Pay Cheques Show Who's Boss
Michael Johnson, CEO of global nutrition and weight management company, Herbalife, took a 36 per cent pay cut in 2014 for failing to meet performance targets. In 2009, Vikram Pandit, the then CEO of Citibank, decided to take a token salary of $1 and no bonus until the bank returned to profitability. In 2008, Jamie Dimson of JP Morgan Chase, John Mack of Morgan Stanley, Rick Wagoner of GM Corp and Alan Mulally of Ford Motor agreed to work for $1, owing to the recession. Most recently, Ross McEwan, CEO of Royal Bank of Scotland, which is undergoing restructuring, turned back a $1-million incentive. Muhtar Kent, CEO of Coca-Cola, which saw profits plunge from $1.71 billion in 2013 to $770 million in 2014, is said to have declined his $25 million bonus owing to the company’s slack in performance.
Compare this with India, where Sanjay Aggarwal, former CEO, Kingfisher Airlines, was paid nearly Rs 4 crore (2012-13) even after the company’s mounting losses grounded the carrier and the employees were not paid for 10 months. (It currently has a debt of $2 billion, and the staffers have gone without pay for over two years). Media baron Kalanithi Maran, as executive chairman, and his wife Kavery Kalanithi, as executive director, got a 6.56 per cent hike in salary in 2013-14 though Sun TV network’s net profit grew only by 4.91 per cent. The couple were the highest earning corporate leaders in India that year, with a package of some Rs 120 crore. Indian employers seem to be determined to keep their CEOs happy even at the cost of the company and other employees.
Seemingly setting an example in right-sizing salaries, billionaire Mukesh Ambani fixed a cap for his income at Rs 15 crore per annum in 2008-09. But, he continued to draw the same package even as his company’s net profit reduced by 20 per cent from $4.9 billion in FY08 to $3.9 billion in FY13. Similarly, Azim Premji’s compensation grew from less than $1 million in FY13 to $1.71 million in FY14, even as Wipro’s revenue registered the slowest growth among top five IT companies at 6.4 per cent in FY14. Ditto with CEO TK Kurien, whose salary touched $1.1 million in FY14. Then there’s TCS chief N Chandrashekar, who got a 60 per cent hike in FY14 taking his salary to $3.15 million. Rightly so, with the country’s largest IT services company’s revenue doubling from $6.34 billion to $13.4 billion in FY14. But it’ll be interesting to watch if there will be any revision, as the company’s performance is likely to be mixed this fiscal. TCS posted a flat net profit in Q2, and the following quarter saw profits rise 5.1 per cent y-o-y as against Infosys’ 13 per cent. Compare this to one of the most profitable Public Sector Units, Oil and Natural Gas Corporation (ONGC), which has a pay scale (excluding benefits) of Rs 62,000-80,000 (Executive Director, E-9 grade) despite posting consistent profits.
Going forward, the trend may get even more deep-rooted. According to global management consultancy firms, top executive compensation is expected to grow by 11-12 per cent up from 10 per cent in 2013-14. This despite the fact that many companies are heading towards muted growth in FY15. As per RBI data, corporates’ net profit for two quarters of FY14 witnessed a de-growth of 8.1 and 19.9 per cent, respectively. Reports indicate that the average pay for top executives of the 30-share benchmark index Sensex in India for 2013-14 was around Rs 10 crore, up from around Rs 8.5 crore in the year ago period.
“There will be a definite increase (in CEO salary). The person on top requires being in the best frame of mind, as he will be going in for personal engagements for the company,” says Aditya Narayan Mishra, President-Staffing, Randstad India. With particular reference to the current year, he said that there was a positive outlook in businesses and everybody would be looking at the future (5-6 years). “Companies will be looking to cement the CEO with the organisation,” he says adding that good talent at top level was in short supply and companies had to retain them at all costs. “His (CEO) compensation package is ‘critical’ for promoters,” Mishra says.
The developments are also leading to compensation disparity in the ever-expanding corporate world. With only a few days to go for the end of the fiscal, it remains to be seen if CEO salaries will fall or peak. According to global management consultancy firm, Hay Group’s report says that senior level managers are paid 11.7 times more salary than their lower level colleagues, up from 7.7 in 2008.
But not all CEO salaries around the world are directly related to performance. Global conglomerate General Electric (GE) CEO Jeff Immelt earned around 8 per cent increase in salary (2014) even though GE shares fell close to 10 per cent in the same period. His employers thought that Immelt had performed well and awarded him a $5.4 million cash bonus and his salary rose to $3.5 million.
“Today, CEOs are like movie stars. There is a lot of expectation from them to perform,” Kris Lakshmikanth, Founder-CEO and managing director of Headhunters says. Stating that the disparity was around 1:15 earlier, he says that this proportion may rise to over 1:100 eventually. Headhunters is an executive search firm specialising in C-Suite search and senior level talent acquisition. Lakshmikanth adds that pay-cuts would be likely if the CEO was also the promoter.
“This is a trend that has been building for the past 30 years, through economic boom. The change in the average percentage difference from the start of the recession in 2008 to 2014 stands at 52.14 per cent,” Ben Frost, consultant at Hay Group says. Adding to this, Amer Haleem, country manager (productised services) at the group, says, “The pay gap growth can also be linked to an intense talent war and increased competition for the few selected jobs available.”
Many companies are ‘breaking the bank’ to get a CEO to facilitate a turnaround. Bengaluru-headquartered software exporter Infosys, which otherwise has a conservative pay structure, hired Vishal Sikka as its CEO for Rs 30 crore ($5.08 million) annually, one of the highest for a non-promoter. His total compensation package is over $7 million (including stock options). Sikka’s salary dwarfs his predecessor and co-founder SD Shibulal who took home a pay of $23,000. Shibulal, however, earned close to $11 million through his stock holdings at the time. “Promoters are willing to go to any length to hire someone who has the ability to turnaround a company,” Lakshmikanth says, without particular reference to Infosys.
The Hay Group says that there has been a steady increase across industry sectors ‘in the prevalence as well as percentage of incentives for MD/CEO and for Other Senior Executives’. “This implies that there is direct alignment between the goals of the company and the compensation plan, as well as the top executive compensation is commensurate with the contribution/ impact of the role,” the company said in a recent report.
Hemant Upadhyay, managing consultant and leader of executive rewards practice, Hay Group India, says that the average target Short Term Incentives (STI) as a percentage of Total Cost to company (TCTC) without Long Term Incentives for all MDs is 27 per cent and for other senior executives this is around 21 per cent. Employee Stock Options is the most prevalent of LTI, which is followed by Performance Shares and Restricted shares.
“Incentive plans (short and long-term) have become key elements of Top Executive Compensation. These plans are aimed at ensuring retention, driving business performance and/or recognising role model behaviours,” says Upadhyay. The firm says that performance linkage is gaining significance to drive business and growth.