Corporate top brass too highly paid

Reminiscent of Mark Twain’s famous quip about weather, everyone has been talking about the stratospheric soaring of corporate compensation packages all over the world but nobody has been able to do anything to stem it. The issue has assumed ridiculous proportions with offer of a few crore as starting remuneration at the time of campus recruitment of fresh, inexperienced graduates.

For the company bosses, even the sky has ceased to be the limit. There are, no doubt, legal provisions stipulating adoption of performance-linked packages, subject to overall ceilings in relation to profits. These safeguards are got around by various subterfuges, with the result the published figures of executive pay represent only a small part of the total compensation pay amount.

That apart, the bosses make a killing under a variety of ingeniously concocted names such as severance pay, side contracts, golden handshakes, stock options, bonuses, commissions, consultation fees, and the like. The condition linking performance with pay is sought to be circumvented by disproportionately enlarging the fixed portion of the package and reducing the variable one based on performance.

Most objectionable of all, the beneficiaries themselves participate in the determination of the direct and indirect components of their packages. Aon Hewitt gives some idea of the extent of the fattening: The median pay for a CEO in India on a purchasing power parity basis was at nearly $3.5 million in 2011-12 (growing steadily at 15-18 per cent in the past few years), in companies with more than $2 billion in revenues. It is half of the figure of $7 million in the US.

FAT CAT PHENOMENON

Again, in India, a CEO’s compensation is on an average 675 times of the minimum wage of an entry-level employee, followed by the US (423 times) and China (268 times). Indeed, the salary of the top job in many companies is many times more than that of the next higher level; for example, as per information culled from the Internet, India’s highest-paid executive Jindal Steel & Power’s Chairman and Managing Director Naveen Jindal gets around 25 times what the next highest-paid Jindal Steel director does.

Not surprisingly, this trend has been given the entirely appropriate name of ‘abzockerei’ or ‘fat cat phenomenon’ in many European countries.

The blame for letting the fat cats have their way has to be laid squarely on the shareholders. Unfortunately, they hardly make an issue of the bumper bonanzas higher company echelons enjoy at the annual general meetings. Or, even when some do, the top brass are able to mollify the occasional critic by means of arguments such as the difficulty of getting talent for lesser emoluments, the need to maintain parity with the market rate, the scale of operations or the profits of the company. Besides, the corporates have also by now learnt to keep shareholders in good humour in a number of ways.

In India, here is notionally a remuneration committee comprising some independent directors, as mandated by the Securities Exchange Board of India (SEBI), but this has turned out to be an ineffective safeguard for two reasons.

SHAREHOLDER ‘REBELLIONS’

First, the independent directors cannot always bring themselves to put their foot down against fanciful compensation packages, as they want to get along without being unpleasant and as they themselves are ‘softened’ by alluring perks and privileges of various kinds.

Second, there has so far been no known instance of the SEBI pinning any company Board down to complying with its regulation and levying heavy fines or applying sanctions for wilful violations of its orders under Clause 49 of the Listing Agreement.

Even the Prime Minister’s warning some years ago to captains of business and industry not to be ostentations and avaricious in feathering their own nests has been nothing more than water on buffalos’ back.

However, there have been stirrings of late among shareholders and governments leading to moves to impose some degree of restraint in countries such as Britain, Switzerland and the US. There have been “rebellions” of shareholders of many companies forcing the governments and the corporate tycoons to take notice.

Recently, the Swiss in a fit of righteous indignation at the sky-rocketing pay packages, passed by a huge majority of 68 per cent a Constitutional ‘initiative’ empowering shareholders with a binding say on executive pay and a prescriptive right to vet board appointments. Violations are to be visited with three years in jail, or the forfeit of up to six years’ salary.

India, too, could do with a similar law.

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