What corporate salaries tell us about income inequality in India
Mumbai: We are the 99%”, was the rallying cry of the Occupy Wall Street movement that rocked the US in 2011.
The movement was a response to worsening inequality in the US and the continued prosperity of the top 1%. Such resentment does not seem misplaced when one considers the fact that chief executive officers (CEOs) of America’s 350 largest firms earned 271 times than what the average worker earned in 2016, according to the Washington-based Economic Policy Institutes. The rise of populist politics in the US has often been attributed to a backlash against such inequality.
How do top corporate salaries in India compare with those in the US?
Data from company annual reports compiled by Prime Database shows that the average Indian top executive earned 88 times than what the average worker earned in fiscal year 2017.
The corporate pay gap thus seems relatively lower in India compared to the US.
Yet, the data on top salaries point to a worrying trend—the rise in top executive salaries over the past few years has outpaced growth in the overall compensation outlay of their companies, pointing to rising inequality within Indian corporate entities.
The analysis of top executive salaries is based on data for 336 companies belonging to the BSE-500 universe.
The BSE-500 index accounts for 93.5% of market capitalization on the bourse.
Prime Database has provided a list of top executives and their compensation for each year since 2012-13.
This analysis considered the highest paid executive for every company from this list, even if that person had a designation other than that of CEO (say, managing director or MD) in the firm.
The term CEO has therefore been used generically in this analysis to include both CEOs and executives such as MDs.
In absolute terms, India’s highest paid executives include Hero MotoCorp Ltd’s Pawan Kant Munjal; Divi’s Laboratories Ltd’s Murali Krishna Prasad Divi; and Apollo Tyres Ltd’s Onkar Singh Kanwar.
The table below shows the top 10 list for 2016-17. Top executive compensation includes salary, sitting fees and commissions.
In terms of the relative difference between the median employee and the highest paid executive, Tech Mahindra Ltd’s C.P. Gurnani leads the pack. Gurnani earned 3,537 times what the median employee in the company earned.
The widest pay gap is in the consumer staples sector.
The median company in the sector paid its top executive 138.4 times the median employee.
It is followed closely by the consumer discretionary sector, where the top-to-median compensation gap is 126 times.
The analysis of CEO-median pay ratio is based on a smaller sample of 236 companies, for which both CEO and median salary data are available.
The consumer staples and consumer discretionary sectors have also been performing well over the past few years, having witnessed robust growth in sales. This has perhaps allowed the highest paid executives to get away with hefty pay hikes.
Apart from sectors such as information technology and telecom, where top executive compensation has outpaced sales growth by a wide margin, there seems to be a broad linear relationship between sales growth and growth in top executive compensation across most sectors.
Does that mean top compensation is always linked to performance? Not necessarily, as an analysis of stressed firms show.
The median compensation to the CEO in a company that was unable to meet its interest payments rose faster than the median pay for a CEO in a company that could meet interest payments over the past few years, data shows.
Firms not able to meet interest payments are those whose interest coverage ratio (ICR) is less than one.
The median pay to the top executive at a stressed firm (ICR<1) was Rs3.76 crore in 2016-17, higher than the median pay to the top executive at firms able to meet interest obligations (Rs3.47 crore). This comparison excludes banks and financial firms.
The annual rate of growth in the median pay of top executives at stressed firms (24%) was much higher than that of the top executives at less indebted firms (15%), the data shows.
The overall compensation growth in stressed firms over the same period was 8% while that among the less indebted firms was 15%.
The burden of cost-cutting in stressed companies seems to have fallen on the shoulders of the average employee even as the top executives have been taking home ever-higher salaries.
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