In a recent postal ballot, an overwhelming majority of SUN TV’s institutional investors voted against a resolution that re-appointed Kalanithi Maran as executive chairman and his wife, Kavery Kalanithi as executive director for another period of five years. Their grouse was not against the position but their staggering remuneration. Both of them, in FY21, had taken home ₹87.5 crore each — amounting to 57 per cent of the company’s total wage bill as pay. On top of that the new resolution sought shareholders nod for a hike in their remuneration by up to 25 per cent.

Under normal circumstances, such an opposition by institutional investors would have forced a company to re-think. Not here. The resolution was passed without batting an eyelid as the promoters owned 75 per cent stake in the company (institutional investors’ stake is just 12 per cent).

Ironically, this is not the first-time institutional investors have opposed Marans’ exorbitant pay. They have been doing so for years with little effect and in that period Marans’ pay has risen from ₹57.01 crore each in FY12 to ₹87.5 crore each in FY21.

This problem is not unique to Sun TV alone. A study by Institutional Investor Advisory Services (IiAS) reveals that CEO pay increase in 66 of the 100 `S&P BSE 100’ companies had outpaced revenue and profit growth (or both) over a three-year period. Even the pandemic has not slowed this trend. While companies retrenched employees and/or cut the pay, growth in executive pay continued unabated. Take the case of JSW Steel. Sajjan Jindal’s remuneration in FY21, at ₹73.4 crore, was 83 per cent higher than previous year. In comparison, the company’s employee benefit expenses dropped by 12 per cent.

If one compares the top executive pay with the median salary in the company, the difference is even more stark. Murali Krishna Divi, MD, Divi’s Laboratories took home a remuneration of ₹80.8 crore in FY21 which is 1,868 times the median employee remuneration of the company. In FY20, the average multiple between top executive pay and median salary in India was 259 times which is second only to US (299 times). For UK it was 201 and China it was 127.

Also, the gap between the top executive pay in a company and the next high-ranking person is unbelievably wide. In the case of Sun TV, Kalanithi and Kavery Kalanithi get a salary that is 55 times that of the next high ranking professional. Hero MotoCorp’s Pawan Munjal’s pay is 13 times his number two official.

That apart, the structure of the remuneration in India is very different from that of global peers. Here the fixed component of the pay is as high as 70 per cent whereas in other countries it is just 40 per cent. This explains why executive pay continued to rise even in the pandemic.

Clearly Indian promoters pay themselves a lot more than they deserve if one takes into account the complexities in their businesses in comparison with their global peers. Let us look at two examples pointed out by IiAS. The highest executive pay in Toyota Motor Corporation, in FY21, is ₹95 crore. This is a company that has operations in 170 plus countries and a revenue of more than $200 billion. In comparison, Marans’ took home ₹157 crore for running a regional TV channel with a revenue of ₹3,177 crore in FY21 ($424 million)

Similarly, CEO of Rio Tinto, a global natural resources company with operations in more than 35 countries and revenue of $44 billion, was paid a remuneration that was just 81 times the median employee pay. In comparison, Amara Raja Batteries’ Jayadev Galla has a pay which is 1,952 times the median employee remuneration. The company’s revenue in FY21 was ₹7,150 crore or $ 950 million.

High promoter stake

The reasons are many as to why promoters in India are able to get away with such exorbitant pay. Firstly, it is a cultural issue. Even after they tap public funds, the promoters continue to believe `it is my company’. The fact that they tend to own much higher stake in the company compared to their counterparts elsewhere in the world emboldens them further.

Secondly, where promoters own very high stakes, the Board of Directors tend to be weak and have no power or interest to question such a high pay. In the US and other evolved markets, strong Boards have ensured that such instances are far and a few between. Where the Board fails, institutional investors or activist investors step in to make a huge issue. The stock markets also punish companies for such things. However, in India, institutional investors prefer to remain silent. The trend of punishing companies that have low governance practices is just picking up in the country.

There are ways to bring about a change. One option is to cap the pay. For instance, Israel in 2016 passed a law to cap pay ratios in the banking and insurance sectors to 44 times the salary of the lowest paid worker. While this will work, it will be seen as a retrograde move — a return to the control era. It will send a wrong signal to the world at large.

The other option is to tweak the regulation on how such resolutions are voted — by treating the resolution on promoter pay like a related party transaction. This will mean that promoters cannot vote and majority of minority votes will ultimately decide the fate of the resolution. Such move will prevent promoters from taking huge salaries or if they do so, they will, at least, have to explain the reasons with global benchmarks.

Finally, creating awareness is the lasting solution. Proxy advisory firms and institutional investors must speak out about promoters who reward themselves unfairly at the cost of minority shareholders (a higher dividend would have been more equitable). It will lead to markets correcting the company valuation downwards. This is also the best deterrent as promoters who typically indulge in such practices tend to hold a high stake. A steep fall in valuation will erode their wealth significantly.

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