The unstoppable CEO gravy train
Infrastructure Leasing and Finance Services (IL&FS) appears to be overtaking Fortis Healthcare and ICICI Bank in the bad governance stakes. In all three cases, commentators have pointed to the board’s dereliction of fiduciary duty. But the impending implosion at IL&FS also underlined a more deep-rooted moral hazard in India Inc: The propensity for senior managements to reward themselves generously regardless of their performance and at the cost of employees and shareholders.
IL&FS, which is staring at major payment defaults in the months ahead, has been in the red since FY16. In FY18, losses jumped to about ~21 billion. This should have been good reason for the senior management to take a voluntary salary cut, you would have thought. Quite the contrary.
Ravi Parthasarathy, who ran IL&FS for close to three decades and bestrode it like a colossus till June this year, saw the salary component of his remuneration package jump 58 per cent between FY15 and F18.
In the same period, Hari Shankaran, vice chairman and managing director, saw his salary jump 64 per cent. For Arun Saha, joint CEO and managing director, the salary jump was more modest, just 14 per cent.
Hemindra Hazari, who wrote a stinging analyses of IL&FS in The Wire, from which the numbers above have been collated, points to the stunning inaction by the board’s Nomination and Remuneration Committee.
IL&FS is no outlier. Even a speed read of Business Standard’s CEO salary survey last week suggests that senior managements in India Inc do not seem to suffer pangs of conscience in delinking their emoluments from the performance of the corporation they are supposed to manage.
The broad picture is disturbing: The growth in CEO salaries between FY16 and FY18 has outperformed the growth in net sales and net profit by quite a margin. Shareholders were not the only ones to have been short-changed, employees were too, with CEO salaries growing in indirect proportion to salaries, wages and bonus.
The standard view is that this skew in corporate emoluments is only to be expected where familyowned companies dominate. But widely-held companies do not deviate much from this trend, though, being subject to more scrutiny, they tend to be less overt in at least this proclivity. Thus, where CEO salary was 13 per cent of Amara Raja Batteries’ profits, for Larsen & Toubro, the figure was 2.4 per cent (not that this prevented L&T’s A M Naik from leading the ranks of India’s top corporate earners). The survey can be read here: [ https://www.businessstandard.
This steep uphill curve in CEO compensation appears to have no limits. Freed from the absurd quantitative restriction on managing directorial compensation from the late eighties, the postreform era saw CEO salaries become truly global. India may still have been poor and unequal — how much remains a matter of eternal debate given our opaque official statistics — but CEO salaries came increasingly linked to global indices. Today, this applies as much to Indian CEOs with experience in India as to CEOs recruited from abroad. No surprise, Bloomberg cites data that shows that the pay ratio between a CEO and the average Indian worker lagged only the US.
Eleven years ago, Manmohan Singh as prime minister set off momentary panic among the CII crowd when he suggested that top management should resist the urge to reward themselves so generously. Contrary to fears, no law was introduced. A provision in the Companies Act, 2013 requiring government permission if top management remuneration exceeded 11 per cent of profit does not seem to have deterred the proclivity toward selfgenerosity. A notification issued Thursday appeared to recognise this reality by stating that remuneration exceeding these limits would now only require shareholder approval. Given the weak nature of corporate democracy in India, CEOs must be popping the champagne.
Should this exclusive gravy train matter in a world of free markets where employees and shareholders have — in theory at least — the option to exit a venal company? The broad arguments that apply to offering high net worth individuals tax breaks extends to CEO compensation as well. The rich tend to put their extra cash into the stock markets and financial instruments that enrich them further. Those down the line tend to spend their earned surpluses on goods and services that spur growth: From spas to cars and consumer electronics. Inequality, it seems, begins in India Inc.