Infosys may have buried its rules for CEO-to-worker pay ratio

During the times when Infosys was headed by its founder NR Narayana Murthy, the software company had an unwritten rule governing CEO compensation. The top executive salary would not exceed 25 times that of an entry-level employee.

It was as much a sign of the times as of the man, who lived a life of spartan simplicity, and who publicly spoke out against “excessive” CEO compensation.

But times, they are a-changing, even at Infosys.

For 2015-16, India’s second-largest software exporter handed out a ₹49-crore compensation package for CEO Vishal Sikka.

There is no measure of how many times it exceeds the entry-level employee’s salary at Infosys. But consider this: it’s about 300 times what the previous CEO, SD Shibulal, drew as a salary (₹16 lakh annually, excluding dividends on the 66 lakh shares he held). According to former board members and top management executives in the company, this represents a tectonic shift in the corporate culture of the company. “The rules have changed; it is no more a Murthy company,” said V Balakrishnan, former CFO, who is now a part of Reservoir Investment Managers, which invests in tech start-ups.

According to company insiders, the change in the compensation rules was met with stiff opposition from some board members. “There were some arguments among some board members on whether this would send a signal that is contrary to the image of Infosys,” said a former board member who did not wish to be named.

Another senior leader in Infosys added that some members disapproved of the compensation structure.

These sentiments were partly echoed when Infosys sent out a notice on February 24 to shareholders seeking their approval for five resolutions, including one on the reappointment of Sikka as CEO and MD. Four of the resolutions met with some resistance from shareholders; only about 23.57 per cent of promoter votes were cast in favour of a resolution reappointing Sikka as MD and CEO (the other promoters abstained from voting). However, all the resolutions were passed with a majority of votes in favour of them.

The concerns over “excessive” CEO compensation reflect global sentiments. “Globally, executive compensation is being debated due to the fact that income disparity is getting wider,” said Balakrishnan. In 2014, the Economic Policy Institute, a non-profit American thinktank, did a study of CEO compensation at the top 350 publicly traded firms; it showed that CEOs were paid an average of $15.2 million in 2013, or 296 times more than the typical worker.

In the case of Infosys, some industry watchers justify the executive compensation. According to Kamal Karanth, Managing Director, Kelly Services & KellyOCG India, a temp staffing company, if a CEO is expected to shore up revenues considerably above industry growth, he will expect to be paid very well.

Sikka has done that by revving up the growth engine, setting a vision for the next five years, improving client relationships and moving the company into a new terrain, which goes beyond cost arbitrage. Since the time he took over, revenues have gone up 23 per cent and profits by 20 per cent on an average.

“When boards approve large remunerations wherein the biggest component is stock option, they are basically sharing profits from markets, which would seem fair,” said Karanth. Others in the industry point to the changing nature of executive compensation in an industry that is largely conservative when it comes to CEO pay.

According to CK Guruprasad, Partner, Heidrick & Struggles, a top executive search firm, Indian IT companies have been conservative in executive compensation in an era when they relied on nothing more than cost arbitrage, which reflects little or no enterprise. Indian outsourcing companies do not have the culture of paying salaries comparable to a Silicon Valley firm of similar size. “Now that is changing,” he added.

While common management beliefs in executive compensation is centred around the risk-reward equation, management consultants have a word of caution.

“The questions relate to the kind of change to pursue and, secondly, how this goal can be accomplished without incentivising the CEO and top management to pursue strategies that involve inappropriate levels of risk,” says Peter Schumacher, CEO of Value Leadership.