The pitch for capping the salaries of chairmen and chief executive officers of companies is a highly emotive and controversial issue. Ever since one can remember, there has been a demand in the West, and in India, for this. It has grown louder after the 2008 financial meltdown. But nothing much ever happened on this score, specially in
the US where top CEOs are now called “layoff leaders”. According to the latest study, 50 top CEOs gave themselves hefty pay packets of $12 million each while laying off a total of 3,000 workers between November 2008 and April 2010.
Those who argue for irrationally high salaries in India predicate their thinking on the issue of demand and supply and argue that given the scarcity of talent in a country like India, it would be even more difficult to cap CEO salaries, or even the salaries of top executives. Besides, most companies would not adhere to the cap and would find 20 other ways of circumventing these limits. Today there is a cap of 11 per cent of net profit on managerial remuneration and five per cent of net profit on an individual manager’s compensation.
The parliamentary standing committee on finance, in its report on the new Companies Bill of 2009, has said that an overall outer ceiling on managerial remuneration should be prescribed and the corporate affairs ministry should evolve a rational formula to implement this. It has also suggested that remuneration should be decided by the remuneration committee of the board, or shareholders, as is proposed in the bill. This hardly works in practice as the board is usually appointed by the CEO, the promoters or the directors, who are in cosy collusion with each other. The shareholders, as is well known, have no voice in a company.
The Prime Minister had himself asked India Inc. in 2007 to resist excessive remuneration to promoters and senior executives in order to discourage conspicuous consumption. He said industry should temper its emoluments keeping in mind the extreme poverty in the country and that rising inequalities in wealth can only lead to social unrest. Of course, this flies in the face of the capitalist laissez faire system that he and the Congress government initiated in 1991, but even so it deserves a serious look. They had removed the cap that existed in the pre-liberalisation era. One of the definitions of self-governance is that it definitely leads to abuse of power. The criteria for laying down the remuneration of the chief executive, promoters and top management must be seriously adhered to and meticulously interpreted. The criteria includes motivation, incentivisation, retention, reward and fairness. Most important of all is the alternate employment at that price, namely whether the same promoter/CEO would command the same price if he was employed elsewhere. This element is usually missed out, particularly in family businesses. There is, for instance, one business family where the father and the son, who are chairman and managing director respectively, take home 11 per cent of the company’s net profit as remuneration.
Of course, salaries in the case of CEOs and top management include commissions, which incidentally form the major part of the remuneration. The basic salary is not as sumptuous. In deciding commissions the issue of fairness is most important. For instance, should the CEO take most of the credit for the profit that the company makes? In family-controlled companies the commissions paid to executives are lower than what is paid to the promoter. Why this anomaly? And is it fair? This is one reason why the government needs to step in even though it may look like a pseudo-socialist move.