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[Contn.] Just Desserts The Variable Factor
The concept of variable pay isn't new to Indian companies. Readers given to going through the small print in annual reports are sure to have encountered the term 'commission'. If the company made a profit, its CEO would be paid a certain commission. Only now, this commission is truly variable. For instance, the CEO of a company that makes profits that are below projections may not be eligible for any reward at all. More important, companies have started looking at measures apart from net profit, marketshare, and revenues to assess a CEO's performance. ''We see two broad trends,'' says Sumer Dutta, Country Manager, Hewitt Associates. ''The first is the usage of more sophisticated measures of financial performance, like Total Shareholder Returns (TSR) or Economic Value Added (EVA). The second is to use a balanced measurement matrix that includes non-financial parameters like customer satisfaction and employee engagement''. Companies such as TCS and Lafarge already use EVA as a measure of CEO performance. Some companies could even split the variable pay component into two parts like Prudential ICICI has done. One of these is related to a company's performance in the short-term (typically sales and profits), and another to its performance in the long-term (Market Value Added or Market Capitalisation). The short-term bonus is typically capped as a percentage of the CEO's salary, while the long-term reward takes the form of stock options. Will Indian companies adopt this trend entirely? Shailesh Shah thinks not. ''The scarcity of talent leaves (Indian) chief executives with more options than companies.'' That's a pity. The avid pay watcher can expect more changes in the structure of CEO compensation in India. The specifics: sign-on bonuses, golden parachutes (See Bailing Out Rich, page 132), and severance packages, all mechanisms that insure CEOs from uncertainties prevalent in today's job market will become more prevalent. Robert Nardelli of Home Depot, for instance, has a severance clause that promises him additional stock option grants worth $20 million. And Disney's Michael Eisner has a minimum post-termination bonus of $6 million a year written into his contract.
There's also a corporate governance aspect to CEO-pay (See How It Should Be Done). This primarily revolves around the decision process involved in fixing a CEO's compensation. The MNCs have this routine down to perfection. In some, corporate HQ lays down the broad guidelines while the actual compensation is a function of local market conditions. In the Indian context it is the board of directors that decides the compensation of CEOs. Since most CEOs also chair the board, this means they write their own pay-cheques. However, some companies (especially the progressive ones) have comp committees in place. Indeed, the Kumaramangalam Birla Committee on Corporate Governance recommends the formation of a 'remuneration committee' which will determine, on behalf of shareholders, the company's policy on specific remuneration packages for Executive Directors and CEOs.
At a theoretical level, compensation committees are a must in companies that weave performance-based and stock-based variables into the overall salary. With an increasing number of companies moving to such compensation structures, committees, logic dictates, should become the norm. More important, regulations may soon insist on external representation on these committees. That, though, could take some doing, especially since most Indian CEOs are, owners who retain a controlling stake of the company directly, through other entities, or both. Still, it is evident that in the long-term CEO pay will become far more performance-driven that it is right now. And that is only in the fitness of things for people whose performance has a direct impact on a company's. -additional reporting by Bhaswati Chakravorty and Mily Chakrabarty 1 | 2 |
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In
the realm of CEO compensation, sound corporate governance takes the
form of determining a chief executive's pay on the basis of the
strategic goals of the company. Studies conducted by The Conference
Board in the US reveal that some companies develop a list of
financial and non-financial indicators representative of the
underlying strategic objectives of the business-a sort of Strategic
Performance Measure (SPM) that can then be used to decide CEO-comp.
The financial performance measures typically include return on
equity, stock compensation, net income, earnings per share, and pre
tax profit. Non-financial measures include customer satisfaction,
employee training and market development.
