The globalisation of compensation PAVAN LALL
Like their international peers, Indian CEOs too have a significant portion of their incomes coming from stock options and performance-linked bonuses
Just two decades ago, it would be unheard of anyone aside from promoters in large listed firms to take home amounts that run into millions of dollars. However, the advent of long-term incentive programmes, rise of capital markets and general awareness about global remuneration trends has changed all that.
The question is, how is the larger variable component in a salary being structured by the nomination and remuneration committees (NRCs) of boards? Former HSBC Asia-Pacific CEO Aman Mehta, who also chairs several NRCs as an independent director at large listed companies, says the principles have not changed but materially what is different is firms that once had a grade structure operating like a salary range with one notch for good, two for excellent and so on, are evolving.
“The slow and steady approach has gone, with the basic salary being a smaller part and the more substantial component being the bonus and stock options, which hinge on performance,” says Mehta. Today, in listed firms, equity grants, stock options and bonuses can go as high as three-five times the fixed salary.
Wipro CEO Abidali Neemuchwala’s compensation rose 34.5 per cent in FY18 to ~182.3 million. Salil Parekh, who took charge as Infosys CEO and MD earlier this year, was offered an annual salary of ~320 million. C P Gurnani, CEO and MD of Tech Mahindra, made ~1.46 billion last year including stock options, against ~10.9 million (excluding stock options) in FY13.
So what’s driving the large pay-outs? For one, these are among the larger IT companies in the world with revenues of billions of dollars, with significant value creation potential. “The threat of digital disruption also means firms need to attract and retain top international talent,” says Vivek Khemka, co-leader of the CEO practice at executive search firm Egon Zehnder.
The growth of private equity (PE) in India over the last decade has also had an impact. Sandeep Chaudary, CEO of Aeon Hewitt, says: “PE firms want top management to have a strong linkage of their earn-out to how value is created.” This is evident across sectors like financial services to e-commerce, he adds.
People today are globally mobile, and compete worldwide, thus making the sectors ‘dollarised’. Mehta goes on to say, “It’s not only in software; it’s even happening in the fast moving consumer goods (FMCG) sector and companies are being benchmarked to international peer groups.”
However, one executive who is a global board member at a multinational firm says it’s key not just to benchmark, but to also ensure a third agency comes in and sees that variable components are in line with what the industry and peer groups are offering based on market share, performance, profit, revenue and so on. “The underlying principle is that key performance indicators have to tie into returns on capital employed,” he added.
Equally, there may be broad formulas for variable bonus compensation like a 60:40 fixed-to-variable split. “It’s really a matter of what the executive is able to negotiate with the board at the time and the relative value in the appointment,” says Zia Mody, managing partner of corporate law firm AZB & Partners. She’s not alone in thinking that way.
Uday Khanna, former CEO of Lafarge India and independent director on some top companies’ boards, says that in his view, a variable component too high is a negative given that it could drive shortterm behaviour. “Thirty per cent of variable pay should be the higher limit,” He adds that the dangers of driving CEO compensation too high leads to ‘keeping up with the Joneses’ syndrome.
Should one question executive compensation being decided by NRCs? Khemka thinks it is appropriate, given a couple of conditions. “It’s important that the independent directors are truly being independent and that they are kept abreast of the ongoing views from senior external talent, as shareholders aren’t always privy to market benchmarks, and insights into complexities of a high-level position,” he says. Beyond that, as Mody points out, how compensation is worked out really has a lot to do with how the board sees value in talent and the timing of everything.