Excessive executive pay must be held in check for India Inc’s sake | Mint

Excessive executive pay must be held in check for India Inc’s sake

Worldwide, it was noticed that after the 2008-09 financial crisis, unreasonably high pay was paid to the top executives of some financial institutions even though they were sinking.
Worldwide, it was noticed that after the 2008-09 financial crisis, unreasonably high pay was paid to the top executives of some financial institutions even though they were sinking.

Summary

  • Companies aiming for equitable and sustainable business growth should not try to game the rules on remuneration. The country’s cap on what publicly held businesses can pay should not be violated.

Excessive executive remuneration that is not linked with performance and does not satisfy transparency norms, disclosure rules and tenets of corporate governance is a problem prevalent in some sections of corporate India. While most companies do adhere to company laws, there are a few where a widening chasm between top pay cheques and median salaries causes tension, heartburn and low productivity, apart from being unsustainable and likely to invite legal challenges.

Instances of substantial remuneration awarded to top executives have been in the news, with a few recent cases, including one at Religare Enterprises (REL), raising eyebrows. Proxy Advisory Firm InGovern Research raised concerns, alleging a “vested interest" and regulatory breaches in the remuneration provided to REL’s chairperson; media reports refer to employee stock option programme (ESOP) benefits exceeding 480 crore doled out by REL and its health-insurance subsidiary CARE, in addition to other perks, despite their financial challenges. It has been alleged that ESOP shares of CARE were issued despite rejection by India’s insurance-sector regulator (bit.ly/3uWmkTp), which has raised questions on it. These allegations have been specifically denied by the firm. Similar instances involving companies like Amara Raja Batteries have also raised concerns about the urgency of reassessing compensation practices.

The issue is stark from the perspective of recent economic turmoil globally caused by the pandemic. This upheaval resulted in distress for junior managers and working classes, as layoffs were part of cost-cutting plans. While enlightened managements took care to design benign and productive remuneration policies for sustainable value creation, there are several other companies where senior executives at the C-suite level took hefty pay cheques and benefits, some of them several hundred times their staff’s median salaries.

Worldwide too, it was noticed that after the 2008-09 financial crisis, unreasonably high pay (unlinked with company performance) was paid to the top executives of some financial institutions even though they were sinking. In fact, some questionable practices adopted by them to increase the value of their ESOPs was among the root causes of that contagion.

According to the 2005 Report of the Expert Committee on Company Law under J.J. Irani as the panel’s chair, executive remuneration should be transparent and based on principles that ensure fairness, reasonableness and accountability. In India, pay is governed by the Companies Act of 2013 and the Securities and Exchange Board of India (Sebi). The remuneration of senior executives is covered by Section 278 of the Companies Act, typically a combination of fixed salary, incentives linked to individual and organizational performance, and stock-linked incentives. Section 197 of the same law caps the compensation paid by a publicly held company (or a subsidiary of one): It should be less than 11% of the company’s net profit in that particular part of the year, unless a higher level is approved by shareholders in a general meeting. This pay should be “for performance" and value creation for shareholders. The role of the remuneration committee is important in this regard.

While legal provisions exist, there is a need for stringent enforcement to ensure transparency and regulatory compliance. In India, the Companies Act imposes penalties for overcompensation, with a fine of 5 lakh on the errant company and 1 lakh on the concerned top manager. There has also been a debate on possibly introducing higher taxes to be levied on companies that fail to meet established norms.

It is noteworthy that shareholders wield significant influence in shaping corporate decisions, including executive remuneration. For example, shareholders at Sobha, Kinetic Engineering, and Balaji Telefilms have exercised their power by rejecting proposals to increase CEO remuneration beyond permissible limits. In March this year, public shareholders of Max Financial Services rejected a special resolution that proposed an annual remuneration package of 3 crore for its chairperson in 2023-24. Around 63% of institutional investors and 99% of retail investors voted against thar resolution. In April, shareholders rejected a proposal that would have allowed remuneration to a non-executive director and chairperson in excess of half the total annual sum payable to all non-executive directors and chairperson this fiscal year.

This underscores the importance of shareholder activism in holding businesses accountable for executive compensation practices. To take charge, boards should design transparent management pay-package policies for sustainable value creation and preservation. Companies could undertake a benchmarking study of pay packages at similarly placed firms, so as to stay broadly within the same range.

As we face the complexities of rapid economic growth, companies must not only comply responsibly with the rules, but also foster a culture of transparency. This will add to shareholder value on a dynamic basis and help ensure a healthy, equitable and sustainably growth-oriented work environment.

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