Opinion
Promoters’ salaries are only part of what they take home
Summary
- Reports about promoters taking large salary cuts during tough times make for good press, but they have other ways of paying themselves, such as dividends and stock options
Reports that Wipro chairman Rishad Premji’s compensation has been reduced have been doing the rounds, suggesting that the cut is due to difficult economic conditions. While it is true in this instance, the salary component of promoters’ compensation is often almost irrelevant as they can easily find other ways to pay themselves and their most valued employees.
Premji received $951,353 (about ₹7.9 crore) in salary in FY23, compared with nearly $1.82 million in FY22. Ignoring currency swings, this cut was indeed due to Wipro’s disappointing performance. Premji is entitled to commission at the rate of 0.35% on the incremental consolidated net profit of Wipro over the previous fiscal. But Wipro saw profit shrink by 0.4% in FY23 and that meant no commission for Premji.
However, he is of course, a member of the Premji family, which holds over 400 crore Wipro shares for a 72.9% stake in the company. His personal holdings amount to 1,738,057 shares and Wipro paid a dividend of ₹1 per share for FY23. (A dividend of ₹5 that Wipro paid in April 2022 was actually declared as dividend for FY22). That’s ₹17.38 lakh more that counts as FY23 income. In total, the Premji family received around ₹401 crore in dividends from their Wipro holdings in FY23, but 57 crore of these shares are held through the Azim Premji Philanthropic Initiatives and the Azim Premji Trust. A large chunk of the income from the family-owned shares reportedly goes to these two trusts.
Dividend income is often a key component of promoters’ compensation. Until fairly recently, dividend income was not taxed in the hands of the recipients, which meant it was an excellent way for promoters to reward themselves since they fall in the highest tax bracket. Moreover, minority shareholders who may raise eyebrows if promoters receive large salaries are generally fine with large dividend payouts.
Mukesh Ambani, Asia’s richest man, famously froze his own salary at a “token" ₹15 crore in 2008-09. He hasn’t hiked it since, and during the pandemic took zero salary for two fiscals (FY21 and FY22).
However, his personal holdings in Reliance Industries Ltd (RIL) amount to 8,052,020 shares. The company paid a dividend of ₹7 a share in FY21 and ₹8 a share in FY22. That works out to ₹5.6 crore in dividend income in FY21 and ₹6.44 crore in FY22. The family holdings in RIL amount to 3,32,27,48,048 shares (49.1%) spread across 51 entities, including trusts. That meant the promoters received ₹2,659 crore in dividends in FY22.
Another titan of industry, Gautam Adani, receives around ₹4.6 crore as salary plus commission from Adani Ports and ₹2.3 crore as compensation from Adani Enterprises (AEL). The family receives around ₹82 crore in dividends from AEL and another ₹640 crore in dividends from Adani Ports. That’s apart from what they receive from other companies in the group.
Another popular means of compensation is via employee stock options (ESOPs). The logic is simple enough – startups generally don’t want to burn cash on high salaries. Instead, they offer stock options that vest at given times for fixed prices. If the company does well and the stock price increases, this offers employees a chance to become wealthy.
ESOPs have made millions of digital industry employees extremely wealthy over the years. Think about those who received stock options in companies like Microsoft, Amazon, Apple, Facebook and Google, and various Indian giants. Infosys for example, allotted 5.11 lakh shares worth around ₹65 crore to employees in May 2023.
ESOPs, however, can be a huge drag on the profit & loss statement in loss-making startups. One97 Communications (Paytm’s parent firm) for example, has permission from shareholders to allot over 61 million equity options to its employees. In FY23 it made new allotments of 3.9 million equity options to employees and expensed ₹3,778 crore on the P&L statement to account for these shares.
Incidentally, Vijay Shekhar Sharma has a personal stake of around 9.1% in the company and receives compensation (salary plus perquisites) of ₹4 crore a year despite opposition from institutional investors. This is about 32 times the median compensation paid to Paytm employees. Sharma says he won’t vest all the stock options granted to him until the share price (currently around ₹700) climbs “sustainably" above the issue price ( ₹2,150). While that’s a splendid commitment, he could always sell a small chunk of his holdings if he needs liquidity for any reason.
Tax considerations no longer favour dividends over salary since the dividend is now taxed like any other income. Capital gains tax and income tax do come into the picture in the case of stock options. This is complicated. As and when employees vest their options, the difference between the market value and the option vesting price is taxed as income. If they do sell shares, they pay capital gains tax on the profits.
But the fact that income tax now applies to dividends and CGT to stock options will scarcely stop companies from using these instruments. Promoters forgoing all or part of their salaries makes for good press but it doesn’t mean they aren’t being compensated.
