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Remuneration structure a concern: CEO pay out of sync with growth in revenues, profits

IIAS notes it would appear that boards believe competence is genetic and independent of experience because there are a few 20+ year-old executive directors belonging to the promoter family that are paid almost equal to the company’s 50+ year-old CFOs and other whole-time directors.

Remuneration structure a concern: CEO pay out of sync with growth in revenues, profits
In FY21, the year of the pandemic, the remuneration of six executive directors exceeded `50 crore.

CEO pay outpaced the growth in revenues or profits, or both for 66 of the S&P BSE companies over a three-year period, a study by IiAS study has revealed. The proxy advisory firm notes that the remuneration structure itself is a concern. In most of these companies, the fixed or assured pay is the bigger component while the performance-based pay is smaller, leaving the incentive to perform a weak one.

Companies often claim their business is a complex one in a difficult sector to explain high CEO compensation. If so, one would expect the CEO pay structure to be, at least, aligned with the company’s internal pay standards. However, there are instances where some promoter CEOs are paid more than 50x the next executive director who is a professional and more than 1000x the median employee remuneration.

While several CEOs did take pay cuts in FY21, during the pandemic, to support employees and to try and avoid retrenchment, there were several pliant boards that allowed the CEOs to retain their compensation at the cost of the employees. The average worker, IIAS found, was hit hard. Very often, the nomination and remuneration panels are filled with friends and family members, who tend to give little weightage to the performance of the individual.

IIAS notes it would appear that boards believe competence is genetic and independent of experience because there are a few 20+ year-old executive directors belonging to the promoter family that are paid almost equal to the company’s 50+ year-old CFOs and other whole-time directors. Promoter compensation alone accounted for more than 20% of total employee benefit expenses in a few companies.

In FY21, the year of the pandemic, the remuneration of six executive directors exceeded Rs 50 crore. IIAS points out these Indian companies lack the size and complexity of their global peers and therefore, such compensation is unwarranted. While in good times, one could ignore such disproportionate pay structures. However, at a time when joblessness is running high, such inequality is discomforting. Labour needs more support.

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