Tuesday, February 28, 2023

CEO salaries as a multiple of median pay vary widely : MInt 1st March 2023

 

CEO compensation has always been impressive in the private corporate sector. In the last two decades or so, there has been a substantial change in how these packages are looked at, with the inclusion of stock options. It is normally believed that once a company’s top management or employees are awarded stocks, they have an incentive to work harder to enhance shareholder value because as profits increase, so does the firm’s market valuation, which in turn benefits everyone. This largely holds in the private sector, though the public sector too runs employee stock option schemes at times. But what about non-stock based compensation?

One may recollect that in the past, a prime minister had spoken about high executive compensation and the need for moderation. That was a subjective view, as, in a capitalist system, the market decides compensation. And normally, as the top management witnesses an increase in pay packages, those down the line also benefit, though not to the same extent. It is the old theory of trickle- down effects.

At the end of the day, any top-level pay package must be ratified by shareholders in an annual general meeting, which is often the clinching argument. If shareholders are okay with a big package, nothing is amiss because it is a reward for performance. The CEO takes maximum responsibility and is answerable to the board, which guards the interest of shareholders. Therefore, any debate on this issue is only academic. The Reserve Bank of India (RBI) has a structure for permissible executive pay at banks, where certain personnel also run the risk of a claw-back in case things go terribly wrong. But in sectors with no such rule, the market decides on the CEO’s pay package.

Average employee compensation varies across industries. Typically, companies which are more knowledge-based tend to have higher rewards, compared to those where skill levels are lower. These days, it is mandatory for companies to reveal the ratio of CEO compensation to the median pay of their staff. This is an interesting metric because it shows how much the CEO is valued. There is, however, no norm for this ratio. There was a time when one could talk of the ratio of the highest and lowest paid worker. But this won’t make sense in manufacturing concerns or even services, where there could be a large number of unskilled workers. Hence, while the median is not the best metric, it is still acceptable when talking of how these heads are valued by their companies.

There is data for 2021-22 on the remuneration multiples of the top person (executive chairman, CEO or MD) to the firm’s median salary for BSE-30 companies. Public sector companies do not need to publish this information, which would anyway be embarrassingly modest. This leaves 27 companies, of which three did not report the same. As far as possible, stock options which have vested have been excluded. We see that the BSE-30 multiples vary from as low as 31 (Maruti Suzuki) to a high of 670 (Larsen & Toubro), which is quite a wide range. TCS’s ratio is 396. Importantly, no specific pay proclivity can be seen in any sector and there are spikes in both the manufacturing and financial sectors, depending on the company.

The multiple shows how a company values its top business leader. These multiples can however be skewed, depending on the median salary of the staff. Not all 30 companies have provided this information, but some have. In the case of Tech Mahindra, for example, the median annual salary in 2021-22 was 5.27 lakh. Hence its multiple of 87 would not translate to a very large compensation in relative terms. In L&T’s case, the multiple of 670 goes along with a median salary which is higher at 9.14 lakh for the year. A company’s median salary tends to vary by the extent to which it has unskilled labour employed, for which the remuneration would be much lower.

The ratio in the financial sector is interesting. These firms too have the characteristic of having a large workforce in sales, which would be on lower pay scales. Here, the variation is quite significant. Kotak and Axis are at the lower end, with multiples of less than 100, while HDFC and IndusInd are much higher, with ICICI Bank somewhere in between. The ratio for Bajaj Finance, a non-bank financial company, is 246, which can be compared with HDFC Ltd’s 156.

Clearly, the person on top is valued many times more than the average employee across the board. This can be linked with the job’s disproportionate responsibility. Often, there could be another 5-6 personnel earning slightly lower than the CEO but significantly higher than the median. Most of these remuneration packages come along with stock options, as also guaranteed pay increases. There would also be a big variable component that is linked to the financial performance of the company.

A provocative thought comes to mind here. In the present context, several companies both globally and within (especially in the IT and fintech spaces), are going in for mass layoffs. There are never instances of CEOs being removed to save on costs, considering that their pay packages can be 300-400 times the median, which means it would be the payroll-cost equivalent to that number of employees asked to leave. While the CEO takes most credit for success, the chief faces no downside when the chips are down. Heads I win, tails you lose? This should foment some debate.

 

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