Big Fat CEO Salaries!

When Manmohan Singh asked the CEO's of Indian Inc, to take a cut in their salaries, I was watching the news with unabated interest as, the whole objective of my MBA, was being debated.Though one does get into an MBA for better job profiles and more senior roles, the lure of the money is paramount, even though it is not explicitly stated.

I personally am not of the opinion that Salaries can be legislated as it is a product of the demand dynamics of the marketplace. Moreover, given that we have very few business schools of quality in the country(Not more than twenty), it is tougher to find people with excellent skill sets for the top management, and as Mr Sunil Bharti Mittal points out, the Indian Salary levels of Top level CEO's pale in front of the salaries offered to top honchos in the Asia Pacific region.

Coming back to the salary comparison in the Asia Pacific, CEOs in fast-rising India are among the lowest paid with an average base salary of $89,759 and annual total cash of $111,510 on average. The average base salary for CEOs in South Korea amounts to $384,123. Cash compensation, including bonuses and other payments, adds another $568,502 on average,while CEOs in Hong Kong receive $250,707 in average base pay and $352,520 in average annual total cash, making them the second highest paid in the region.

"Compensation has long been driven by such factors as historic pay levels, size of economy and competition for talent," the Business Times quoted Mercer's Steve Gross as saying.

(Data from Mercer Report).

So India has a lot to worry about expanding the economy and the last thing they need is to make the CEO's take a paycut.I think The PM's message was more so in view of the wealth inequality in the country.... It's the in-your-face expenditure that hurts the have-nots. He meant ostentatious display of wealth should be avoided, so that the wealth disparity is not so marked to have aspersions cast.

But if one were to look deeply into what Manmohan Singh said, the CEO paycut could make India a more dynamic economic powerhouse. Why you may wonder? Here goes...

The sharp rise in executive pay in the US and the UK has to do with a large variable component in the form of stock options. The argument for stock options is that by giving executives a long-term stake in their firms, it aligns incentives closely with performance. This is fine in a context in which firms, especially large firms, are run by professional managers, but given the Indian corporate landscape which is heavily dominated by family-managed businesses and public sector firms, CEOs in family-managed businesses and others at the top being from the family, have large equity stakes in their companies. They receive substantial dividends that are not taxed in the recipient’s hands. Why would they need to pay themselves huge salaries?

Where the CEO is a family member, we need to have a built-in mechanism for moderating executive pay. The CEO does not need a big pay packet in order to deliver performance — his equity holdings provide all the incentive he needs. Once the CEO’s pay is pegged at a reasonable level, reining in compensation down the line is not difficult.

The presence of the public sector in several areas of the economy provides a cushion against soaring pay in the private sector. Family businesses may have to compete for professionals with foreign firms who can offer internationally competitive pay. But they have access to high quality talent in the public sector where compensation is way below that in the private sector. The public sector is appropriate to use private sector compensation to demand more pay. Maybe it is time to reverse the paradigm. How about benchmarking private sector compensation with pay in the public sector? There has been vast improvement in the market value of several PSUs in the post-reform period. How do managers in PSUs rise to great heights without the bait of six-figure salaries and stock options? Perhaps, it is appropriate to recall text-book principles about motivation — pay matters but there are other elements as well, such as the challenge in the job, the culture of the firm, recognition, etc.

One needs to see whether the variable pay schemes in the Indian corporate world are related to absolute increases in share price or increases relative to the market or peers? If the former, we have might have a recipe for disaster. In a booming economy that is exposed to foreign inflows, increases in share price may not be strictly correlated with company performance. Stock option schemes can easily yield undeserved gains to corporate bosses.

So after seeing both sides of the argument, I have decided I need more data to analyse this pay cut conundrum, which has got me all the more excited, as in a few years time, the pay cuts issue is something that could easily affect some plans of mine.

Article Composed after inputs from Business Line, Economic Times and The Hindu