Runaway pay

There is no doubt that the quality of disclosures from India Inc on top management compensation has materially improved with the changes mandated by the new Companies Act. The new rules require listed companies to provide relative metrics such as the ratio of top management pay to the median worker’s pay, the increase in top managers’ pay compared to hikes in workers’ pay, and the relationship between CEO pay increases and the company’s performance, in their annual reports. These are far better than the bare-bones numbers provided so far, which offered little scope for meaningful inter-firm or intra-industry comparisons. It is also laudable that Indian regulators have already pushed through these rules, even as similar pay-gap disclosures are still hanging fire in developed markets such as the US.

Having said this, the disclosures for FY15 now trickling in from corporate India suggest two worrying trends. One, they reveal that income inequality is as much of an issue in India Inc as it is in the developed markets. Recent studies have shown that, at last count, the average pay-gap ratio between the CEO and the average worker stood at about 373 times in the US, and at about 131 times in the UK. In India, the latest reports reveal pay-gap ratios ranging anywhere between 70 and 2900 times for leading firms. From the disclosures so far, it wasn’t the financial firms — infamous for their exorbitant pay — that handed out the fattest compensation packages to their CEOs, it was Indian technology firms. While the top managers of Indian private banks took home 75 to 97 times their median employee’s salaries, comparable ratios for the software majors ranged from 200 to 400 times. The data predictably show that pay gaps in promoter-managed firms tend to be higher than in professionally managed ones. Some mid-tier firms also feature far higher pay-gaps than market-leading firms. Tech Mahindra’s CEO, for instance, earned 2920 times the median employee’s pay, while the ratio was just 117 for Infosys. These disclosures drive home the point that income inequality is alive and well in corporate India — a trend that may need reining in by policymakers and organised workers’ unions.

Two, and this is something shareholders need to worry about: corporate profit growth and stock price performance seem to have little or no bearing on managerial pay hikes. To address this problem, the ministry of corporate affairs could step in to require all listed companies to establish a transparent framework which links at least part of top management pay to shareholder returns or dividends. This may help in a better alignment of their interests with the shareholders. This apart, the problem of runaway managerial pay is best checked by shareholder activism. Now that they have been armed with all the data necessary to benchmark a company’s compensation policy to others in the industry, public and institutional shareholders in listed firms have no excuse for remaining silent spectators when corporate boards approach them with exorbitant pay packages. It is only when these investors begin to actively vote out such proposals that the new pay-gap disclosures would have made their mark.

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