1. How valuable is the CEO in monetary terms? The answer will make you blink

How valuable is the CEO in monetary terms? The answer will make you blink

The CEO is always considered to be the most important person in an organisation as this position is responsible to the Board of Directors, and hence shareholders, for delivering superior results. In a way, the CEO owns the balance sheet and profit and loss of the company as, at the end of the day, the responsibility for performance stops here.

By: | Published: October 5, 2017 4:54 AM
rbi, rbi monetary policy, experts views on monetary policy Of late, it is mandatory for all companies to disclose the multiple of CEO compensation to the median salary in the company.

The CEO is always considered to be the most important person in an organisation as this position is responsible to the Board of Directors, and hence shareholders, for delivering superior results. In a way, the CEO owns the balance sheet and profit and loss of the company as, at the end of the day, the responsibility for performance stops here. It is not surprising that the CEO would always be receiving the highest remuneration in any organisation. However, the compensation will vary across industries and companies depending on their size, scale and performance. Is it possible to gauge how valued CEOs are on a relative scale across companies and industries?

Of late, it is mandatory for all companies to disclose the multiple of CEO compensation to the median salary in the company. This is a useful indicator, as absolute compensation would not reflect the relative importance within the organisation even if the number is high. The IT sector, for example, would tend to have higher compensations across the grades relative to manufacturing where there is a distinction between blue collar and white collar workers. By juxtaposing the same with the median value, one can get a sense of how valued is the CEO relative to the rest in the organisation.

The ideal set of firms to look at would be the Sensex companies, as they represent the top firms in terms of market capitalisation. The annual reports of these 30 companies have been used for making this comparison. Of these companies, public sector companies SBI, NTPC, Coal India, Power Grid Corporation, ONGC and Maruti Suzuki do not provide this information, while the same was not available for Reliance Industries.

The balance 23 companies can be broadly classified into the following sectors—banking and finance, IT, metals and engineering, automobiles, infra, consumer products, and pharmaceuticals for the sake of comparison. The ratios mentioned here are for FY17, and data on percentage growth in the median salary as well as average increase in non-key managerial salary is provided to give an idea on how salaries have behaved this year. In fact, these two indicators would also show the basis on which the average salary moves compared with the median if the top officials are excluded. The accompanying table provides some interesting insights.

The first observation is that there is no clear norm of this multiple and ranges from around 47 in Kotak Bank to above 1,000 for L&T and Lupin. Second, there does not appear to be any relation of the multiple to the ownership pattern and hence is more dependent on the sector and individual performance of the company. At times, it is felt that owner-driven companies would tend to have higher or lower multiples, but this is not validated here. Third, within the broad sectors used here, there is considerable variation. For instance, in banking (excluding finance), two have a multiple of less than 100, while the other two are above this mark. The IT sector also displays variation, with TCS being almost double of Wipro. In case of automobiles, the highest multiple could go up to almost seven times the lowest multiple, and for consumer-oriented industries it is about four. Hence, various companies have different ways of providing such remuneration, and given that these companies are the crème de la crème, there is no uniform pattern.

The second bit of information is also interesting and relates to the increase in median salary for the company. The banking and finance sector has an almost uniform increase of 10-12%, while for IT it is more company-specific. In fact, in almost all the other broad sectors, there is variation across companies, with Asian Paints (16%) and Adani Ports (14.1%) having the best growth rate, while Wipro and M&M have the lowest percentage increase. The two other companies with double-digit growth in median pay were Tata Steel and Lupin. Hence, as a pattern it looks like that the financial sector tends to give better salary increases at this level.

Third, this pattern is also replicated when the average percentage increase in the non-managerial staff is concerned, i.e. average of all except those who are key managerial personnel. Banks have maintained the range of 10-12% for FY17, which looks more even relative to the median. Interestingly, for IT, the percentage increase is higher for this category relative to the median increase, while for metals and engineering it is lower. This may be explained by the fact that there would be several blue collared workers in this sector who are valued lower than the median level which would have more of the white collar personnel. In case of IT, all would tend to be with technical qualifications and this distinction would get blurred. In case of auto, it appears to be fairly balanced, while for consumer goods, infra and pharma, the median increase tends to be lower than the general increase.

Data on these 23 companies show that corporates place different values for their CEOs and they do command a higher pay relative to the median, which could be substantially different from other companies and industries. But with the median multiple of 233, it is definitely the case of CEOs commanding a lot of value. Also, the sector does not really matter and there is no clear pattern and appears to be company-specific. There is no clear view on the increase provided at the median level compared with the general level, though most would have a higher rate for staff in the pecking order. This pattern may be assumed to hold for other companies too.

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