Good Read

Spoonfeedin WOrld

Business – Indian CEOs Get What They Deserve

SALIL TRIPATHI
Raging about executive pay is all the rage in India at the moment. Yet on the evidence, Indian executives are not actually overpaid. And the more noise New Delhi makes about corporate compensation, the greater the risk that politicians will unleash unintended consequences that will be worse than any perceived inequity in current pay scales.
Earlier this month, Minister for Corporate Affairs Salman Khurshid condemned the salaries of Indian chief executive officers: “When we are working on austerity, we can hardly say that we will shut our eyes to what salaries the CEOs are going to take.” He wants a parliamentary committee to weigh in, even though he says it’s ultimately matter for shareholders to decide. He added: “I don’t think anyone in India today has reached the level of liberalism where vulgarity is also a fundamental right.”

The threat of government intervention was clear. And right on cue, Mukesh Ambani, one of the country’s richest executives, announced he’d take a voluntary 66% pay cut from his job leading Reliance Industries, by some measures India’s largest company. That politically astute move brings his salary down to around $3.2 million, not counting profit-sharing. That might still sound like a lot in a country of 1.1 billion people where about one-third earn less than $1 a day. But it isn’t really—not even compared to the government’s existing rules on executive compensation.

Under current law, a managing director’s compensation cannot exceed 5% of net profit, and pay and directors’ compensation as a whole cannot exceed 11% of profit, without government permission. Mr. Ambani’s compensation in 2008 was around $10 million—only about 0.29% of Reliance’s net profit. A Federation of Indian Chambers of Commerce and Industry study shows Mr. Ambani is the rule, not the exception, in the “modesty” of his pay. Sunil Mittal, who heads Bharti Airtel, India’s leading telecom company, took home 195 million rupees ($4 million) in 2008, or 0.32% of the company’s profit. Kumar Mangalam Birla of the Aditya Birla group earned 112.5 million rupees, or 0.56% of net profits.

Some CEOs did cross the 5% threshold, but they were more likely to be CEOs of family-run firms, not professional managers. Many CEOs take home much less than what the government allows them. Despite these realities, government threats regarding executive pay are good politics. An unscientific Internet-based poll among readers on the Web site of the Indian newspaper the Economic Times showed that reader responses ran two-to-one for some cap on CEO pay in India, for instance. But India also has relatively recent experience with what a terrible idea pay-limiting policies are in practice.

Before the Big Bang liberalizations of 1991, executive pay was strictly limited. Salaries could not be higher than specific amounts (drawn up arbitrarily), and at one point in the 1970s, the highest effective marginal tax rate was 97.75%. The result was that much executive pay just went under the radar as companies struggled to attract talent. Many firms offered a mind-boggling array of perquisites, from housing to cars and drivers to school uniforms for the children to money for holiday travel, to pad salaries. This was a losing proposition for everyone. Companies had to expend time and money devising complex compensation arrangements. Shareholders had trouble determining actual compensation levels. Tax revenues suffered because it was easier to hide income.

The 1991 reforms made it easier for companies to pay their executives more, and as a result, pay packages also become more transparent. This is true not just on the company’s balance sheets, tax returns or proxy statements, but also in the executive’s own lifestyle. Before the reforms, when government played a more activist role in pay-setting, living modestly was a political necessity for executives lest they attract unwanted scrutiny from New Delhi. Less government interference has set executives free to consume conspicuously. One CEO has built a skyscraper for his residence, and some have given famously lavish gifts to their spouses (in one case, a yacht).
This display of wealth is sparking angst about inequality. New Delhi also draws political impetus for its statements about executive pay from abroad. The Group of 20 largest economies, of which India is a member, set down six principles on executive bonuses at its recent Pittsburgh summit. Yet executive pay in India, unlike elsewhere, is a purely private-sector affair. The companies in the firing line have not received any government bailouts or other benefits, beside the tax incentives and subsidies that were in place long before the latest fulminations on pay started.

So it should be for the shareholders to object to any supposedly outsized pay. Investors have repeatedly expressed confidence in many of the companies whose executive compensation is attracting government attention. Presumably they think the money is worth spending to attract and retain talent to run the country’s largest companies—or to reward the entrepreneurship of families that have created companies that have generated so much wealth.

There are indeed companies where executives take their shareholders—particularly minority shareholders—for granted, and create elaborate webs of deceit to mask big payouts. The state has a legitimate role in preventing such looting. But absent fraud, Indian companies and their shareholders benefit from the freedom to set competitive compensation levels.

Asking CEOs to earn less—or spend less—will shift what’s above board today to below-the-ground. It will not transfer a single rupee to India’s poor. But it will tell Indian businesses who the real boss is. Now, that’s a vulgar display of power.

Mr. Tripathi is a writer based in London.

Advertisements

October 20, 2009 - Posted by | Uncategorized |

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: