The great divide in CEO pay

Income inequality is a hot-button issue in economics, but did you know that it is quite rampant in corporate India as well? Starting this year, listed companies are required to make several new disclosures in their annual reports on CEO and top management pay, how it compares to the wages of the ordinary worker, and whether at all it has any correlation to company performance.

These disclosures have begun, but reading through individual annual reports may still leave investors no wiser about whether pay practices at the company they own are good or bad. That’s why BusinessLine scanned through the latest annual reports of India’s top 50 companies (the Nifty constituents) to cull out trends in CEO pay which investors can benchmark their firms to.

Globally, bankers have a reputation for overly generous pay packages, irrespective of whether their bank is sinking or sailing. But that doesn’t seem to be a problem in India. India Inc’s top paid CEOs hail, not from the banking or financial services sector, but from the manufacturing, technology and pharma packs.

Tech Mahindra’s CEO and Managing Director CP Gurnani easily tops the charts among the Nifty firms in 2014-15, netting ₹165.5 crore as his compensation for the year. But that’s overstated by ₹163 crore — the value of stock options that he exercised. If this is excluded as a one-off payment, his compensation was at a (relatively) modest ₹2.4 crore.

Excluding his case, Pawan Munjal of Hero MotoCorp (₹43.9 crore), Lupin’s Desh Bandhu Gupta (₹37.5 crore), Sunil Mittal of Bharti Airtel (₹27.2 crore) and AM Naik of L&T (₹27.3 crore) were the best-paid top bosses from the Nifty firms. Family-run companies weren’t necessarily the most extravagant in compensating their top bosses.

But not all Nifty companies were equally generous with their CEO pay. The top bosses at public sector undertakings earned compensation packages that were much less than ₹1 crore a year, a fraction of what their private sector peers took home.

Comparing across industries reveals a humongous public-private divide in CEO compensation. In banking, while ICICI Bank’s Chanda Kocchar attracted a total compensation package of ₹5.1 crore, SBI Chairperson Arundhati Bhattacharya netted less than one-twentieth of that at ₹23 lakh. While Kotak Mahindra Bank and Axis Bank forked out compensation of ₹7.5 crore and ₹4.2 crore to their top managers, Bank of Baroda and Bank of India shelled out ₹25 lakh and ₹26 lakh, respectively, to their CMDs.

In the power sector, NTPC’s recently retired chairman Arup Roy Choudury received just ₹50 lakh, while Tata Power’s Anil Sardana received ₹5.5 crore, including commissions for the previous year. What ONGC’s Chairman earned (₹61 lakh) wasn’t a patch on Cairn India’s compensation package of ₹7.33 crore for its Chairman.

This was despite these PSUs towering over their private sector rivals in terms of profits. In 2014-15, Tata Power reported consolidated profits of ₹167 crore (it had just turned around) against NTPC’s ₹11,403 crore. ONGC’s profits were at three times Cairn India’s.

This public-private divide in pay extended not just to top managers but also to independent directors at these companies. While PSUs compensated their independent directors only with nominal sitting fees, leading private sector firms incentivised their independent directors with generous commissions linked to net profits, in addition to sitting fees.

But if such wide pay gaps must surely handicap the State-owned firms in attracting talent, they do result in monetary savings for investors. While the above private sector firms paid out 1-2 per cent of their net profits as CEO compensation, PSUs got by with just 0.001 to 0.004 per cent!

Okay, there’s quite a bit of disparity between the have and have-not CEOs at India Inc. But how does CEO pay compare to that of the average employee at the same firms? The median pay disclosure rule, which requires listed companies to disclose the ratio of top management pay to the median worker’s, arms you with this information. (‘Median’ refers to the compensation earned by the middle worker in a firm if you rank all employees by their pay packets).

Management guru Peter Drucker advocated a CEO-to-median worker pay ratio of 20 times in the eighties. But actual pay-gap ratios at corporate India bear no resemblance to this.

Lupin’s Chairman, for instance, earned 1,168 times the package of the median employee at his firm in 2014-15. Hero MotoCorp’s CEO earned 631 times what the average worker took home. Hindalco’s Managing Director earned 518 times the median worker’s pay. Both L&T’s Chairman and Cipla’s CEO attracted compensation packages that amounted to 453 times that of their median employee. ITC and TCS too saw their ratios top 400.

While these were undoubtedly the outlier firms, the pay-gap ratio for a fourth of the Nifty companies fell in the 75 to 100 range. A fifth of the companies reported ratios of 100 to 200 times.

Most public sector firms skipped these pay-gap disclosures in their annual report, citing a Central Government exemption. That’s unfortunate because, had they made the disclosures, it may have worked in their favour. Coal India, one of the few PSUs to disclose the CEO-median worker ratio, revealed that its Chairman earned just five times the median worker’s pay!

While income disparity is alive and kicking at India Inc, the good news is that the generous compensation packages were not always reserved for promoters or the founding family. In fact, quite a few professional CEOs and MDs bagged hefty compensation packages, at times far exceeding the promoters of their firms.

Cipla’s Global CEO Subhanu Saxena, with an annual package of ₹13.3 crore, earned far more than the Hamieds from the founder family, who took home ₹2 crore each as non-executive directors.

Malay Mahadevia, Executive Director of Adani Ports and SEZ, reported a compensation of ₹10.38 crore while Gautam Adani earned ₹2.8 crore. Dr Reddy’s Labs, Mahindra & Mahindra and HDFC also compensated their professional CEOs much more handsomely than they did their promoters or founders.

Yet there were a couple of notable exceptions to this trend. Bharti Airtel’s Chairman Sunil Mittal disclosed compensation of ₹27.2 crore for the year, while CEO Gopal Vittal netted a lower ₹7.7 crore. At cement major UltraTech, Kumar Mangalam Birla’s compensation for the year, at ₹19 crore, topped that of the Managing Director (₹8 crore). But Birla’s compensation was lower than that of professional managers at other group firms - Hindalco and Grasim.

There were also a couple of instances where several members of the promoter family doubling up as whole-time directors, earned a sizeable compensation package. Hero MotoCorp was a standout example here, with Brij Mohan Lall, Pawan and Sunil Kant Munjal, as whole-time directors, totting up a combined package of ₹129 crore for 2014-15 (about 5 per cent of net profits), mainly by way of commission. Lupin’s Guptas (Desh Bandhu Gupta, Nilesh Gupta and Mrs MD Gupta) earned a neat package of ₹61.2 crore in total.

Of course, investors in these companies may still be better off than those in listed firms that kept these pay details a closely guarded secret.

While the entire lot of public sector companies (except Coal India) took shelter under a Central Government exemption in June 2015 to skip pay-gap disclosures, a few private sector ones, such as Bajaj Auto, offered to provide such details to shareholders ‘on request’. These instances should attract negative marks on governance.