Over the last few weeks, significant attention has been drawn to the issue of executive compensation, following observations by the Minister for Corporate Affairs that there ought to be moderation in CEO salaries in India. Two factors seem to have triggered such attention. One, which carries political overtones, is the Government’s own measure of austerity. The other is the raging debate on CEO pay that is ongoing in countries such as the U.S. and the U.K., partially as a result of the collapse of companies in the banking and insurance sectors. Salil Tripathi has a column in the Wall Street Journal that provides a nice perspective of the issues.
There is, however, one key aspect of management in Indian companies that has been ignored in this debate. In countries such as the U.S. and the U.K., CEOs and other senior managerial personnel rely on compensation received from the companies in the form of salary and other perks. Apart from stock options or some shareholding (usually as a result of exercise of options), CEOs do not hold any significant stake in their companies. Moderating executive compensation in such scenario carries some logic to it. On the other hand, CEOs in India in large measure take on a different character. They are not truly employees of the company; they also control the companies. A substantial part of corporate India, including public listed companies, consists of family-owned businesses. In those cases, the CEOs not only receive compensation from the company in the form of salary, but by virtue of shareholding and control, such CEOs may receive other economic benefits in the company, such as dividend and an appreciation in the value of shares of the company. It is trite to believe that in these circumstances, the CEO is incentivised purely by the salary obtained from the company; rather, it is the benefits of shareholding and control that operate as key incentives.
Given this scenario, too much is being attributed in the Indian context of a CEO here or there agreeing to a significant drop in salary or even giving up salary altogether. Reduction in such CEO salary may, at some level, indicate a sense of austerity, but it may mean less when seen in the overall context of the various commercial incentives of a CEO in a family-owned business. In that sense, the debate of CEO-pay seems misplaced to a large extent in the Indian corporate context. It is perhaps a case of shadow-boxing. Of course, there may be a handful of companies that are truly management-driven, or in the case of Government-owned companies, where CEOs rely solely on compensation received in the form of salaries, but those appear to be more the exception than the rule.
It may augur well for the Government instead to redirect its efforts to ensure that the benefits of control are not abused in such companies so that minority investors are protected, thereby ensuring the robustness of the capital markets.
very good article and the only one I have read in the context of the Indian debate which addresses the real issues.
The whole debate in India seems misplaced. The whole Mukesh Ambani compensation cap was such a red herring because he owns close to 50% of the company.