With great power comes great responsibility. However, with the recent protests in US and UK by investors on banks CEO’s pay (RBS, Citi, Barclays), this dictum can be altered to “with great power comes a great salary”. This debate again raised the discussion on role of compensation committees. Are the compensation committees empowered to decide salary of CEOs or is it just a theoretical eye-wash? Let us delve on this topic from an Indian perspective, as till now the investors haven’t raised a hue and cry about it.
1. A Look at the Highest Paid CEOs
Business Today jointly with INSEAD-HBR did a study to identify India’s best CEOs by evaluating their performance from 1995-2011. As per the study Mr. Naveen Jindal, CEO of Jindal Steel & Power ranked first, followed by Mr. A.M.Naik, CEO of Larsen & Turbo and Mr. Y.C. Deveshwar, CEO of ITC. By another study Mr. Jindal is also the highest paid CEO in India with a salary of Rs 69.7 crores. (USD 12.75 million ).
However, the other two CEOs do not come in the top ten list of highest paid CEOs in India, as both are professional CEOs. Mr. Deveshwar’s salary plus perks excluding bonus was Rs 5.52 crores (USD 1.01 million) and he was entitled to a bonus limited to Rs.6.24 crore (USD 1.42 million) for 2011-2012 financial year. Mr. A.M.Naik’s salary including stock options was Rs 14.18 crores (USD 2.59 million) for the same period. Though market capitalization, net profits and growth have been on similar graphs for all the three companies.
Mr. Mukesh Ambai, CEO of Reliance Industries is ranked seventh on the list of best CEOs’. After being on the highest paid CEO list in 2008, he voluntarily decided to restrict his salary to Rs 15 crores ( USD 2.74 million) though he had shareholder approval for Rs 38.82 crores ( USD 7.10 million). However, the amount is peanuts considering his wealth. He is the richest man in India with a net-worth of USD 22.3 billion and he along with his family are entitled to dividends of Rs 1244.33 crores ( USD 227.73 million) in 2011-12 financial year from Reliance Industries alone.
Most of the highest paid CEOs in India, consist of promoter-owner CEOs, and not professional CEOs. There is a huge disparities in the pay structures.
2. Disparities in Pay Structure of Chairman, Managing Directors and Directors
Looking from the regulatory angle, as per the Companies Bill, a managing director ( CEO in American terms) pay cannot exceed 5% of the net profits of the company. The total remuneration to directors cannot exceed 11% of net profits of the company. However, if approval of higher salary is taken from the shareholders in a general meeting, the limit can be exceeded with the approval of Central Government. Now the question is, as the CEOs get the highest pay packet and promoter-owner CEOs have controlling stake, can the other directors really have much say, monitor the activities and decide on remuneration?
Coming back to Mr. Jindal’s case, he stated in the Business Today interview, that he spends 20-25% time on business, and most of his time is spent on his constituency as he is a Member of Parliament. Members of Parliament just earn around Rs 50,000/ per month. His mother, Savitri Jindal is the Chairperson of the Jindal group and 56th richest person in the world with the net-worth of USD 13.2 billion in 2011. Therefore, considering all this information, can the success of the company be attributed to him? Moreover, does he deserve this salary? Can the remuneration and compensation committee actually decide his salary independently and objectively?
Now let us look at the compensation of Chairman and Directors. Here are some details from the India Board Report 2011:
a) Non-executive director compensation ranged from Rs 1 to 10 lakhs (USD 18,000) in more than half of the companies surveyed. Average compensation rose 20% to Rs 9.9 lakhs in 2009-10 from Rs 8.2 lakhs in 2008-09.
b) The minimum compensation paid to non-executive directors was Rs 15,000 whereas the maximum
was Rs 54 lakhs (USD 100,000) for 2009-10 from among the companies surveyed.
c) The average compensation paid to non-executive chairmen rose from Rs 15.7 lakhs in 2008-09 to Rs 21.7 lakhs (USD 38,000) in 2009-10, an increase of 38%.
d) Among the companies surveyed, the minimum compensation offered to the non-executive
chairman was Rs 16,000 and the maximum was Rs 13 crores (USD 2.37 million).
Hence, if you see the CEOs pay usually far exceeds Chairperson and Directors pays. There is no parity in their earning capacities and value for time.
3. Questionable Independence of Compensation Committees
In such a scenario, are boards capable of judging remuneration of CEO or other key personnel objectively? Generally, the Nomination and Remuneration Committees are charged with job. As per the Companies Bill in India, the committee should “consist of three or more non-executive directors out of which not less than one half shall be independent directors.” Hence, the premise is that as there are independent directors, they will be fair. However, the question remains are these directors really independent ? Below are some information nuggets from the India Board Report 2011.
a) On an average in Indian boardrooms, 71% of directors are non-executive and 54% of the directors are independent. Just 16% of the directors are related to promoter or promoter’s spouse.
b) Just 10% of the board members were appointed through search firms. The rest were chosen through personal network of chairperson and managing director.
Therefore, in a way the independent directors appear superficially independent and there are deep relationships existing among them. More so, in family managed business. For instance, ITC has a diverse board room as public sector companies and banks have significant investments in the company. It is a 100 years old company and in last 15 years Mr. Deveshwar was the CEO. Therefore, the compensation committees can be transparent and objective only when they are not under the control of owner-promoter CEOs.
In the western world, CEOs of banks and financial institutions are facing investment ire for unduly rewarding themselves at the expense of the shareholders. In India, the investors generally do not make any noise on pay structure of the owner-promoter CEOs as investors expect them to reward themselves. Although, the owner-promoter pay structures are 3-4 times higher than the professional CEOs. With such a mindset, can we really say corporate governance practices have a chance of succeeding in India? It is a controversial question, nonetheless, let me ask – What should the investors and regulators do to control promoter-owner CEO’s salaries?