Rising salaries of Indian CEOs are a healthy trend
Indian CEOs’ pay cheques may have been increasing exponentially, but underperforming PSUs continue to be badly served because of disparity in salaries
Latest News »
- Bharti Infratel Q1 consolidated profit falls 12%
- World oil demand could peak in 2024 on higher vehicle efficiency: Goldman Sachs report
- After five decades in politics, President Pranab Mukherjee says ‘Nomoshkar’ to private life
- Opposition boycotts UP Assembly, holds parallel ‘House’
- IT start-up employees are entitled to labour law benefits, says government
It pays to be the chief executive of a top Indian company. Salaries of India’s corporate bosses are soaring, according to an analysis by news agency PTI of what Indian CEOs of top Sensex companies made for the financial year 2015-16. What’s more their salaries have shown an exponential rise over the last two years. The numbers include salaries, commissions, allowances, value of all perquisites and ESOPs (employee stock ownership plans) exercised during the year, among other benefits disclosed by the companies as part of their total remuneration.
While the analysis looks at only 20 of the top listed companies, if it is a trend across all listed companies, it is a very healthy sign of a robust corporate culture. Regardless of what critics say, rising salaries at the top almost always lead to an equivalent downward percolation, besides enforcing stringent performance goals. If you were making Rs.20 crore a year, chances are you would work pretty hard to protect that package.
Of course, such rising salaries in India will push to the fore the vexed issue of the ratio of CEO pay to the median salary for all other employees in the company. But last year, when capital markets regulator Securities and Exchange Board of India (Sebi) first floated the idea that firms need to put out pay disparity numbers, it didn’t cause too much excitement. In any case, given the logistics of comparing numbers across sectors and stages, it is unlikely to go too far. The era of high salaries for the men and women at the top is here and we are better for it.
That apart, there are four clear trends emerging from the analysis.
Firstly, CEO salaries are on a tear even though corporate profits haven’t kept pace. A 100% rise in average CEO salaries over the last two years, against a backdrop of more or less stagnant profit growth in the same period, implies that companies and remuneration committees believe that a good CEO can make a massive difference to a company’s fortunes. Which is why Tata Motors is paying top dollar salary to its new CEO and managing director Guenter Butschek in an effort to lift the company out of its poor run over the last so many years.
Secondly, in a most heartening development, professional CEOs are now being paid more than family heads at several companies. The two highest paid CEOs in India are both professionals—A.M. Naik of L&T and Vishal Sikka of Infosys. Naik for what he has achieved in the last 18 years at the helm of the engineering giant and Sikka for the promise of what he could do with the erstwhile IT industry bellwether that has been struggling somewhat for growth. By contrast, Gautam Adani was paid Rs.2.8 crore as chairman and managing director at Adani Ports and SEZ, while his son Karan Adani, who was appointed CEO with effect from 1 January 2016 did not draw any remuneration for the year. Compare that with the Rs.10.7 crore that whole-time director Malay Mahadevia got at the same company.
Such a disparity is in tune with a healthy market-driven corporate structure since owners should logically earn their returns as investors rather than as executives. It also follows from the greater dispersion of holdings in public limited companies. As the percentage holding of owners goes down, professional CEOs are more empowered to write their own salary slips as also those of other senior executives.
The exceptions are where the family owner is also the effective CEO. Given the performance of their companies and their personal contribution to that performance, few will grudge Sunil Mittal or Mukesh Ambani or Pawan Munjal their hefty pay cheques. It is also a far cry from the days when owners would show low salaries but pull out cash from their companies through various devious means.
Thirdly, average Indian CEO salaries, even at these elevated levels, are still some distance from those in the US. The good news is that even though the Rs.20 crore that Indian CEOs get on an average is still a sixth of average US CEO salaries of around $20 million, there is a narrowing of the gap. While US salaries have shown a decline in the last couple of years, those in India are shooting up. That’s a great trend and means that India could soon present a lucrative opportunity for global CEOs, particularly since in most developed markets high CEO salaries are increasingly coming under pressure. Reuters just reported a survey by the High Pay Centre that said the average FTSE 100 chief executive’s pay package hit £5.48 million in 2015, up from £4.96 million in 2014. This has already led to a clamour in the country for a cap on salaries of top CEOs.
But high CEO salaries in competitive markets like India have another and more devious objective. The high salaries paid to CEOs who have been around for a while are also a hedge against the kind of market cap erosion a company is likely to face if he or she were to leave. Thus, Sikka’s high salary isn’t a fraction of how much market value would be wiped out were he to step down today. Markets hate shocks of this kind and so companies would rather overpay to prevent sudden movements. That risk is multiplied manifold when it comes to really long-serving CEOs like Naik or Yogi Deveshwar of ITC Ltd.
The fourth and most worrisome trend from the PTI analysis is the huge gap between salaries of public sector CEOs and their private sector counterparts. At Rs.31.1 lakh, the salary of Arundhati Bhattacharya, chairperson of State Bank of India, India’s largest bank, pales in comparison with that of Shikha Sharma of Axis Bank who took home Rs.5.5 crore. Given that large swathes of the Indian economy are still in the domain of the public sector, this disparity will continue to keep the best talent out. Which means underperforming PSUs will continue to be badly served.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.