24.98% for the information technology and consumption sectors, respectively, over the past four years. It grew at 5.46% for the materials sector and fell at an annual pace of 13.03% for the real estate sector over the same period. Overall compensation outlay has also witnessed muted growth in the indebted sectors.
Executives at indebted firms hit hard by the debt burden may perhaps want to take inspiration from Iacocca’s tale. The turnaround that Iacocca engineered caused the board to reinstate his salary a year later. He said that he would donate the amount to charity. A few years later, stock options in the company he received were worth $20.5 million. That helped him become the best paid CEO on the Forbes list for the year.
With inputs from Ravindra Sonavane
This is the concluding part of a four-part data journalism series on corporate debt in the country. The first part looked at the record asset sales of firms in 2016, the second part examined the leverage levels of small-cap firms, and the third part analyzed India’s corporate debt position relative to emerging market peers.