Fixing the Executive Salary |
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Hailing industry for sustaining a high growth rate, Dr. Singh said that to be globally competitive, "You must work in
a harmonious environment in which all citizens feel actually involved in economic growth and in which each citizen sees hope for a better future. Among other things, industry must have a "healthy" respect for workers; invest in
their welfare, health and children's education." He asked, "Industry needs to be moderate in emoluments levels" as higher salaries, unless matched by rising incomes "across the nation" would stoke disaffection amongst those outside
of the growth parabola". The Prime Minister's call to India Inc to trim salaries of executives' ahs got thumbs down from industry. Newly elected head of CII Sunil Bharti Mittal said, "Salaries cannot be legislated.
There is shortage of skill at the top level, which is why pay packages of senior executives are high.. Salaries were a product of demand dynamics." Motivated by Dr. Singh's call, CICCI President Habil Kharakiwala agreed with this
in lines with Gandhiji's concept of trusteeship theory. (Times of India, May 27, 2007). In response to the caution of Dr. Manmohan Singh, Planning Commission, Deputy Chariman Montek Singh Ahluwalia said that there
is no proposed move to impose any cap on their salaries. Prime Minister cautioned that rising income and wealth inequalities, if not matched by a corresponding rise of incomes across the nation, could lead to unrest. Dr. Ahluwalia
advised shareholders to raise questions over rising salaries of executives. S. Ram Darai, CEO and M.D. of Tata Consultancy Services, joined Tata group in 1972. In the retiring age he is getting annual pay package of
Rs. 3.00 crores excluding gratuity and health insurance premium. He gets Rs. 1.6 crore as commission besides company's accommodation and other facilities. Vivek Paul once highly executive with Wippro was paid Rs. 6.02 crore per
annum as salary, later he resigned. Consequent upon the opinion of Prime Minister Lt. Gen. S.S. Mehta, Director General, CII said, "The PM's message is to have self-reliant. There is no call for control or new laws.
He has appealed to the industry to think beyond corporate profits and success in business, to be sensitive to other's needs, and most important of all, his is a call for partnership". He also added that "the salary of a person is
subject to the responsibility he is interested with! CEO is a person who's handling pressure from the board members, answerable to shareholders and is responsible for the profit/loss of the company. Cases of high salaries indicated
by the PM are few. The industry has taken note of it and will respond to the PM's Charter in all seriousness". (B & E 15-28 June, 2007). In fact, salary of corporate India is growing in like with other developed markets. Vodafone, the world's largest mobile player by revenue, gave more than $33 million to Sarin Arun as salary and other benefits in the form of cash, stocks and options in the financial year ended march 31, 2007. Sarin got a base salary of $2.5 million while his total cash remuneration including incentives and other benefits stood at $6.4 million, the company said in its annual report. This was higher than the
salary taken by LN Mittal last year as CEO of Mittal Steel, to be renamed as ArcelorMittal. The steel giant disclosed last month in its annual report and Mittal earned a base salary of $ 2.005 million, while total
cash package including performance related payment stood at $ 3.68 million. Sarin was also granted shares worth $7 million under the company's short-term and long-term incentive plans, in addition to grant of stock
options worth about $20 million. The total share options held by Sarin at the end of last fiscal were valued at about $70 million. Besides, he has accumulated shares worth about $22 million, which have been given to
him under various incentive plans. In comparison, Mital was awarded options worth just $1.8 million as the chairman and CEO of Mittal Steel, talking g his total holding of options to about $8 million at the end of
2006. A year ago, Sarin was lagging behind Mittal in terms of annual compensation by a small margin. The Vodafone CEO got a base salary of $2.18 million in the previous year, just below $2.20 million of Mittal.
While Sarin got a hike of about $35,000 in his base salary. Mittal took a pay cut of $1,89,000 in 2006. Mittal also did not get any performance related payment in 2005, although he held stock options worth about $6 million at the
end of that year. Sarin's total cash package was around 5.4 million in the previous year, including additional cash benefits. The Vodafone CEO got a hike of £5,17,000 pounds, about 19% in the year; apparently being
considered a reward for successfully executing the $11 billion Hutch-Essar acquisition in India that gives the UK firm an access to one of the world's fastest growing telecom market. Earlier in FY05, Sarin had taken
a pay cut of £6,90,000 pounds or over 21%. Sarin had come under sharp criticism last year when he took borne a paycheck of over £5 million with a hike of about 9%, despite a whopping loss of about £15 billion posted by Vodafone.
(Times of India, June 15, 2007). Indian market is on boom. Hindalco registered 60.69 percent increase in the gross sale, Hindustan Zinc – 120.05%, Ambuja Cement – 131.73%, Torrent Power – 298.21%, Unitech – 283%.
Most of the company's EPS grew unexpectedly. EPS of Madras Cement grew 292.31%, Zuari Industries – 1,403.60%, ICI (India) – 794.21%, Orient Paper – 578.90%, Kesoram Industries – 481.38%. The gross operating margins reported
sneak-peak during last financial year. Gross profit of Hindustan Zinc grew 174.67%, Corporation Bank – 172.97%, ACC – 204.26%, Corporation bank – 172.97%, ACC – 204-26%, Dr. Reddy's – 290.22%, United spirits – 192.58%. (Business
& Economy, June 15-28, 2007). With such impressive financial results, companies are upbeat and they are distributing their profits to shareholders and increasing the salary base of executives.
Driven by ever-expanding workforce and salary levels, the employee expense bill of India corporates has grown beyond Rs. 1,00,000 crore level with public sector companies and private sector IT giants retaining their position as the
top spenders. The collective employee expenses of companies, whose fiscal year end on March 31 and have announced their full-year results, has grown to Rs. 1,14,900 crore, representing a 35% gain over Rs. 85,000
crore in the previous fiscal. However, the combined turnover of these 505 companies, whose annual results are available with stock exchanges, has increased to Rs. 14,31,209 crore. This represents a 13% increase from
the cumulative turnover of 644 companies last year, which stood at Rs. 12,67,348 crore, based on the available data. The companies spent close to 8% of their collective turnover on employee expenses in the last
fiscal, up from about 6% a year ago. The country's largest lender State Bank of India remained the biggest spender with annual employee cost of about Rs. 10,600 crore for the year ended March 31. SBI
is followed by Tata group's IT arm TCS, the country's largest software exporter, which booked a bill of over Rs. 7,700 crore for employee costs in the year. Infosys and Wipro, the other two domestic IT giants,
incurred employee expenses of Rs. 6,314 crore and Rs. 5,768 crore respectively. PSU steel giant SAIL came at the fifth place with total employee expense bill of Rs. 5,133 crore in the year. Largest private sector
lender ICICI bank was at ninth position with a total bill of about Rs. 2,636 crore. HDFC Bank, Kotak Mahindra Bank, Allahabad Bank and UTI bank booked employee expenses between Rs. 400-2,400 crore. Corporate
governance implies management assuming the role of trusteeship with all the attendant checks and balances which creates a high performing organization lending to greater customer satisfaction, his employee morale and commitment,
enhancing shareholder value and sensitivity to societal concerns. Tata Iron and Steel Co. Ltd. now renamed as Tata Steel adopted employee welfare and introduced worker's participation in management decades before these concepts
were legislated on and became general practice in the developed countries. The company built an excellent township and creed a very congenial environment for the employees to work and live. Ti instituted a Social Audit by a group
of very eminent citizens from diverse walks of life. India has abundance of resources and the industry too has developed a strong will to compete with the best in the globe. But the biggest dilemma of our times is
that despite having a youthful population, we have limited rightly skilled people to catapult India to new economic heights. The high rise in the salary of executives is more due to this factor. Most of the H.R.
professionals and CEOs have more reasons to worry because they are facing acute shortage of skilled professionals to execute operations. Lack people with right skill set may cause inordinate delay in execution of projects and it
the problem persists, it might retard exponential growth of the company. There are some deep rooted problems confronting India's corporate world. Though our economy is consistently growing with all sectors barring agriculture,
registering positive trends – the educational facilities in the country are however, failing to deep pace. The result is not very difficult to fathom – India Inc has started feeling the heat of talent pool crunch. This is why, most
of the top B-schools in the country complete their placement in zero session and many companies visit other institutions in search of executives. IIM and other top B-school graduates are being offered lakhs of
Rupees per annum as salary with other perks. Many MBAs of other institutions are unemployed, while students of top B-schools have more than 3-4 offers in hand. H.R. divisions of companies are gearing up their arms to win the war
for talent which is to be fought in campuses of premier management and technical institutions, considering the short supply, rise in the salary can not be avoided. Companies will have to provide good monetary
incentives to professionals to encourage them to attain higher competency level in domain skills. This is why, corporate jobs are being favoured by youths. President Dr. Kalam has expressed his anxiety over lack of interest in
scientific research among students. Indian army is finding difficult to attract youths because the salary offered is matchless with corporate jobs. So, rising salary of executives is threat to other employers viz. defence,
agriculture, non-profit organizations, educational institutions. World Wealth Report prepared by Merrill Lynch and Capgemini, affirms the India rising story that over 1,00,000 Indians are millionaires in dollar terms. A steadily
rising number of high net worth individuals (HNWIs) is a sign of economi9c well being, because HNWIs boost asset markets, which in turn enhance business. Their consumption of goods and services generate employment and helps sustain
growth. As the late Deng Xiaoping said in the context of promoting the market in China, "To get rich is glorious". By acknowledging the worth of wealth creation about 25 years ago, China emerged as the manufacturing powerhouse.
(Times of India, July 1, 2007). The coin has another side also. Expanding individual wealth tend to be judged in moral hues, especially in a society where poverty is stark and often in your face. This twist on the
morality of getting rich may clash against a reality of expanding prosperity and reducing poverty. India is creating millionaires and a population of aspiring millionaires, as opportunities expand and markets develop. But rising
expectations – and therefore, perceived inequalities can act as a tiger for social and political unrest, if the process of growth is not seen to be inclusive. The challenge for a democracy like India is to manage these competing
claims on resources without giving wealth creators a bad name. Developed countries are alleged to be responsible for the environmental degradation. Rich pollute more and this higher risk group is poor. Possibly, Dr.
Manmohan Singh's opinion reminds us of these consequences. Executives forms human capital. Now, companies call 'emplo9yees first' instead of 'customer first'. The first code of conduct outlines that employers owe it
to labour to recognize that welfare is not conceived in terms of philanthropy, but as a social obligation. Fair wages should be paid for work done. Working conditions shall be as pleasant as possible. Opportunities should be made
possible for the worker to gain technical skills and better his economic prospects and social status. (Shroff, 2000). In realizing good corporate governance, employees must not only feel empowered to take risks, but
also be aware of the accompanying responsibilities. People must be encouraged to seek and allowed to test new ideas to continuously improve the processes they are involved in new learning has to be woven into the fabric of the
company to achieve professionalism across all sections. That is how a company can convert every employee into a self-driven entrepreneur willing to take risks, a quality so essential to achieve long-term success. As the Cadbury
Committee report says, "It is important that all employees should know what standards of conduct are expected of them (It is a) good practice for Boards of Directors to draw up codes of ethics or statements of business practice and
to publish them internally and externally" (Dadiseth, 1997). It is very true that globalization has opened the gateway of opportunities for skilled manpower. Campus placement is common to all premier management and
engineering institutions. With their entrepreneurial acumen, young graduates have too much influence over the board which appoint them. Robert Daines, the Pritzker Professor of Law and Business at Stanford Business
School studied the relationship of executive pay to executive skills. In his paper published in the Economic Times he said that particularly in big firms a high salary does not necessarily mean that a CEO is more competitive than
his or her peers. Though company performance can depend on a number of factors beyond the power of an individual CEO, the economy, regulatory constraints or industry conditions. There have been legitimate concern about executive
pay. In 1992, the average CEO of an S & P 500 firm earned $2.7 million. By 2000, average pay for those CEOs had increased more than 400 percent to more than $14 million. When compared to the pay of average workers, the increase
is even more dramatic. IN 1992, CEOs were paid 82 times the average of the blue collar workers; in 2004, they were paid more than 400 time those salaries (Times Ascent, 2005). India's corporate sector has grown
steadily over the past two decades in terms of number of registered companies and amount of paid up capital. Corporate sector consists of closely held (private limited) and public held (public limited) companies, with approximately
6,19,000 registered companies in 2004. The ownership of India's corporate sector tends to be concentrated in the hands of firm promoters and, to a lesser extent, small investors. Focusing on the manufacturing sector, promoter's
share was 48 percent of the paid up capital for all companies in 2002 and as high as 71 percent for government owned enterprises. The promoters shareholding is spread across several relatives as well as corporate entities. (Som
2006). Considering such strong hold in the board room, salary of executives is soaring high. The difference between an executive and a worker is growing many fold, this may affect the relation of blue and white
collar employees. Due to computerization and application of modern production technologies, companies are reducing number of employees and profit-per-employee is being accounted. For example, Tata Steel addressed the problem of
overstaffing by adopting employee – friendly separation scheme. As a result, the manpower has been brought down to below 40,000 in 2004-05 from 85,000 in 1990-91. The profit-per-employee in the company was $20,198 in 2004-05 which
is much below when compared with global steel majors. POSCO has $176,135 and NIPPON has $ 65,839 (Sheshadri & Tripathy, 206). Holistic HR strategies to attract, motivate and retain talent will be needed in order
to supplement current strengths. The Indian economy is on a roll, and quality people are at premium. Talent search is rigorous and tough exercise and talent retention is challenge for HR executives. Executives are moving not only
to their competitors but are also changing their expertise. Worried by the growing disparity of salary, officers of IAS cadre have approached to enhance their salary in line with their corporate counterparts. Their
compliant is that a senior IAS officer gets approximately Rs. 40-50,000 per month with fewer perks while a young graduate is offered more salary with various perks including ESOP and other benefits. Dr Manmohan Singh's view may be
called motivational instrument towards greater involvement of business houses in corporate social responsibility. Shareholder approaches argue that corporations have a limited set of responsibilities, which primarily consist of
obeying the law and maximizing shareholder interests. In contrast to shareholder approaches, stakeholder models of corporate governance argue that those responsible for the governance of the corporation have responsibilities to
parties other than shareholders and that, any fiduciary obligations owed to shareholders to maximize profits might be subject to the constraint of respecting obligations owed to such stakeholders Darryl Reed argued that, in order
to be compelling stakeholder models must undertake several basic tasks, including (1) providing an account of what stakes are and who has them; (2) circumscribing corporate responsibility to stakeholders; and (3) determining how to
evaluate the claims of competing stakeholders (Reed 1998). Shareholder vs. Stakeholder conflict has resulted in various misshapenness either it is present conflict on land acquisition for SEZs or lock outs which
resulted in the closure of many factories. The management and worker are learning to co-exist. Change in the manufacturing sector has been molded by various pushes and pulls. The number of lack outs and strikes has been coming down
consistently. The dominant objectives of business is profit and wealth creation. For the 'Puritanical' cult of capitalism, Adam Smith is considered the high priest and Milton Fried man the most force full
evangelist of the most sacred mantra of profit maximization. Adam Smith came up with the idea that the greatest good of the greatest number, which was later in the eighteenth century known as the "utilitarian theory of business
ethics" enunciated by Jermy Bentham and John Stuart Mill is effectively served by the 'Invisible Hand' of self-interest. According to Smith, what is good for an individual is good for society also. Milton Friedman of the university
of Chicago said, "There is one and only one social responsibility of business – to use its resources and engage in activities to increase its profits." He later relented to some extent and accepted that profit maximization should
be attempted within a legal framework and subject to broad social ethical norms (Khanka 2005). The obsession with profit maximization has led to several undesirable and unethical business practices such as unhealthy
work environment, bribing, evading tax liability, manipulating share prices through insider trading practices, polluting the environment. Business history is replete with instances that eth mindless obsession with profit
maximization at any cost, when carried out to any extreme can lead to failures like Enron, WorldCom, Union Carbide. On the other hand there are also the business houses confirming that organizations conducting business following
practices with humane concerns like Ford Motors, Tata Steel, Aditya Birla Group. Executive compensation schemes through stock options have bolstered profit and wealth maximization cut. A survey by ECA international
says that Indian salaries will rise by 12 percent in 2007-08, the highest of 45 countries surveyed. Dr. Manmohan Singh shared his thought in CIIs conference on "Inclusive Growth : Challenges for Corporate India".
The speech set out to talk about a 10 point social charter for inclusive growth that could be the result of a "new partnership" with industry. After dwelling, point one to three, on issues such as caring for workers, corporate
social responsibility and employment for the less privileged, Dr. Singh asked industry captains to "resist excessive remuneration to promoters and senior executives, and discourage conspicuous consumption. In a country with extreme
poverty, industry needs to be moderate in the emolument levels it adopts. Rising income and wealth inequalities, if not matched by a corresponding rise (in) incomes across the nation, can lead to social unrest". According to a
Business Today analysis of CEO salaries at BSE, the highest compensation in the country is paid to Reliance Industries Chairman and Managing Director, Mukesh Ambani. He took home Rs. 24.52 core for the year ended March 31, 2006.
Brijmohan Lall Munjal got Rs. 15.58 crores, Sunil Bharti Mittal Rs. 12.67 crores, while the smallest pay packages went to public sector bank chairman – Bank of Baroda's Anil K. Khandelwal and Canara Bank's M.B.N. Rao – Rs. 5 lakhs
in annual salary. The average remuneration of CEOs of the BSE 100 companies woks out to Rs. 2.45 crore. The study reveals that top seven of the list are promoters. The difference between promoter – CEO salaries and professional –
CEO salaries was stark. While promoter salary jumped 133 percent in 2006 over 2005, the Mercer Human Resource Consulting analysis revels, those of professional head hunches roles less than 12 percent. India's highest paid CDO
Mukesh Ambani got Rs. 60 lakg as base salary and commission of Rs. 23.43 crore in 2005-06. While Tata Steels Managing Director, B. Muthuraman, was paid Rs. 62.80 lakh as base salary but a commission of Rs. 1.20 crore. Considering
the demand of professionals in various fields and emerging business, export in the country are FMCG FEOs such as Douglas Baillie of Hindustan Uniliver and Mortial Rolland of Nestle Inida. They took home salary of Rs. 4.59 crore and
4.36 crore respectively. Independent directors like Shailesh Hari Bhakiti of AC got Rs. 12.60 lakh, Omkar Goswami of Ambuja Cement – 3.30 lakh, R.C. Bhargav of Grasim – 20.53 lakh, C.K. Prahlad of Hindustan Uniliver – 7.00 lakh,
Prof. M.G. Subrahmanyam of Infosys – Rs. 20.01 lakh, Jagdish N. Sheth of Wipro – 19.66 lakh earned as salary. According to the Business Today – Onam Consultants salary surveys for junior to senior managers, salaries
have been rising out anything upwards of 15 percent year-on-year. While the gap between the CDOs salary and a young executive can be quite wide, mercer data shows that a sales tainee in 2006 entered the jobh at Rs. 2,66,169 a y
ear, compared to Rs. 2,00,966 the year before. Various researches reveals that executive pay is directly linked to the growth in profits of companies. Jignesh Shah of Financial Technologies got salary package of Rs. 0.12 crore in
2003-04, Rs. 0.24 crore in 2004-05 and 3.17 crore in 2005-06. The company's profit was Rs. 12.74, 9.31 and 42.47 crores in respective years. Sunil Mittal of Bharti Airtel got salary of Rs. 5.66 crores in 2003-04, Rs. 7.11 crores in
2004-05, Rs. 12.67 cores in 2005-06. The company's profit Rs. 1210.67 crores in 204-05 and 2012.08 crores in 2005-06. (Business Today, July 1, 2007). LEGISLATION Government bought ESOP under fringe
benefit-tax, now shadow ESOP is reported. As reported earlier, there is no proposal to legislate salaries Bill Clinton brought in a tax rule 162 (m), which sought to curb excessive executive pay by linking it to performance.
Therefore, to deduct executive compensation of more than $1 million, companies had to prove that the executive had met certain performance goals. Companies lowered the performance goals, and executive pay continued to be determined
by market forces. In India, the companies act 1956 controlled executive salary. Between 1969 and 1974, the maximum that a whole-time directors of a public company (and its subsidiaries) could make was Rs. 90,000 per
annum. Appointment of directs also needed to be approved by the government. But over the years, the government has made several concessions to the rules, and in 1993 if effectively allowed companies to appoint directors without its
prior approval. The total managerial pay of a public company cannot exceed 11 percent of the net profit, and managing director can get t5 % of profit private companies are exempt from al remuneration limits.
REFERENCES |
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Source: E-mail April 10, 2008 |
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Articles No. 1-99 / Articles No. 100-199
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Articles No. 200-299 / Articles No. 300-399 / |
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