It’s a Variable World When it comes to Indian CEOs’ Pay
More than half of honchos’ salaries being linked to performance
New Delhi: India Inc’s big bosses are losing a compensation comfort they enjoyed vis-a-vis chief executives in other major economies — more than half of Indian CEOs’ pay will soon be variable, linked to performance. This is a big change. Just five years ago, less than a third of Indian CEOs’ pay was variable. Data from a CEO compensation survey of 380 companies in India show that more than half of the CEO pay is tied to performance. This means that just about 50% or less of the CEO salary is fixed, and the remaining is performance-linked and distributed in annual bonus and long-term incentives. And the fixed pay component of CEOs is likely to shrink further.
If global compensation structures are any indication, CEO compensation in India will get increasingly geared towards results in the coming years. The executive compensation survey 2015-16, shared exclusively with ET, was conducted by Aon Hewitt across eight industries.
One of the leading factors for high percentage of pay for performance is pressure from shareholders, which has prompted companies to tie a greater percentage of their CEO compensation to outcomes and results.
“CEO compensation is outcome-driven. The shareholders need to see there is connection between compensation and outcome. As CEO compensation increases so does the percentage of the performance-linked pay,” said Anandorup Ghose, partner, Aon Hewitt. Fortune 250 companies have almost 70% allocation to long-term incentives, according to compensation experts. Globally, pay for performance can account up to 85% of the CEO salary.
Listed companies have higher proportion of variable pay and long-term incentives compared with non-listed counterparts, reveals the survey. Close to 60% of CEO salary in listed companies is at risk.
“Listed organisations are more aggressive in pay for performance, and these would also pay a chunk of CEO salary in ESOPs (employee stock option plans). The upside for listed companies is that markets are funding the CEO compensation,” Ghose adds.
Compensation experts point out that the promoters who were earlier very conservative in sharing gains or ownership with professional CEOs are enabling long-term incentive and wealth creation to attract and retain best talent — senior executives from multinational corpora- tions. Professionals are too welcoming this change, as they consider it fair that companies structure compensation in a way where they have potential to earn more if they contribute to the growth of the company.
SENSE OF OWNERSHIP
“Companies are looking for professionals who come with a sense of ownership. The best way to demonstrate that is if a professional is willing to have a major part of his/her compensation come through long-term incentives,” says Pallavi Kathuria, who leads the Asia-Pacific technology practice for leadership advisory firm Egon Zehnder.
Across sectors, the ‘pay at risk’ is highest in the financial services, followed by services sector, according to the survey. However, the quantum of variable pay is determined less by the nature of the industry and more by the impact on the business in a particular industry of variables that are either in the control of the executive or doors that are beyond his/her control. In sectors such as infrastructure, large capital goods and mining industries — where the intervention of the government policies and regulation is quite high — the total proportion of variable pay is on the lower side between 20% and 30%, another compensation expert said. So what does the future hold? “We may see a little bit of stabilisation in the structure from here on in India. However, as the companies grow in size and if western markets are any example to go by, we believe that greater amount will be allocated to long-term incentives in future,” says Anubhav Gupta, solution head (executive compensation), Aon Hewitt.