Indian companies are not of the same size as the S&P 500 constituents, but they seem to be emulating global pay standards. While we don’t have a Nikesh Arora with an annual remuneration of over $100 million, we do have remuneration levels that stand out. A Wall Street Journal study showed that S&P 500 company CEOs get paid about $1 million a month. For India, that number for BSE 500 companies is around Rs 5.7 million a month (excluding the remuneration of CEOs of public sector enterprises). In FY18, the Marans (Kalanithi and Kavery) of Sun TV took home an aggregate of over Rs. 1.75 billion altogether. And, they were the highest paid executives of the BSE 500 companies.
The defeat of Apollo Tyres’ resolution on the reappointment and the remuneration of Neeraj Kanwar in September 2018 is a telling sign of how investors are voicing their opinion on excessive remuneration. Neeraj Kanwar’s and Onkar Kanwar’s remuneration together accounted for 15 percent of Apollo Tyres’ 2018 post-tax profits. The resolution proposed an increase in remuneration from these already high levels. After the board revised the remuneration downward (an almost 30 percent reduction) in December 2018, shareholders approved the resolution. Several resolutions on stock options schemes too are facing investor push back—especially those that are granted at a discount to market price, or where the original terms of remuneration are being revised.
Market participants have raised concern over the structure of remuneration in corporate India. A 2019 survey conducted by Institutional Investor Advisory Services (IiAS) on executive remuneration across market participants (investors, analysts, board members, and KMPs) throws up some interesting insights. Seventy percent of the respondents believed that remuneration practices of corporate India are opaque. Fifty six percent of the respondents believed that in less than 25 percent of corporate India, CEO remuneration is aligned to company performance. This belief is not unfounded.
Over the last five years, the CEO pay of BSE 500 companies has grown at a median rate of 72 percent, while revenues and profits have grown at 47 percent and 56 percent for the same period. For boards, CEOs seem to be cut from a different cloth since their remuneration has grown faster than the median employee remuneration. In FY18, the median multiple of BSE 500’s CEO pay to employee remuneration was 104x vs 88x in 2017.
In SENSEX companies, the CEO pay is over 150x of the median employee remuneration. This multiple tends to be lower where there are more white-collared employees (financial services, information technology) and higher where there are more blue-collared workers. Even so, the promoters of Amara Raja Batteries Limited, Apollo Tyres Limited, Avanti Feeds Limited, and Divi’s Laboratories Limited were paid over 1000x of the median employee remuneration in FY18.
While promoters tend to think of themselves as more important to the business than professionals— that being so, from a remuneration perspective, 70 percent of the respondents of the IiAS 2019 survey believed there was no need to make a differentiation in the assessment standards for pay practices between promoters or professionals. If at all, 26 percent believed that there might be some degree of leniency towards professionals. Yet, the 2018 data shows that the pay gap between promoters and other executive directors of the same company is high. In FY18, that difference, at the median level, was almost 2x.
To ensure that the remuneration is balanced—in line with the company performance and relevant to the size and the complexity of the business—a high proportion of variable pay is desirable. In the 2019 survey, over half the respondents believed that the CEO pay must comprise at least 50% to 60% variable pay. Yet, Indian CEOs’ remuneration, on an average, has just about 30% variable pay. Almost 70 percent of their total remuneration is fixed pay. This differs across industries. Financial services (including banking) and information technology sectors tend to relay far more on stock options while manufacturing sectors (especially the old economy sectors) tend to have a larger fixed component to overall remuneration.
Separating ownership and management is another challenge for some promoters. As owners, they have shareholder rights and, given the size of their shareholding, veto rights as well. As managers, promoters have a stewardship responsibility. Yet, in several companies, there are multiple family members on the board and, in key managerial positions, resulting in high family remuneration. For example, NCC Limited had five family members on the board on 31 March 2018, and their aggregate remuneration of Rs.191 million amounted to over 11 percent of the company’s FY18 post-tax profits.
Promoters often see board seats for family as a right (rather than the one that is earned or commanded). The Premjis and the Bajajs are rare families that decided to have their children begin from the ground up. There are several instances where 20-year olds are directly inducted into the company at CXO positions or at board levels. This is something investors don’t appreciate. IiAS’ 2019 survey shows that more than half the respondents believed that family members must have at least 10 years of work experience before joining the board.
The Nomination and Remuneration Committees (NRC) has a strong role to play in deciding who joins the board and in setting an optimal remuneration structure. Under Indian regulations, the NRC must comprise at least three non-executive directors, of which the Chairperson must be an independent director. Yet, given that almost two-third of Indian companies are family-owned and managed, promoters are members of the NRCs and/or are related to the CEO in several companies. Independent of the argument of managing the obvious conflict of interest, the presence of a promoter as a member of the committee by itself limits the committee’s ability to be brutally objective.
Companies want to retain their CEOs—finding replacements is a difficult task, and succession planning remains an area of focus for corporate India. Investors too do not want CEO vacancies. And, while the remuneration must be competitive to retain talent, it cannot be a competition about who gets paid more.
This is the last of a three-part series on CEO pay by IiAS. Click for reading part 1, part 2 and part 3(Hetal Dalal works with Institutional Investor Advisory Services India Limited (IiAS). Twitter: @hetal_dalal)