Companies value CEOs far more than the rest of the top management

Global management consultancy Hay Group has some bad news for chief executive officers (CEOs). According to its recent annual ‘Top Executives Compensation Report 2012-13’, compensation of CEOs is set to increase only by a modest nine per cent next year.

The top management teams will do a tad better, logging a global, all-industry average hike of 9.4 per cent in the coming year. But before senior vice-presidents of the world start celebrating the fact that missing the CEO job may have not turned out to be such a bad thing after all, here is another nugget from the same report: companies spend as much as three times on rewards and compensation for CEOs as they do for anybody else — including the man just below the top honcho.

The report features insights from about 158 organisations across auto, chemicals, basic resources, oil and gas, FMCG, retail, construction and materials, telecommunication, utilities, industrial goods, and transportation sectors.

Compensation drivers

Says Sridhar Ganesan, Rewards Practice Leader, Hay Group India, “Markets, strategy, culture, and ambitions are the four real drivers of modern-day executive compensation. This is important to keep in mind as data analytics on executive compensation have to be interpreted beyond just the stated numbers.”

Simply put, one has to look beyond whether a CEO receives ‘industry comparable’ compensation, or more or less than that figure. And usually, whether that figure is more or less than the sector average, more often than not, depends on the nature of the organisation.

Statistical analysis between the Hay Level (developed by weighting in terms of scope, scale, size, complexity, etc.) and total Cost to Company found a co-relation of 0.26 — indicating that other factors, besides just the organisation’s contour affect CEO compensation.

That can lead to some distortions, particularly in organisations where the CEO is also the principal owner or shareholder of the business.

India’s top-five highest-paid CEOs, for instance Naveen Jindal of Jindal Steel, Kalanithi and Kavery Maran of the Sun Group, and Brij Mohan Lall and Pawan Munjal of Hero Motocorp, all own a dominant share of the businesses they head.

Company clusters

Sridhar qualifies, “CEO pay can be contextualized into four potential context clusters — the Carers, the Contractors, the Cultivators, and the Fundamentalists. The Carers are companies that operate in an environment of social capitalism, while the Contractors have a clear focus on extracting business value from contracts and terminating them in case of failure. On the other hand, the Cultivators have the ability to spin a compelling story and inspiring investors and employees with their energy to take risks, while the Fundamentalists believe in an environment of continuous innovation without compromising on the company’s identity and cultural strengths.

He cites the Tata Group as a ‘carer’ — “where the organisation uses social and environmental consciousness to create a powerful employee and customer brand — thus the CEO pay reflects the organisation’s long-term ideals.” On the other hand, current CEOs of online portals such as Flipkart and Jabong mark the ‘cultivator’ approach, “reflecting dynamism and highly leveraged payout norms.”

Ready-made CEOs

While all companies put a much higher value on the role of the CEO for achieving overall business results as compared to the top management team, the multiplier goes up to more than four in industries such as basic resources and retail, while it falls below the average in industries such as transport and logistics, and construction and materials.

Says Ganesan, “Recruitment of ‘Ready-made CEOs’ is one of the reasons for variance in the compensation multiplier across sectors. Sectors with a high multiplier, such as retail, are still evolving in terms of business model and readily-available talent — so external recruitment of CEOs has become very prevalent. These CEOs who are recruited externally at current market rates and realities will drive the multiplier up vis-à-vis internally grown incumbents. These sectors are looking at “Ready-made CEOs” as the mantra for success.”

Another striking feature of the findings is the deep-rooted preference for leveraged pay or pay for performance in the overall compensation philosophy — for the top team executives including the CEO. Around 30 to 44 per cent of the overall compensation mix, for the CEO and the top team, comprises incentives. Corporate India is addressing salary increases by moving higher parts of the increments into pay for performance.

The report also finds variable pay, as a percentage of CTC (excluding Long-Term Incentives or LTI), to be the highest in the retail sector at 29 per cent, followed by utilities at 26 per cent.

The report, however, is silent on the question which has hogged the limelight ever since the global financial meltdown of 2008 and the resultant slowdown — are CEOs worth it? Shareholder and taxpayer outrage over the skewed pay packets of CEOs has led to a widespread backlash, with growing calls for legislative limits on executive pay.

Even back home, India Inc’s ‘conscience keeper’, Infosys’ founder and emeritus chairman N.R. Narayana Murthy, has said that CEO pay should not be more than seven times the pay of a junior manager.

(This article was published on December 20, 2012)
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