It’s a Vari­able World When it comes to In­dian CEOs’ Pay

More than half of hon­chos’ salaries be­ing linked to per­for­mance

The Economic Times - - Front Page - Saumya.Bhat­tacharya @times­group.com

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.

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