How We Ranked Them
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India's most ‘value'able ceos survey started with the Bombay Stock Exchange 200 (BSE-200) as the base set, as it gave us a sufficiently large universe (200 companies) to start with and was also fairly representative (86 per cent of India's market capitalisation). Data was collated from CMIE Prowess, annual reports and publicly available information.
Last year, we reviewed two-year performance; this year, we have taken three: 2006-07 to 2008-09. To the universe of the BSE-200, we applied a set of filters to arrive at a list of companies for whom performance could be effectively measured. The parameters used were:
1. Companies with a trading history of more than three years
2. No losses reported in the past three years
3. The tenure of the chief executive officer or managing director was more than three years
We also used a couple of parameters to remove the outliers:
4. Less than Rs 10 crore in profits in the starting year (FY 2006-07)
5. The CEO/MD's compensation in the latest year was less than Rs 1 crore
After applying these filters, we were left with a set of 77 companies where performance could be effectively valuated and compared with the CEO's compensation. The methodology to evaluate company performance focused on a combination of fundamental factors and share price performance, using both absolute and relative measures. We added a factor to capture company size as it is a driver of compensation as well. Relative measures such as comparison with sectoral indices were used to adjust for sector-specific factors. Every industry has its ups and downs, and it is only fair to evaluate a CEO's performance in the context of the industry environment of the company.
We considered revenues (or sales) and profit after tax (PAT) growth over FY07-09, both measured on an absolute and relative (by comparison with peers in the same industry). Similarly, price performance was measured to sector basis. Price data was taken from 31 March 2007 and 30 October 2009.
Lastly, absolute market capitalisation (as on 30 October 2009) was included to reflect company size, as otherwise, based on only growth and share price performance, smaller companies could have had an advantage over larger ones. That is also why size (in terms of market cap) was given high weightage.
WEIGHING THEM RIGHT
Weightages given to various parameters Sales growth
In all, we have four fundamental factors (absolute and relative revenue growth; absolute and relative PAT growth), two price performance factors (absolute and relative share price performance), and one size factor (absolute market capitalisation). Companies were given scores on each factor on a scale of 1 (company with lowest growth) to 100 (company with highest growth) with the others interpolated. This is better than a simple ranking on each factor as that would not have captured the relative difference between two firms. Each factor was also given a certain overall weightage (see ‘Weighing Them Right'). Composite company performance scores were arrived at by summing up the weighed scores on each factor.
Separately, compensation for the CEO/MD was captured and a compensation per point score calculated to arrive at a composite measure of CEO compensation. The company whose CEO gets the lowest compensation per point is the one that gives shareholders the most bang for their buck, the most ‘value'able CEO. The compensation figures include salary, bonus, commissions and cash perks. What they do not include is stock options; several firms have stock option plans, but are not required to disclose details of individual options vested. The stockmarket regulator, Sebi, requires that only the total amount of options vested and exercised in each year be disclosed for the company as a whole.
There are three sets of tables: the most ‘value'able CEOs; India's most highly paid CEOs; and a third set that provides ranking of the most ‘value'able CEOs by sector.
Click here to view 'The Most Valuable CEOs'