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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