Is Salary Of Big Players Justified?

CEO salary again a subject of debate; minister urges austerity, industry hits back.

Corporate affairs minister Salman Khurshid has triggered a debate on the salaries of the CEOs by advising them to observe austerity and asserting that government would not shut its eyes on the amount of money that company chiefs are taking home.

The minister’s comments, though well intended, evoked sharp reaction from the industry, which opposed any government check on the salaries of CEOs. Khurshid, however, found support from Planning Commission deputy chairman, who said that CEOs should not be taking home “indecent salaries”.

Who decides?

To pacify the industrial lobby, Prime Minister Manmohan Singh clarified that government was not intending to impose any restriction on the salaries of the CEOs. Company boards, Singh opined, should decide the salaries.

Khurshid too had maintained that onus of fixing salaries should rest with the boards and shareholders of the companies. He was against government approving the salaries of the CEOs. Under the current Companies Act, 1956, there are certain restrictions on salaries of directors and salary hikes beyond a point have to be approved by the corporate affairs ministry.

Under Schedule XIII of the Act, remuneration of a managing and whole-time director of a public company cannot exceed five per cent of the profit for one such person and 10 per cent if there is more than one such person. In the new company law, which is awaiting approval of Parliament, companies will not be required to seek government approval for salaries. Companies Bill, 2009, however, is currently being scrutinised by the Standing Committee of Parliament.

The Committee is expected to make some recommendations, which may or may not be accepted by the government while moving the bill for consideration and passage in Parliament sometime later.

Industry reasoning

The debate can be narrowed down to a simple question — should government impose restrictions on the
salaries of CEOs and directors of listed companies? There are strong arguments on both the sides. Votaries
of free market want no restriction whatsoever. For them, market forces should determine the salaries, board of companies and shareholders. India Inc for obvious reasons wants complete freedom. Industry chambers argue that high salaries were necessary to retain talent. Otherwise, the best minds would move to greener pastures and other locations. It was also pointed out that in a globalised world, Indian industry has to compete with the international companies and hence they would have to pay salaries comparable at international level. It has also been pointed out that global CEOs take much higher salaries than their Indian counterparts and there was nothing “vulgar” about their remuneration.

“Any new norms on compensation to India CEOs may set in motion a flight of talent and capital away from the country,” industry chamber FICCI’s president Harshpati Singhania said in a statement.

The Confederation of Indian Industry said it will come up with a governance code for its members that would deal with remuneration of executives at board level and a level below. A CII task force, under the chairmanship of former Cabinet secretary Naresh Chandra is studying the key issues of corporate governance, including the compensation packages of senior management.

“CII has always believed that corporates have a social responsibility and always supported self regulation…,” its president Venu Srinivasan said. Global consultancy firms like Deloitte Touche Tohmatsu and Ernst & Young also expressed similar view.

“In the global environment, which keeps changing, market forces will determine the right salaries. International talent is willing to be employed in India on Indian terms and conditions which would have been unthinkable a few years ago… any artificial cap would lead to flight of talent”, said P Thiruvengadam, senior director, Management Consultancy Services, Deolitte. According to SN Rajan, partner, Ernst and Young, “CEO salary has to be viewed in relative terms, and not just an absolute value. Aspects that impact include size of organisation, its performance, profit generated, impact of the CEO on the organisation, market equivalences in terms of compensation, replacement cost, expectations and resultant risk of being held accountable.”

The thrust of all these arguments is that government should play no role in determining the salaries of CEOs. Companies should be given complete freedom to determine the salaries of its directors.

Case for cap:

On the other hand, those who advocate some kind of restrictions and checks on salaries of CEOs too have an arguable case. The government has been advocating austerity, advising ministers and top functionaries to travel economy class reduce office expenses and avoid organising conferences in five stars hotels.

Amidst this background, Khurshid said, “What our leadership is telling us is that please inculcate a temperament of austerity and simplicity… We can hardly… shut out eyes on what salary the CEOs are going to take (home).” Replying to a question on the stand of government on some CEOs taking home very high salary, which can be described as “vulgar”, the minister said, “We have reached the level of liberalism where vulgarity is also a fundamental right.”

Ahluwalia’s remarks that CEOs should not be taking home salaries, which are “indecent” is in the same spirit. Trade union leaders and left parties also expressed their views on imposing some checks on the salaries of CEOs. One of the trade union leaders had said that there should be a “maximum wage”, on the similar lines as we have a “minimum wage.”

“We don’t approve high CEOs’ salaries. The government should bring strict law to deal with this problem. Self-regulation in this case is no remedy,” said Centre for Indian Trade Union (CITU) general secretary Mohammad Amin, adding the trade union would build public opinion on high compensation for corporate honchos. “There should be some restriction on CEOs’ salary… There should be strict regulation to deal with this,” opined Hind Mazdoor Sabha (HMS) secretary AD Nagpal.

Going by the arguments of both the sides, it would not be appropriate to give complete freedom to companies their board and shareholders to determine the salaries of CEOs. Shareholders too should have some say in the matter.

The onus of finding a mid-way rests with the government and Parliament and its Standing Committee, which is currently examining the new Companies Bill. The choice is not between freedom and no freedom, but between some freedom and some control.

In a nut shell

Government would not shut its eyes on the amount of money that company chiefs are taking home: Salman Khurshid

Government not intending to impose any restriction on the salaries of the CEOs: PM

Under the current Companies Act, 1956, there are certain restrictions on salaries of directors

Remuneration of a managing and whole-time director of a public company cannot exceed five per cent of the profit for one such person

In the new Company Bill, which is awaiting approval of Parliament, companies will not be required to seek government approval for salaries

High salaries necessary to retain talent; any new norms on compensation to India CEOs may set in motion a flight of talent and capital away from the country: industry

Indian industry has to compete with the international companies and hence they would have to pay salaries comparable at international level.