Per­for­mance-Linked Pay Get­ting Big­ger for CEOs

The Economic Times - - Careers: The Fast Track/companies - Rica.Bhat­tacharyya @times­group.com

Mumbai: In­dian com­pa­nies are get­ting more ag­gres­sive on per­for­mance-linked pay for CEOs than the lo­cal units of their global peers, not only hold­ing the top ex­ec­u­tives more ac­count­able for busi­ness per­for­mance, but also of­fer­ing hu­mungous wealthcre­ation op­por­tu­ni­ties to those who de­liver on prom­ises.

A tal­ent crunch at the top is driv­ing this shift away from the tra­di­tional struc­ture where fixed com­po­nents ac­counted for most of the pay, ex­perts said. Com­pa­nies are go­ing all out to lure ex­ec­u­tives, who could lead their ex­pand­ing busi­nesses and steer them into the fu­ture, with great of­fers.

Ac­cord­ing to a re­cent sur­vey by HR con­sult­ing firm Aon He­witt, lo­cally listed In­dian firms are plac­ing far more em­pha­sis on an­nual as well as long-term in­cen­tives, com­pared with multi­na­tion­als that are listed in In­dia and un­listed com­pa­nies. CEO pay mix is chang­ing in favour of higher vari­able pay as com­pany size in­creases, with the per­for­mance-linked por­tion con­sti­tut­ing 3040% of the to­tal pay on an av­er­age, showed the ex­ec­u­tive com­pen­sa­tion sur­vey con­ducted dur­ing Au­gustDe­cem­ber 2016.

There has also been a drop in fixed pay in­cre­ments — to 9.3% in 2016 from 9.7% the pre­vi­ous year, the sur­vey showed.

In­dus­try es­ti­mates sug­gest the vari­able com­po­nent (in­clud­ing short­term and long-term in­cen­tives) in a few cases could be as high as 50-55% of the pay mix. “While CEOs of In­dian com­pa­nies are re­spon­si­ble for tak­ing the com­pany global, the role of most for­eign MNC CEOs is lim­ited to In­dia and South Asia. This gets re­flected in the CEO pay struc­tures. In­dian com­pa­nies, go­ing for­ward, will have higher at­tri­bu­tion to long-term in­cen­tives,” said Anub­hav Gupta, Aon He­witt’s South Asia head of ex­ec­u­tive com­pen­sa­tion. For large-cap com­pa­nies, short- and long-term in­cen­tives now form 50% to 70% of a pro­fes­sional CEO’s pay.

The cor­re­la­tion of pay and per­for­mance has tra­di­tion­ally been low in In­dia, pri­mar­ily be­cause the es­tab­lished com­pen­sa­tion struc­tures had a high fixed com­po­nent and a low vari­able. This is chang­ing now with high risk and high re­turn op­por­tu­ni­ties for CEOs.

“The vari­able com­po­nent of pay is ‘at risk’, which means it is sub­ject to pre-de­fined per­for­mance con­di­tions be­ing met. In the re­cent past, we have seen as much as 50% of the to­tal com­pen­sa­tion be­ing per­for­mance-linked vari­able pay, which is a sig­nif­i­cant shift from five years ago,” said Pratik Mehta, di­rec­tor, Deloitte In­dia.

IT/ITeS com­pa­nies are ob­served to be more ag­gres­sive on long-term in­cen­tive as they com­pete with global ri­vals for tal­ent and thus need to be more aligned to global com­pen­sa­tion

struc­tures, said Shalini Jain, tax part­ner with peo­ple ad­vi­sory ser­vices at EY In­dia.

In the tra­di­tional man­u­fac­tur­ing in­dus­try (es­pe­cially in­fra­struc­ture, min­ing, etc.), where in­ter­ven­tion of gov­ern­ment poli­cies and reg­u­la­tion is quite high, vari­able com­po­nent is ob­served to be on the lower side, she added.

It is a win-win for both the or­gan­i­sa­tion and the ex­ec­u­tive. “Greater em­pha­sis is be­ing placed on vari­able pay which is also in a way aimed at wealth cre­ation, in­creas­ing re­ten­tion, re­duc­ing fixed com­mit­ments and driv­ing higher per­for­mance ori­en­ta­tion,” said Akhil Bansal, deputy CEO, KPMG in In­dia.

Com­pa­nies are get­ting more in­no­va­tive when it comes to in­cen­tivis­ing the top per­form­ers, com­ing up

with newer long-term struc­tures like re­stricted stock units and per­for­mance shares be­yond em­ployee stock op­tions.

One of the rea­sons for adding more com­po­nents to per­for­mance-linked in­cen­tives is high volatil­ity in share prices, of­ten caused by fac­tors out­side the con­trol of the man­age­ment, which af­fects the ac­tual stock-based com­pen­sa­tion, said Gupta. Also, a re­cent change in ac­count­ing stan­dards — stock op­tions will now be treated as an ex­pense — is prompt­ing the shift. While some com­pa­nies are mov­ing away from stock op­tions, there are oth­ers that are link­ing vest­ing of ESOPs to per­for­mance than time, ex­perts said.

“Just be­ing with the com­pany does not guar­an­tee the op­tions will vest,” said Garima Sharma, vice pres­i­dent, Just Esops.

Per­for­mance pa­ram­e­ters in­clude not only meet­ing in­di­vid­ual goals, but com­pany tar­gets as well. ESOP vest­ing is now linked with met­rics such as growth in earn­ings per share, share­holder re­turn, or event or mile­stone in terms of the or­gan­i­sa­tion’s per­for­mance.

The over­all idea is to not re­ally use long-term in­cen­tive ve­hi­cles as merely re­ten­tion mea­sures, but also as per­for­mance driv­ers. “With reg­u­la­tory man­dates on com­pen­sa­tion dis­clo­sures for se­nior lead­er­ship roles, re­mu­ner­a­tion com­mit­tees ev­ery­where are steadily work­ing to­wards meet­ing share­holder ex­pec­ta­tions of closely align­ing busi­ness per­for­mance mea­sures and out­comes with the vari­able pay for the ex­ec­u­tives,” KPMG’s Bansal said.

How­ever, there is also a flip side of high vari­able com­po­nent. In the past, large bonuses and stock op­tions have been held re­spon­si­ble for overly risky be­hav­iour and short-term strate­gies, said EY In­dia’s Jain. Also ex­trin­sic mo­ti­va­tion may crowd out in­trin­sic mo­ti­va­tion and in­no­va­tion. At the same time, mea­sure­ment of ‘per­for­mance’ through ex­ter­nal pa­ram­e­ters is not al­ways com­pletely ob­jec­tive and may lead to fraud.

“Typ­i­cal share/stock-based per­for­mance met­rics do not ad­e­quately fo­cus on the levers of value cre­ation and may not al­ways con­trib­ute to sus­tained com­pany growth and per­for­mance,” said Jain.

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