Why do head honchos earn so much?

Chief executive officers (CEOs) provide the vision and direction for the success of their companies, but it comes at a price — obscenely high salaries!
Image for representational purpose only
Image for representational purpose only

Chief executive officers (CEOs) provide the vision and direction for the success of their companies, but it comes at a price — obscenely high salaries! The automobile industry, which is showing high rates of growth, has among the highest-paid CEOs. At the top is Pawan Munjal, Chairman and MD of India’s largest two-wheeler maker, Hero MotorCorp, who took home `75.5 crore for financial year 2018, a jump of 26 per cent over the previous year. 

But HeroCorp’s Munjal is still not at the very top! For FY2017, he stood No. 4, behind A M Naik, Group Executive Chairman, Larsen & Toubro, (`78.9 crore), and the two Sun TV Network promoters Kalanithi Maran and Kavery Maran, who paid themselves `77.9 crore each. Significantly, many of these top-paid executives are not genuinely ‘professional’; they are promoters of their own companies, and can push through high compensation for themselves through their captive boards. 

On the other hand, there are those who do what is politically right, and cap their salaries. But then, that is misleading, as it does not reflect their overall income, most of it which comes from dividends from their shareholding. Mukesh Ambani, chairman of Reliance Industries (RIL), for instance, has capped his salary at `15 crore a year for almost a decade; however, for the last financial year, his earning as the largest single shareholder in RIL was a whopping `14,553 crore!

WHAT IS ‘FAIR’ DISPARITY?
Nobody said capitalism is a system that seeks out ‘fair’ compensation. But there are best practices that limit the disparity. For instance, the American system frowns up on the CEO getting more than 300-350 times the median salary in the company. If we take that principle, the highest paid in India have broken the ceiling several times over. For instance, Amara Raja Batteries’ MD, Jayadev Galla, who has a package of `38.1 crore, made 2,082 times the median remuneration of company employees, while A M Naik’s remuneration was 1,001 times the median earning at L&T. 

Infosys, a creation of professionals, developed a norm that top salaries should not exceed 55-60 times the median salary. That is why in the beginning of calendar 2017, when Infosys CEO Vishal Sikka got a 55 percent hike to $11 million a year (`73.4 crore) he waded into a storm as he had way surpassed the 60 times ratio limit from the median salary. 

A little investigation will show there is something intrinsically unfair in this system of determining salaries for the top honchos. For instance, the top bankers of state-owned banks get a small fraction of their colleagues in private banks. A survey by Quartz India for FY2017 showed Arundhati Bhattacharya, chairperson of the State Bank of India which is among the world’s top 50 banks, took home a salary of `29 lakh. This was less than five per cent of the `6.09 pay package of Chand Kochhar, CEO of ICICI Bank, or about three per cent of HDFC Bank MD Aditya Puri’s remuneration of `10.05 crore of that year. 

CALCULATING CEO PAY
A strongly held view is that the explosion in CEO compensation is largely a result of the growing power of managers and their ability to determine their own compensation by dominating company boards. However, there are others who feel these high pay packages are a function of a shortage of talent and the ability of these CEOs to contribute to the bottom line in a big way. 

Simone Sepe, a US specialist on law and corporate governance says, “..the executive compensation contract is ‘dynamic’. That is, it develops across multiple periods rather than just one period. Paying executives high rents might provide them with a continuation value that efficiently bonds executives to long-term firm value creation. Hence, CEO salaries do seem to be economically justified.”

However, remuneration in most cases has little to do with scarcity of talent, and is more about what the other guy is paying. A US study on Jarden Corp, a big group producing the Yankee Candle brand and Rawlings sports equipment, revealed how the company identified Oracle Corp among 14 other peers to fix CEO compensation. 

In India, there are regulatory parameters in place. The boss should not earn more than five per cent of the company’s revenue. But there is also a crying need for a more scientific matrix to fix the remuneration related to real performance, and to limit disparity between employees. Right now, it is only ad hocism that dominates.

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