Does CEO compensation in India need a rethink?

compensationIt all started, late last year, with Corporate Affairs Minister Salman Khursheed advice to Corporate India to refrain from doling out “vulgar” salaries to its top executives.

While PM Manmohan Singh in a statement, later, allayed the worst fears in private enterprises by saying that the Govt has no intentions of imposing restrictions on CEO salaries. Interestingly, in the PM’s earlier statement in May 2007, he asked companies to “resist excessive remuneration to promoters and senior executives and discourage conspicuous consumption.”

The industry though is very clear in its stand – to leave the pay packets to be decided by the industry and not the Govt. While FICCI President Hari Prasad Singhania, in an earlier statement, cautioned that any new norms in compensation of India Inc might see a flight of talent and capital away from the country.

In a news report carried by DNA newspaper recently, it found out that most CEOs’ base salary is actually peanuts and most companies make up for this by matching with the CEO’s performance-linked remuneration like commissions and bonuses. As per the news report, in 2008-09, the highest grosser in India Inc were the Marans of Sun TV whose earnings were Rs.74.16 crores.

The next in line was Anil Ambani who drew a neat Rs. 52 crores, followed by Sunil Bharti Mittal at Rs.9.59 crores as base salary.

Opposing these jostling figures made by the top guns, are the trade unions who demand that Govt should play a dominant role in determining CEO salaries. Senior leaders from Centre of India Trade Unions (CITU) believe that self-regulation is no remedy and suggests that the Govt take help of FICCI and CII to deal with the situation of regulating CEO salaries.

However, there is a difference of opinion among the trade unions as well. Indian National Trade Union Congress (INTUC) is of the view that a reduction in top executives’ salaries may affect the administration as well as the image of the company in the market.

The debate continues…with the pendulum oscillating between the ever-growing divide of the rich and the poor. But, a critical question remains to be answered: why is the issue of CEO salaries so crucial? A definite observation to this question could be linked to the recent economic slowdown where a sustainable social and economic order has been challenged. In a country where basic amenities are still the need of the hour for millions, economic development can only happen once social development is achieved.

RBI Governor D.Subbarao has categorically remarked, in an interview with Mint newspaper, that compensation packages, especially of large financial institutions, were one of the factors which contributed to the recent global financial crisis. RBI has already said that it will issue guidelines to ensure regulation in the compensation and bonus packages of private and foreign banks.

Besides such external regulations, ideally self-regulation seems to be the plausible solution to this concern. India Inc has not refrained from demonstrating highest ethical standards in terms of self-regulation, during the economic crisis. Mukesh Ambani displayed an example of moderation in compensation by drawing Rs.15 crores in 2008-09 as against Rs.44 crores. Others included Bharat Forge MD, Baba Kalyani, who took a 20% salary-cut and a voluntary move by NIIT leadership team to take a 25% cut in remuneration.

 

- Suniet Bezbaroowa (views expressed in the article are that of the author)

 

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