The Hindu Business Line : Regulating executive pay

A salutary outcome of the global financial crisis is the coming into the open of the outrage universally felt over the sky-rocketing amounts in salaries, bonuses and severance compensation (mis)appropriated by the top executives of firms, with the CEOs setting an awfully bad example. Indeed, some sort of a rule had come to be established that the worse managed a firm, the more serious the malfeasance, the more ruinous the consequences for investors, the more astronomical w ill be the payments to the top brass. No wonder the state of affairs has earned the apt description of “heads-I-win, tails-you-lose” with no answerability, accountability, and guarantee of performance.

The curse is mostly prevalent in the US. Everyone knew what was going on, especially since companies such as Enron and WorldCom began crumbling and vanishing some 15 years ago. But nothing was done during all this period, except for news dailies and economic journals publishing articles on the iniquity of it all and thinking their duty was done. With the tsunami-like global financial turmoil exposing the abysmal depths to which human greed can sink, attention has at long last turned to the imperative need to put curbs on executive pay.

Benchmarking pay

There is even a demand that the fat cats who had collected disproportionate pay cheques and other perks and benefits in various names from the companies they headed should be forced to return whatever is determined to be in excess of what is computed as their legitimate compensation by applying fair and equitable criteria. Some of the criteria being mentioned are: The equity base, the average return over a given period, the volume of transactions, reasonable ratio between the highest and the lowest paid employee, present and likely future investments and return on them and the prevailing trends in the industry in other industrial countries.

Raghuram G. Rajan, a professor of finance at the Graduate School of Business at the University of Chicago and former chief economist at the IMF, and recently appointed adviser to the Prime Minister, Dr Manmohan Singh, is credited with the proposition of judging the eligibility and quantum of bonuses with reference to what he calls ‘accounting performance’, instead of stock performance which is likely to be erratic and unreflective of the true worth of the company. He would also like the pay of the chief executive to be benchmarked against the performance of rival firms.

Vexed question

Whatever the criteria, the matter of bringing the top executives down to earth, even if it be with a thud, brooks no delay. The idea of what has come to be known as ‘claw-backs’, meant to recover from former bosses their ill-gotten bonanzas is most alluring and one would like to be personally present and watch their faces as they cough up what they had so brazenly appropriated for themselves without any sense of social responsibility.

The plans for putting a ceiling on executive compensation often come up against the vexed question of the degree to which the governments should come into the picture. Should they have a say, and once the compensation is capped, should they ensure, by law or some oversight mechanism, adherence to it by companies?

Recent experience of fraud and misconduct in a number of companies in the US and elsewhere has made it amply clear that self-regulation has not worked and will not work. Therefore, government keeping a wary eye on the enforcement of whatever pattern is arrived at becomes unavoidable. In India, too, it is time the SEBI evolved a set of reasonable criteria applicable to executive compensation and ensured that it conformed to the prescribed formula.

B. S. RAGHAVAN

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