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SALARIES Just Desserts Eroding market values and flagging sales could force Indian companies to review CEO salaries, and a BT-Omam survey of CEO pay indicates that the process is already underway. By Seema Shukla
Another fact for some more heartburn: in 2000-01 Wipro paid its chairman Azim Premji an annual salary of Rs 4.28 crore, a 130.1 per cent increase over what he earned the previous year. That number was just a shade over the 121.7 per cent by which Wipro's net profits increased that year.
Finally, here's a trend that should bring some vicarious pleasure. On October 5, as this article went to press, RIL's market capitalisation had fallen from an average of Rs 36,600 crore in 2000-01 to Rs 26,565.3 crore; Wipro's from Rs 61,714 crore to Rs 21,443.51 crore. And questions about the amount CEOs reward themselves, which had begun to be asked some time ago in the West, had reached Indian shores. In the US, CEOs like Hewlett-Packard's Carly Fiorina, PepsiCo's Roger Enrico, and Capital One's Richard Fairbank have announced that they'd like to see their salaries pruned or return part of their bonuses, as a sign of their commitment to helping their companies tide over bad times. On another note, Cisco's John Chambers has announced that he is reducing his salary to $1 from the $1.3 million he earned last year, in an effort to save some jobs in a company that has resolved to cut 8,500 of them this year (never mind that even the $1.3 million looks insignificant when compared to the $150 million he earned by cashing his stock options last year). So, is it time for Indian CEOs to give back some? Not quite, but compensation experts - that is a field of study, and there are several of the species in India-believe that even if Indian CEOs do not voluntarily agree to have their salaries rationalised, they can expect a reduction in the same, courtesy the presence of a variable performance-linked component. ''The fixed pay of CEOs won't come down, but some of them will take a hit in their bonuses,'' says Sonal Agrawal, Director, Accord Group. Hurrah! Last year, for instance, the head of a foreign investment bank could have expected to earn a fixed salary between Rs 1.4 crore and Rs 2.35 crore. With a hefty bonus, some of them could have expected an annual payout close to Rs 5 crore. This year-the US economy is in recession, and the Indian economy is getting there-could be different: forget the variable component, in some cases even the fixed one could see some reduction. ''It is certain that CEO pay across sectors will take a beating primarily through a reduction in variable pay,'' explains Atul Vohra, a partner at search firm Heidrick and Struggles. ''But even if the base remains stagnant, that is in effect a reduction in pay once you factor in inflation.'' East And West If there's one thing working to the advantage of Indian CEOs it is the fact that they do not earn as much as their American counterparts, even after the requisite adjustments for purchasing power parity. BusinessWeek lists Citigroup's Sanford Weill as the highest paid CEO in the world who earned $224.9 million last year ($19.9 million in bonus and $204.9 in long-term compensation). And DaimlerChrysler's Jurgen Schrempp, who saw his company's shares depreciate by 39 per cent last year, earned $10.5 million. According to a Business Today-Omam Consultants survey of CEO pay (conducted in September 2001), the average Indian chief executive earns Rs 98.8 lakh a year. That's small change in comparison to the numbers in the previous paragraph. Adjusted for purchasing power parity (a multiple of 5.01) that works out to Rs 4.9 crore or $1.0 million-well short of the $13.1 million, the average American CEO earns. However, Indian chief executives can take cheer from the statistic regarding variable pay: this accounts for, on an average, just 23 per cent of their salaries; in the US, it could be anything between 30 and 50 per cent. While entry-level and middle-management salaries are largely a function of the sector in which the company operates-salaries are appreciably higher in some-there is no such distinction in the case of CEO salaries. ''Today, CEO salaries are not dramatically different across industries; companies like ITC and HLL pay as well as the top it companies,'' says Ajit Abraham, CHRO (Chief Human Resources Officer), Sify. Differences in CEO salaries, then, are largely a function of the company's performance. The BT-Omam survey bears that out. The effects of the slowdown in the software services sector is already evident in pay-cheques: the average CEO salary in the it sector is, at Rs 60.2 lakh per annum, 61.4 per cent lower than that in the FMCG sector (Rs 1.56 crore). One reason for the poor showing of CEOs of infotech companies (in terms of salaries, not performance) could be the value attached to their stock options. Most it companies structure their salaries around the sizeable stock options they issue; with the stock markets being where they are, the value of these options have depreciated. And infotech CEOs can't really insist on an all-cash package. Imagine the market's reaction when it finds out even the CEO doesn't set much stock by, well, his company's stock. It's The Structure Stupid Things, though, may not become as sticky for Indian CEOs as they have for some of their American counterparts. The reason? Competent Indian execs can find openings in companies anywhere in the world, and someone who has what it takes to be the CEO of a company that figures in the higher echelons of the BT 500 listing, probably has what it takes to occupy the corner room of a Fortune 500 company.
''CEO salaries in India have grown rapidly in the last decade,'' says Shailesh Shah, the chief executive of Watson Wyatt, a hr consulting firm. ''Today, they match CEO salaries in some parts of the Asia Pacific region''. Several companies also end up forking out a lot more to a CEO than they otherwise would have in the hope that the right kind of CEO can retrieve it from a slump. In May 2001, Zee Telefilms hired Sandeep Goyal as the CEO of its broadcasting operations at a cost to company of Rs 1.17 crore. ''Boom or bust, talent will always fetch a good rate,'' says Vohra of Heidrick and Struggles.
Still, it is going to be a rare (Indian) company that isn't affected by the slowdown, and several CEOs will take home less this year simply because their companies have moved to compensation structures with a high variable-pay component. ''Many CEOs will see a cut in their variable pay which is normally between 10 per cent and 35 per cent of the total cost to company,'' explains Anita Ramachandran of Cerebrus Consultants. ''On an average, I'd say there will be around a 15 per cent reduction in CEO salaries this year''. Over the past few years, Indian companies have been increasing the proportion of variable pay in the CEO's package. According to statutory guidelines, this can be as high as 1 per cent of a company's net profit. On the upside, that usually works out to 50 per cent of the basic (or fixed) pay, and 30-35 per cent of the total cost to company. Still, this structure is different from that adopted by most American companies where the fixed component accounts for no more than 20 per cent of the total, a bonus accounts for around 30 per cent, and the reminder takes the form of stock. 1 | 2 |
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Here's
a fact that should cause every right-thinking exec some heartburn.
According to Reliance Industries' annual report for the year 2000-01,
Chairman Dhirubhai Ambani's annual salary was a princely Rs 8.85 crore.
That was a 73.8 per cent increase over the Rs 5.1 crore he earned in
1999-2000. Just for the record, RIL's net profit in 2000-01 was 10.9 per
cent higher than that in 1999-2000.
