Staff wages, directors’ pay move in sync with co profits

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Sample study of 350 NSE listed cos for 2002-03 to 2007-08 period.

D. Sampathkumar

Chennai, Dec. 28 Mercator Lines, a shipping company, has seen its profits grow from a modest figure of around Rs 5.5 crore in 2002-03 to a sum in excess of Rs 165 crore in 2007-08. That is almost a doubling of profits every year on a compounded basis.

No surprises there, one might say. But one thing surprising is that both the company’s directors (principally the whole-time members) and employees have gained, in more or less of a similar order. Their earnings too, while not actually doubling every year as corporate profits have, registered an annual growth of roughly around 85 per cent during this same period.

The story of Mercator is, in fact, representative of the performance across a significant section of the corporate sector that has seen workers and directors share, alike, the growing pie.

Tracing the trend

An analysis of financial performance for the period 2002-03 to 2007-08 of a sample of over 350 companies listed on the National Stock Exchange shows that staff salaries and directors’ remuneration more or less kept pace with the growth in after-tax earnings. The sample showed after-tax profits growing by 28 per cent annually on a compounded basis. Directors’ remuneration grew annually by 25 per cent, while staff costs registered a growth of 21 per cent.

The period, by all accounts, represented a boom phase in corporate performance that began to show signs of flagging only in the second quarter of the current fiscal. Indeed, even critics of the erstwhile NDA Government saw fiscal 2002 as some kind of an inflexion in corporate fortunes when they claimed that the ‘India Shining’ campaign of the previous Government was flawed in as much as the rural ‘Bharat’ far from shining was actually bathed in darkness.

That employee earnings have a tendency to largely keep pace with corporate profits, even during not so good times, is evident from a similar analysis of performance in the earlier block of years 1999-2003. The period saw corporate earnings grow by 12 per cent. Interestingly, employee costs too tended to grow at a comparable 11 per cent.

Corrections and cuts

A slowdown in overall economic growth and sharp correction in output in several sectors have seen corporates scrambling to cut wage costs through downsizing. The corporate managements have been criticised by representatives of workers’ unions and political leaders for what is seen by the latter as ruthless behaviour.

The reality appears to be somewhat more nuanced than suggested by a straight reading of reports of downsizing and lay-offs. The growth trends in staff costs and corporate profits during both lean (1999-03) and good (2003-08) times are a clear pointer to the fact suggesting that a subtle process of synchronous movement governs their performance.

In contrast, trends in advertising and marketing expenses suggest that they reflect heightened business confidence about the future. They are potentially a ‘lead’ indicator of improved corporate performance in the days ahead. Thus travel, advertising and marketing expenses were already running ahead at a growth rate of 16 per cent during the period 1999-03 even as profits and wages were rising at a more modest rate of 11 to 12 per cent.

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(This article was published in the Business Line print edition dated December 29, 2008)
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