Ris­ing Crit­i­cism Over High CEO Pay Ra­tio

The Economic Times - - Economy: Macro, Mi­cro & More -

“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

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