Rising Criticism Over High CEO Pay Ratio
“Shriram Subramanian, founder of proxy advisory firm Ingovern, said: “it will be pertinent to know what proportion of the CEO pay is performancelinked and what is the industry” benchmark. While government-owned enterprises don’t have to disclose median pay, companies such as Bajaj Auto, Reliance Industries, Maruti Suzuki and Bosch have chosen not to include pay ratios in their annual reports. High CEO pay ratios have come under criticism globally, although the UK and the US do not require these to be disclosed. A UK government green paper on corporate governance reform in November last year revealed that total pay of CEOs at FTSE 100 companies quadrupled in 18 years to £4.3 million in 2015. This was largely due to the growth in annual bonus payments and long-term pay incentives far outstripping the growth in average pay in the UK. On average, FTSE 100 CEOs were paid128 times more in 2015, up from 47 times 20 years ago.
This ratio is estimated at 300 in the case of US companies. The issue gained currency after the disclosure of pay ratios was made enforceable from this year as part of the Dodd-Frank Act. However, its implementation is likely to be delayed or dropped with the Trump administration mandating a sweeping review of the law.
Incidentally, in November 2014, Swiss voters rejected a proposal to cap the salaries of top executives at 12 times that of a company’s lowest wage.
“The arguments that are used to explain the pay gap are selfserving and not really very convincing,” said Stefan Stern, director of High Pay Centre, a London-based think tank. “People talk of exceptional executives with great talent and amazing gifts required at the top. I don’t think evidence points to that.”
A Lancaster University Management School study last month found a negligible link between CEO pay and company performance. The study, involving more than a decade of data on the pay and performance of Britain’s 350 biggest listed companies, found that remuneration had increased 82% in real terms over 11 years to 2014. Much of this increase was the result of performance-based pay. In contrast, the level of value creation over the same period was low and erratic from year to year, the study revealed. “This is a big question for a globalising India that to what extent it wants to adopt the Western approaches of CEO pay,” Stern said. “India has to be careful before it embraces some of the trends of the UK or the US, which I am not sure if they are resulting in long-term benefits for our economies.”
TWO MAIN REASONS
The separation of ownership and management and talent crunch are the two main reasons for high pay ratios, said Bino Paul, dean at the School of Management and Labour Studies at the Tata Institute of Social Sciences (TISS).
“With the separation of ownership and management, owners have to pay more to managers for taking risks and delivering performance on a shortterm basis,” he said. “Besides, executive search is a costly affair. Talented executives with prominent firms don’t come easily without an attractive pay package.”
The balance is likely to shift, said Uppaluri of Randstad. “Going ahead, the pay gap may shrink in case of sectors such as healthcare, education or BPO, which are fairly less risky and have streamlined processes,” he said. “On the other hand, innovation-driven and risky sectors like ecommerce, services and technology companies may see the gap remaining wide.” But that may not happen overnight.
“It will be too premature to gauge what the trend will be. One has to see what the data is over a period of time. It remains to be seen how stakeholders such as labour unions use this data,” said Subramanian of Ingovern. “Shareholders are not worried about the pay ratio per se. They are more interested in peer comparison of remuneration and whether it is linked to company’s performance.”
In 2014, Tata Motors faced the ire of minority shareholders over increased executive pay beyond the permissible limit before the move was approved eventually. “The increased pay gap is definitely creating a growing inequality and a silent dissent which is a threat to employee engagement and company’s performance in the long run,” Paul said.
A UK govt green paper on corp governance reform in Nov revealed that total pay of CEOs at FTSE 100 cos quadrupled in 18 years to £4.3 m in ’15