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Peter Drucker, the renowned management consultant, had once surmised that CEO pay should not exceed 20 times the pay for the average worker in the company; anything beyond that may dent employee morale, reduce productivity and undermine the company’s internal dynamics. Closer home, similar views have been espoused by Narayana Murthy, the founder of Infosys and one of the early torchbearers of ‘compassionate capitalism’. And while there is no empirical data to support this hypothesis -- especially in today’s scenario where business dynamics have undergone significant changes -- it does set the stage for a closer review on the prevailing pay gaps between various sections in organisational hierarchies.
CEOs get paid significantly higher than other employees
An IiAS study finds that in Sensex companies, the CEO pay aggregates to more than 150 times the median employee salary. In the BSE 500, the ratio is more than 100 times. This is lower than what we find in some other markets (for example, S&P 500 companies have a CEO to worker pay ratio of 347:1), and is clearly out of sync with globally accepted thresholds. At these levels, such practices run the risk of alienating employee communities and incentivizing individual performance at the cost of downplaying the collective efforts of the team.
Another metric which stands out is the pay gap between CEOs and other executive directors (EDs) on the board. CEOs in India are now getting paid almost twice as much as other executives. This can be partially attributed to a change in the recruitment mindset. With search committees now looking externally to bring in talent, compensation benchmarking has become more lateral. CEO pay is compared to industry and global peers which creates an upward bias in pay scales. At some point, boards need to revisit this process and stack up the CEO’s pay against other executive directors reporting to them. This will level the playing field and reduce the power distance across the board.
Promoters get paid higher than professional CEOs
Almost two-thirds of the listed companies in India are promoter (family) owned. While some have professionalized management, most of them continue to be run by family members. In such companies, remuneration becomes a form of related party transaction and needs closer monitoring. Especially because currently, the pay for top promoter directors is considerably higher than that of professional directors.
While the gap has reduced during the year, it continues to remain substantial. Seven of the top 10 highest paid CEOs belong to promoter families. Further, the highest paid professionals are generally awarded through long term incentives or stock grants which get vested over time and whose value is determined by market performance. In contrast, promoters are given cash handouts which are commission-based and short-term in nature.
Women are underpaid and under-represented
A large part of the debate is also shifting towards gender pay disparity. This is another area where India Inc. needs to catch up. In FY18, the median pay for male CEOs was much higher than that of women CEOs. At the ED level, men were paid more than 1.5 times as much as their female peers.
This inequality is observed in almost all industries. And while all of it may not be attributable to occupational segregation or direct pay discrimination, it does merit a review. Representation from women at the CXO/ED level continues to remain low at less than 8 percent. Companies need to understand the need and value in increasing women presence across leadership ranks – numerous studies have shown that it is not just a feel-good argument but makes sound business sense for the bottom line.
Conclusion
Executive pay is already a recurrent theme in governance discussions. The reason why the subject resonates among market participants is because it touches upon a motley of societal issues, most notably the gap between the haves and have-nots. In the end, an equitable and inclusive culture is at the heart of any successful organization. To get there, boards need to proactively address some of these discriminatory practices and ensure fairness in pay polices.
Note: Data for this report has been sourced from IiAS’ proprietary pay analytics platform, comPAYre, which contains historical remuneration and performance data for executive directors across BSE 500.
Disclosures:
- Data pertains to CY2017 or FY2017-18 (depending on financial year-end for respective companies).
- PSUs have been excluded from the analysis.
- Fair value of stock options granted has been included while calculating overall pay.
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