Sucheta Dalal :Let's discuss CEO compensation
Sucheta Dalal

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Let's discuss CEO compensation  

May 28, 2007

 Prime Minister Manmohan Singh’s Ten Point Social Charter to industry was entirely in line with the CII’s theme for its annual session. Yet, only one of his ten points—the bit about conspicuous consumption and excessive remuneration—has corporate India all a titter. The pink press has begun to see shades of red in the PM’s remarks. Actually, excessive CEO compensation is very much a 21st century issue, and causes outrage even in developed capitalist economies. 

While Dr Singh made no mention of capping compensation through statute, the US and UK have gone down the road of introducing more disclosure norms and some legislative curbs through shareholder empowerment. Australian Prime Minister John Howard recently said that some CEO salaries were “over the top”. Disgust over excessive CEO compensation is stoked by examples like the $210 million in cash and stock options that Robert L Nardelli of Home Depot took away as part of his exit package after a poor performance. US Senators, especially Democrats, sensed an opportunity to cash in on middle-class anger against excessive pay and perks, and mooted legislation to give shareholders a veto over CEO pay packets if supported by 50% of them. Why Dr Singh, even President George W Bush said in January that fat pay cheques were getting to be “a problem”. In the US, 51-year-old Meredith Miller, a Connecticut State official in charge of a $24-billion public employee pension fund, has launched a campaign against excessive executive compensation. She recently pushed Morgan Stanley into reworking salaries. Miller has focused on the possible conflict of interest between management and compensation consultants hired by companies. In India too, leading HR consultants quietly admit to such conflict—they get paid a hefty percentage of the compensation and HR officials of some firms routinely demand kickbacks. This is a big incentive to drive up salaries. An undercover investigation into HR practices will lead to some eye-opening revelations even for CEOs themselves.

In a country where elections are lost over the price of onions, it is natural that the PM would be concerned about the media beaming a lopsided view of economic prosperity to people. But even without this political dimension, it is time that CEO compensation is debated with specific emphasis on the rather different management and shareholding structure of Indian firms. Listed companies here are largely managed by families that have always wielded considerable clout and liberally helped themselves to corporate resources for personal benefit, even whilst the government controlled CEO compensation. Retail investors in India are too weak and disorganised to object, institutional investors only ever assert themselves at the behest of political masters and FIIs prefer to vote with their feet rather than fight.

Nobody wants to go back to the bad old days when some bureaucrat in Delhi decided what managing directors would earn, but how about more transparency in reporting pay and perks from multiple sources?
Economic liberalisation has seen a big and often well-deserved spurt in executive compensation, especially for professional managers. Over a hundred Indian CEOs now earn million-dollar salaries, and we don’t grudge those. But the incredible bonanza to some family-run managements certainly warrants scrutiny. These have moved swiftly to award fat pay cheques to family members, who now enjoy quadruple benefits—from capital appreciation of their fat shareholding, dividends, fat pay cheques and the usual perk of exploiting company property for personal use.

Nobody wants to go back to the bad old days when some bureaucrat in Delhi decided what managing directors would earn, but how about more transparency in reporting pay and perks from multiple sources and giving teeth to institutional investors? As Sunil Mittal says, executive compensation is not yet obscene enough to raise a public outcry, but good governance requires the CII to examine the PM’s concerns instead of dismissing them outright. 

-- Sucheta Dalal