Crazy honcho salary! Here's how commission based remuneration has a role to play

Last year around this time, Tata Motors Ltd witnessed a stormy AGM, the one which saw minority shareholders defeating a proposal to pay salary in excess of the permissible limits to three of its executive directors. The minority shareholders’ approval was required since the proposal envisaged payment of salary in excess of 5 percent of profits per executive director and in excess of 10 percent of the profits for all the three executive directors. [caption id=“attachment_2263670” align=“alignleft” width=“380”] Representational image. AFP[/caption] The company had been making losses for the last couple of years. Corporate governance enthusiasts went bonkers and gushed Indian shareholders had come of age. But it would seem it was a one off thing – the anger of minority shareholders could be displayed thanks to the law that required their approval. The minority shareholders wielded the new-fangled power almost with a childish glee when they should have shown greater understanding in deference to the fact that the executive directors were not promoters but technocrats who needed to eke out a living. Be that as it may, profitable companies cannot be similarly hobbled because honcho excess cannot be questioned if profit justifies such excess, period. It boils down to this – if profits are enough, the honcho salary can be excessive. Since the law countenances honcho salary upto 5 percent of profits, everyone assumes that even when the median salary and the honcho salary differ by a country mile, it is kosher. In a riveting analysis, Firstpost has brought out some eye-brow raising facts to the notice of its readership –Yogi Deveshwar the CEO of ITC Ltd who drew a salary of Rs 15 crore during 2014-15 left behind the median worker of the company by 439 times by far the largest differential for the year in question. Companies are required to reveal this statistic pursuant to the Companies Act, 2013 and SEBI corporate governance code. In our country, there seems to be a notion that disclosure absolves one of all guilt if not crimes. The law instead of mandating disclosure of potentially envious statistics must set out to bring about a modicum of comparability between honcho salary and median salary. The following steps can be taken: • Narayanamurthy, one of the founders of Infosys while holding forth on corporate governance from a CII pulpit said the gulf between top salary (read honcho salary) and median salary should not be more than 15 times the latter. Today he would blush to find the newly appointed CEO of Infosys Sikkha exceeding the median salary by 116 times even while the median salary declined by 5.2 percent vis-à-vis last year. The Ministry of Corporate Affairs should step in and amend the relevant section of the company law to restrict Honcho salary to 15 or 20 times the median salary. • It must be expressly stated that profit linked Honcho remuneration is strictly not on. Suppose a company makes a profit of Rs 10,000 crore and agrees to pay 4 percent of profits as remuneration to its CEO. This would translate into a cool Rs 400 crore for him. It would raise eyebrows if the median salary is Rs 10 lakh. The honcho, median differential would be 4,000 times. And should the profit next year fall sharply to Rs 5,000 crore, the CEO would wear the halo of a martyr which of course would be misplaced. More importantly, profit based remuneration tantalizes a CEO to adopt sharp accounting practices, detrimental to long term interest of the company. Therefore profit based honcho salary, if at all, should be allowed by taking a long enough time horizon, say five years. If the Bar Council rules prohibit percentage based fees for layers as permitted in the USA, there is no reason why the same should be kosher for CEOs. It is often argued disingenuously that high salary for promoter-honcho is justified because he is a risk-taker. This misses the woods for trees – for risk taking rewards lie elsewhere in the form of dividend and capital gains from the share market. His salary should be purely for what he brings to the table. A non-promoter honcho is viewed more tolerantly when he gets a mind-boggling sum especially if he brings expertise and esoteric knowledge to the table of the company driven by state-of-the-art knowledge in the field.