Prime Minister Manmohan Singh has been worried about runaway CEO salaries. But perhaps he ought to look at the salaries of those who are supposed to decide on the compensation.
Turns out, the remuneration of directors on the boards of India’s 500 largest companies has been rising far more rapidly than the growth of their companies’ net profits.
A Mint analysis of the top 500 listed companies in India by market capitalization, or those on the Bombay Stock Exchange’s 500 index, shows that while directors’ remuneration has risen at a compounded annual growth rate of 27.8% over 1996-2006, the net profit at these companies, adjusted for exceptional items, has increased at only 17.1%.
The trend gets even more acute at the largest companies. Firms that make up the Top 100 firms in terms of their market capitalization, or the BSE 100, saw their directors’ remuneration rising by 28.5% over the 1996-2006 period, while net profits of these companies rose 17.7%.
And it isn’t that the directors are getting paid more along with everyone else who works at these companies. Overall salary and wage increases at these companies trail well behind the rise in their director’s remuneration. For companies that make up the BSE 500, salaries went up by 14.9% between 1996 and 2006, sharply below the rates of growth for both director’s remuneration and net profits.
Even if a growing talent crunch has meant that the BSE 500 companies collectively reported a salary costs growth of 21.5% in 2005-06 on a net profit growth of 11.6%, the growth in directors’ remuneration continued to outpace salary growth in 2005-06 as well.
In sharp contrast, India’s per capita income at factor cost and at current prices increased by a compounded annual growth rate of just 9.5% between 1995-96 and 2004-05.
In other words, pay and perks for directors, who are supposed to be guiding managements at these companies and overseeing corporate governance, have increased far more than the rise in profits or how everyone else at their companies is paid.
“Companies often justify the rise in directors’ compensation by saying that companies are doing well because of them,” says Gautam Nayak, partner, Contractor, Nayak and Kishnadwala, chartered accountants. “But a company may do well because of so many other factors.”
The whole corporate compensation issue has become a hot button topic in recent weeks with the Prime Minister suggesting that top corporate executives should consider a cap on their remuneration and is being uniformly opposed by companies and executives of all hues.
To be sure, directors aren’t paid anywhere close to CEOs at many companies. Moreover, their compensation must be approved by shareholders, along with those of managing directors who are on the board, though many Indian companies have directors who are promoters and who typically own the majority of the voting shares.
“Compensation across the board is going up and directors are no exception,” says Anita Belani, country head at human resources consulting firm Watson Wyatt India. “Their role has changed and become broader as companies go global. These people are getting difficult to find and you have to pay a premium.”
Adds Ajit Ranade, chief economist, Aditya Birla group: “The market for directors is not like the market for, say, journalists. It’s much thinner and less liquid.”
Indeed, the rise in directors’ remuneration has accelerated in recent years. Directors’ salaries at BSE 500 companies as a proportion of net profits of these companies rose from 0.81% in 2003-04 to 0.94% in 2005-06. That is the last year for which data on directors’ compensation is available. Data for 2006-07 won’t be widely available until end of this year.
While hikes have been accelerating over the last seven-eight years, there needs to be a “balance between being competitive and excessive,” concedes Belani.
Going by the Section 309 of the Companies Act, which governs Indian corporations, directors’ remuneration consists of salaries, perks and commissions. Since 50% of the board must consist of independent directors, according to capital market watchdog Securities and Exchange Board of India regulations, the sitting fees of these directors plus other sums paid to them are also part of directors’ remuneration. Unlike in the US, stocks are not the major part of directors’ compensation packages in India.
“There is a history. If it has grown in the last 10 years, there is a catch-up,” says Kaushik Dutta, partner at assurance firm Price Waterhouse, who notes that Indian companies could not pay a lot earlier because there were limits on compensation.
Prashant Srivastava, country head of consulting firm Gallup India, adds that looking at the overall data can be misleading as it combines remuneration for professional CEOs and directors, with promoter CEOs and directors and it was the former group that needed to be better compensated.
While it won’t be clear for quite a while as to the more recent trends in directors’ compensation, a survey by Watson Wyatt projects that top management salaries in 2007 are projected to increase by 14.5% for the median firm for the general industry sector, while salaries for senior and middle management and for supervisors is projected to increase by 15% this year. Clerical staff, however, are likely to see only a 12.8% rise in their salaries.
Many HR consultants say that the rise in top management salaries is the result of market forces. Dutta of Price Waterhouse says the increase “has nothing to do with profits of a company, it is a demand-supply situation.”
Rajiv Kumar, director and chief executive of Delhi-based think tank Indian Council for Research on International Economic Relations, says that rising director compensation is the result of increasing convergence between Indian and global remuneration.
“This is a convergence that is expected in a globally competitive environment, especially in sectors that are open to competition,” says Kumar. “It also reflects the higher packages paid to returnees and expatriates.”
And, in defence of the Prime Minister, Kumar says that the criticism of compensation is “more about ostentatious consumption and not remuneration”. Remuneration, according to him, has to converge to international standards but does not have to give way to vulgar display.
DISTORTED GROWTH (Graphic)