PAY CHECK OF CEOs - DO THEIR PAY'S NEED A CHECK?
By Ruma Dubey
For once, we can feel proud that US is following the footsteps of India in an area least expected – corporate governance! SEBI's Corporate Governance Code which came into effect last October, already stipulates that CEOs pay, as a median of average pay of employees be disclosed. And our first set of such disclosures are already out. US is only now bringing this disclosure into effect, which will actually start coming out in the public by 2017.
On 5th August 2015, there was a big rule announced by US Securities and Exchange Commission (SEC). It mandated that every public company will henceforth need to disclose the ratio of the total compensation of its chief executive officer (“CEO”) to the median total compensation received by the rest of its employees. The hope, quite simply, is that this information will better equip shareholders to promote accountability for the executive compensation practices of the companies that they own.
Simply put, it means that we will get the median average pay of all the employees vis-à-vis the pay of the CEO. This will show, how much more or how much less the CEO takes home. It will show whether employees are paid enough or does the CEO take away all the money. In a way, this rule puts a value to the work of the CEO, in comparison to the employees of his organization. In short, is the CEO earning his worth or more than his worth?
Obviously, this rule has been brought in to rein in runaway pays of CEOs. The obscene amount of pay which a CEO takes home is always justified with the value he creates for the shareholders, how is leadership enhances the market value. Under that one reasoning – creating value, CEOs take home, most of the times, more than what they work for or more than the value they think they are creating. How is one single person – the CEO alone, responsible for the success of the company? Can Google (sorry, Alphabet) become what it is today with only Larry Page? Linking CEO pay to stock price is probably the biggest con in the corporate world.
Most in the industry say that US could see a ratio of 300:1 or somewhere around there, not 20:1 or even 30:1. That’s the kind of disparity this ratio will reveal. It will bring to light the huge disparity between the pay given to one single employee and thousands of other workers, who actually toil to make the company what it is.
Sounds like we are talking about India too? Aon Hewitt Executive Compensation report for 2011/12 was very revealing – it stated that there is a huge disparity between salaries of CEOs and rest of staff. The study has showed that minimum wage of an unskilled worker is 822 times lower than that of a CEO. And the minimum wage of a graduate is 675 times lower.
Yes, we do have the Companies Act which stipulates – “remuneration payable to any one managing director; or whole-time director or manager, shall not exceed five per cent of the net profit of the company. If there is more than one such director, the remuneration shall not exceed 10 per cent of the net profit to all such directors and manager taken together”. And SEBI’s Corporate Governance Code also stipulates the median. And what we now know for sure is that salaries in India, like in USA are completely skewed.
As per the disclosures, what we now know is that Mukesh Ambani has not taken a pay hike for seven years, but his salary is over 205-times that of the median employees of RIL. ITC’s Deveshwar’s ratio is obscene at 439 times; Wipro’s Azim Premji is at 89 times. HDFC Bank's Managing Director Aditya Puri got a remuneration that was 117-times of the median employee, ICICI Bank CEO Chanda Kochhar is at 97 times, Axis Bank's Managing Director and CEO Shikha Sharma is at 74 times. Infosys CEO Vishal Sikka pay is at 116 times, Vedanta’s Chairman Navin Agarwal is 293 times.
There are many who say that it is unfair to go a witch hunt after the CEO’s pay. Those in support say that the pay scales of CEOs have risen 25% only over past five years and this is in tandem with profits of the companies too. And yes, they follow the rule of 1% of net profit while they are allowed to take 5%; so why the grouse? The logic for high pay is also in support of a high price being paid for talent and skills. The fear in the corporate circles is that if pays come down, it would lead to further brain drain.
Yes, maybe they have point too. But the complaint is not against CEO pay – the ratio indicates that the divide is huge, meaning that employees pay have to go up to lower the gap. And that is where India Inc needs to step up. Just as CEOs need to be retained with big pay checks, so do the employees. And non-performing CEOs? Surely no pay hike and maybe a pay cut to reduce the ratio would sound good.
To end, this quote from Warren Buffett sums it up; when asked about what he thought about his paychecks to top executives, here is what he said, “Well, I feel fine with people making a lot of money for doing a great job. Yeah. But what I object to is the people that the-- the biggest payday of their life is the day that they leave a company from which they failed, or-- or where they get paid automatically big sums. If you want the shot at the brass ring-- if you want a shot at making tens of millions of dollars a year, if you flop, why in the world should you be making $5 million a year, or $3 million a year? That it's pay for performance is fine. Pay for showing up is not, not with the huge goodbye present or bonuses that are not tied to real performance, I think that's terrible.”