The issue of executive compensation, especially to senior management, came under intense scrutiny in the wake of the global financial meltdown in 2008, the argument being that excessive risk-taking and exorbitant pay packets had also contributed to the crisis. Globally-accepted disclosure norms on corporate governance that were developed after 2008 were grounded in the idea that optimally structured remuneration packages could align the interests of the top executive with those of the shareholders. These norms have translated into legislative reforms in other jurisdictions, including the United States of America, requiring information on executive remuneration to be made publicly available, thereby enabling shareholders to associate executive remuneration with the firm’s financial performance.
In India, the Securities and Exchange Board of India (Sebi), issued a notification on March 18, 2016, effective from the April 1, 2016, extending disclosure requirements relating to annual remuneration from listed companies to mutual funds. Mutual funds must now make the following information available to the public: annual remuneration equal to or above R60 lakh; if the employee is employed for only a part of the financial year, monthly remuneration in the aggregate not less than R5 lakh per month; the ratio of the CEO’s remuneration to median remuneration; and the Fund’s total assets under managmenet (AUM), both debt and equity.
The disclosure of this information is likely to lead to a more nuanced understanding of the relationship between remuneration, risk-taking and the financial performance of a firm and enable the regulator to make more efficient micro- and macro-economic regulations for the market. Although Sebi declared that these disclosure requirements were non-negotiable and urged the Funds in May 2016 to comply immediately, information still remains extremely limited.
Given the importance of such disclosure, some questions become highly relevant, like how far are funds complying with Sebi’s notification, if at all there is any correlation between the different markers in these funds, like fund size (AUM as an indicator of the size of the fund), top executive remuneration, and the median remuneration awarded. Based on some publicly available data, an attempt has been made to graphically analyse these relationships.
In the accompanying graph, the AUM (in rupee crore) is represented on the x-axis, whereas the median remuneration (multiple), and the top executive salaries (in rupee crore) are represented on the y-axis. The AUM represents ordinal values and the bar graphs are for representational purposes only. The numbers on the x-axis do not reflect particular fund houses, instead each number represents a range of funds, grouped according to their AUMs.
What emerges from the graph is interesting. While it is observable that there exists some positive correlation between the size of the funds and the top executive salaries, for both the top funds and the smaller ones, the AUMs surprisingly had no demonstrable impact on executive remuneration. Further, median remuneration seems to be independent of AUM, with no clear linear relationship between the two.
While it is clear that most mutual funds have not complied with the Sebi notification, amongst those that have, most have made the data very difficult to access, by requesting folio numbers, registered phone numbers, PAN card details, etc, making publicly available data extremely limited. Interestingly, Funds with lower NAVs (net asset value) and AUM have shown more compliance; and make data more accessible. In an increasingly globalised world, for working towards more transparency and accountability, it is essential that such information be made available to the public. The complete disclosure of information will ultimately lead to a closer correlation between executive remuneration and financial performance; or at least give us an opportunity to study the correlations between the two more scientifically and accurately. Until such disclosure, however, we can only play around with half-truths and the ineffectual morals drawn from them.
The author is research fellow (corporate law and financial regulation), Vidhi Centre for Legal Policy