How We Ranked Them

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08 November, 2014

This year’s survey of India’s Most ‘Value’able CEOs took place in the most trying of circumstances. India’s economic growth remains tepid; the global economic scenario continues to be uncertain; and the central government seems to be lacking in authority and direction.

But what better a time to evaluate a CEO’s performance than during hard times? As in previous editions, we started with the BSE 500 as the base. It gave us a large universe to start with and was also representative (over 90 per cent of India’s market cap). Using publicly available data and company reports, we grouped them into four categories — super-large (revenues greater than Rs 20,000 crore), large (Rs 6,000-19,999 crore), mid-size (Rs 1,500-5,999 crore) and small (Rs 500-1,499 crore). Companies with revenues below Rs 500 crore were not included in the sample. To this universe, we applied a set of filters to generate a list of firms whose performance could be measured.

The parameters used were:

Companies had to have had a trading history of over three years
No losses should have been reported in the past three years
The tenure of the CEO or managing director had to be more than three years

Two additional parameters were applied to remove the outliers: those with less than Rs 10 crore in profits in the starting year (2010-11), and whose CEO’s or managing director’s compensation in the latest year was less than Rs 1 crore. After applying these filters, we were left with 212 companies where performance could be effectively evaluated and compared with the CEO’s compensation. The methodology to evaluate performance focused on a combination of fundamental factors and share price performance, using both absolute and relative measures. We normalised for company size as a driver of compensation. Relative measures such as comparison with sectoral indices were used to adjust for sector-specific factors.

We took into account revenues and profit after tax (PAT) growth between 2011 and 2013, both measured on absolute and relative (comparison with peers) terms. Similarly, price performance was measured on a sectoral basis. Price data was taken from 2011 to 2013. Lastly, absolute market capitalisation (as on 31 March 2013) was included to reflect size, as otherwise, based on just growth and share price performance, smaller firms could have had an advantage over larger ones. That is also why market cap was given high weightage.

In all, 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) were involved. Companies were given scores on each factor on a scale of 1 (lowest growth) to 100 (highest growth).

This is superior to a simple ranking on each factor as that would not have captured the difference between firms. Each factor was also given a certain overall weight. We arrived at composite performance scores by summing up the weighted scores on each factor. Separately, compensation for the CEO was captured and a compensation per point score calculated. The firm whose CEO gets the lowest is the one that gives the most bang for the buck. Compensation includes salary, bonus, commissions and cash perks. What it doesn’t include is stock options.

We enjoyed doing this survey. We hope you find it valuable.

(This story was published in BW | Businessworld Issue Dated 02-12-2013)