Honchos rake it in, no questions asked

The ‘say-on-pay’ movement gathering momentum in Europe seeks to make remuneration to honchos subject to the binding approval of shareholders. In Switzerland, in the recently held referendum, 68 per cent of the voters approved a proposal that would require a listed company to seek a binding vote from shareholders on top executive pay.

Britain plans to follow suit. Hitherto, in these two nations, the shareholders’ vote on executive pay was not binding on the board of directors. The Swiss law-in-the-making put its foot down to golden handshakes to top executives while entering and golden parachutes while exiting. This is as it should be.

The legendary GE honcho Jack Welsh created a stir a decade ago when he wangled for himself a generous exit pay packet of $400 million or so, that included lifelong tickets to Wimbledon and other assorted sporting events. He had to back down after persistent criticism, but at the end of the day it was only a haircut.

Honcho salary has always excited passions on both sides. Those who aver that they must be pampered have it that otherwise a company cannot attract the best talent.

Those who demur have it that working in a company is essentially a team effort and the honcho, despite his formidable talents, cannot hog everything for himself.

Back home, the honcho excesses are the stuff of legend. The Ambani brothers caused a flutter by helping themselves to Rs 45 crore each as their annual pay packet. Most of the Indian listed companies are family promoted and controlled so much so that the honcho invariably turns out to be the promoter himself or a scion of the family.

The whopping salaries taken by them would pass muster had they been the norm across the company — everyone getting a generous pay packet. But more often than not, the top pay is at least ten times more than the second largest salary. The gulf between the lowest salary and the highest is humungous, which provoked N. R. Narayana Murthy of Infosys to say a few years ago from the CII pulpit that the gulf between the lowest and highest should not be more than 15 times. Predictably, his unsolicited advice did not go down well with the assembly and the media.

Confusion of roles

To the starry-eyed public, there is nothing wrong in the top executive being pampered because in their minds he brings more to the table than what the lesser mortals do. Doesn’t he take risks, they ask with injured innocence, little realising that the risks he takes are in his capacity as a shareholder and not as an employee. And for his risks as a shareholder, he gets amply rewarded with dividend and capital gains. In India, the law itself is tilted in favour of executive excess — 5 per cent of net profits can be paid as whole-time or managing director’s salary, and where there are more than one such person, among them they can take 10 per cent of the net profits.

A company as large as Reliance produces enough profits as to make even a 1 per cent share a huge and disproportionate one. Compounding the inequity is the regime that offers minimum compensation, that itself is generous in the event of loss or inadequacy of profits. This is heads-I-win-tails-you-lose.

India already has a regime that Switzerland and Britain are all set to roll out — binding shareholder approval.

In other words, the Indian excesses occur with shareholders’ approval or sometimes apathy. In many a listed company, the promoters have a vice-like grip. Wipro and DLF spring to one’s mind, in view of a sizeable 80 per cent or more being with the promoters.

The SEBI mandate to take up the public shareholding to a minimum 25 per cent before June 30, 2013, has caused consternation in company circles, but the trust route promises to address their concern and discomfiture.

In India, several companies are controlled by trusts. Create a trust and transfer the shares to it so that it passes muster as a public shareholder. The truth is such trusts are as much a handmaiden of the promoter as their investment companies. Even if the public shareholding rises in listed companies, one cannot expect them to change their character and style. In addition, shareholder apathy is legendary in India with even institutional shareholders barely bestirring to ask inconvenient questions, much less voting the inequitable proposals down.

Stock offers

The middle path could be offering shares to honchos, like the Americans have been doing. Let honchos be offered shares in recognition of their formidable talents at, say, 25 per cent discount vis-à-vis the market rate with a lock-in period of, say, three years.

This would egg them on to work harder for the company, without resorting to short-term measures with a eye on bolstering the profits on which hinges their own fortune.

(The author is a New Delhi-based chartered accountant.)

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