This weekend, corporate affairs minister Salman Khursheed described CEO salaries as a “vulgarity”. “I think when we are working on this (austerity), we can hardly say that we (will) shut our eyes on what salary the CEOs are going to take.” If this wasn’t ominous enough, Montek S. Ahluwalia, deputy chairman of the Planning Commission, echoed these thoughts on Monday.
The United Progressive Alliance (UPA) must be thinking of making “austerity” its next election slogan. After making sure its ministers and parliamentarians aren’t living in hotels or twittering, it has now set its sights on the private sector. In the government’s attempts to impose austerity on company executives, it’s forgetting it already does so.
In an ideal free market, what executives earn should be a matter strictly between them and the company’s shareholders. But India’s never had an ideal free market. Two decades ago, the government used to regulate how many widgets a factory produced, not just how many rupees a CEO could earn.
Illustration: Jayachandran / Mint
First, the government still retains control over executive pay, even if liberalization has made it relinquish control over a factory’s units of production. The 1956 Companies Act sets limits on managerial pay as a percentage of net profits. One could actually argue that existing limits have done harm: Smaller or not-so-profitable companies can’t attract talent with higher pay.
Second, any stricter regulations are sure to trigger unintended effects. With Indian companies competing globally, shareholders will try their best to retain or attract managers. If firms can’t pay large salaries, they will resort to stock options or alternative perquisites. Stock options haven’t been popular so far—this is a developing country where cash is still king—but what if government arm-twisting makes them prevalent?
Third, this issue comes against the backdrop of a financial crisis where the allure of short-term profits made management at Western banks blind towards risks. But that’s a Western problem: The Reserve Bank of India already looks into what bank executives earn. And if the UPA’s populism extends beyond the financial sector, it’s worth remembering an ordinary auto or steel company doesn’t pose the same systemic risk as a large bank.
Fourth, disclosure is a better way to deal with “vulgar” pay. Except that listed companies in India already disclose compensation in annual reports.
The best check remains a company’s shareholders. But instead of encouraging shareholder activism, the UPA is busy playing the demagogue.
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