Fat Cats & Revolting Shareholders
There seems at best a loose linkage between pay and performance in the Indian boardroom
The shareholders of Apollo Tyres recently rejected the re-appointment of Neeraj Kanwar as Managing Director. The institutions are reported to object to an enhanced compensation package offered to Kanwar, up some 40 per cent to Rs 68.4 crores, at a time when the company’s sales are flat and profits down. Kanwar is the son of the promoter and Chairman, Onkar Kanwar. Globally, boardroom pay is a hot subject. Regulators and institutional investors have demanded greater disclosure and justification of pay and the introduction of such measures as claw-back of bonuses and minimum shareholding requirements. Last year, 18 of the FTSE 100 companies in the UK had at least 20 per cent votes against adoption of their remuneration policies.
Discontent over executive pay remains much more muted in India. Shareholder revolts against board pay are still rare despite the greater disclosure and voting power given to shareholders over remuneration policy by the Companies Act 2013.
In principle, higher pay in India’s fastgrowing and complex market is, of course, justifiable. For years, boardroom pay was artificially suppressed by regulation. India now operates in a global market for top talent and, despite recent increases, on average Indian CEOs are still paid less than global comparators.
But remuneration committees, boards and shareholders must grapple with the issues raised by escalating executive compensation before revolts like that in Apollo Tyres become frequent or politicians seek to reimpose tight regulation of pay.
First, the quantum and rapid increase in executive pay packages raises legitimate questions of fairness in a country with GDP per capita of just $2,000. Salaries of CEOs at the leading 500 listed companies in India has grown by 85 per cent in the last five years, according to a study by IiAS. Bloomberg reports that CEO pay at companies in the Sensex now averages $3.6 million. The ratio between CEO pay and that of the average worker, at 229 times, is the second highest worldwide after the US.
Second, and more tellingly, there seems at a best a loose linkage between pay and performance in the Indian boardroom. IiAS’ CEO Pay Chartbook reports that CEO pay has increased at nearly twice the rate of either revenues or profits over the past five years. A key difference between India and international best practice is that fewer companies have adopted Long Term Incentive Plans (LTIPs) that explicitly link a high proportion of compensation to the creation of shareholder value. Variable compensation in India tends to mean the annual bonus or commission. In part, this reflects the hostile tax treatment of ESOPs which taxes the grant of an option as a perquisite notwithstanding that any benefit is at best uncertain and years in the future.
Third, shareholders and boards are still not tackling the promoter distortion of pay levels. Nine of the top ten highest paid CEOs in India are promoters rather than being professional managers. The correlation between compensation and the size of the company is weak; six of the ten highest paid CEOs in 2017 led companies outside the Sensex. IiAS calculate that, on average, promoter directors are paid 60 per cent more than professional directors (even not counting dividends).
Few would begrudge executives generous compensation if they deliver shareholder value. India has witnessed a rise in shareholder activism in recent years and it is now time for boards and shareholders to ensure that boardroom compensation is linked to performance, not family name.
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