N R Narayana Murthy, the founder of Infosys, must be congratulated for questioning the current practices that have sent the compensation package of the top company officials into the stratosphere. Murthy has expressed his concern for a second time in two months. Though Murthy has raised the issue both times in the context of the payments to the top officials of Infosys, India’s premier tech company, his argument holds good for the larger corporate environment in India today as well.
Given Murthy’s larger-than-life profile in India as a founder of a company that was based on fair play and justice – a company that created wealth for the nation, for the top officials and also for those at the bottom of the organisational pyramid (remember the drivers and other service staff members became millionaires when the company went public) – his objections to the huge salary gap within the company he founded has been taken note of by the mainstream media.
It is indeed an irony that in a poor country like India, the exorbitant payment to the CEOs has never been a matter of public debate in politics, academia or media; this is in sharp contrast to the rich Western world, in the USA, for example, where CEO salaries have zoomed over the years and where such debates are all too frequent in the public sphere. These debates might not have wielded any concrete results so far, but at least they have ensured that the issue remains etched in public consciousness.
In USA, every four years, the presidential candidates usually pay lip service to the larger concern of the inequity in salary division in various companies, though they usually get bullied into silence by vested interests after they get elected.
In his campaign manifesto, Putting People First, in 1992, Bill Clinton had called for a ceiling on tax deductibility of executive compensation. His election plank was that he had no authority to cap the salaries of the private executives, but he vowed that, if elected as President, he would ensure that no business expenses above 1 million dollar would be eligible for corporate tax deduction.
But when Clinton got elected, he was persuaded by a majority of the cabinet colleagues – the stellar exception was his Labour secretary Robert Reich -- to leave a loophole in his tax proposal to the effect that any ‘performance-based pay’ in the form of stock options and bonuses would continue to enjoy tax deduction. The result was that companies began to put a cap on a one-million dollar salary (which was a tiny portion of their actual salary) and paid the overwhelmingly large part of the compensation as ‘pay for performance.’
Take the case of John Stumpf, CEO of Wells Fargo. He received huge bonuses from this international financial services company year after year in the name of ‘performance pay’. Between 2012 and 2015 alone, his employer-bank enjoyed $54 million in tax subsidies related to just this one man’s bonuses.
The American corporate history tells that there is a total disconnect between pay and performance. Many Wall Street CEOs who amassed big fortunes left their companies worse off when they departed. Take the case of J P Morgan Chase CEO Jamie Dimon, for example, who cashed in $23 million in fully deductible stock options at the peak of the subprime crisis in early 2010. What was his performance for this pay? The bank had to pick up a tab of more than $28 billion in mortgage and other financial misconduct settlement fees, all thanks to the ‘extraordinary’ stewardship of Dimon!
This sordid situation arises because companies have no clearly discernible performance metrics. J K Galbraith, the well-known US economist, summed it up well: “The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”
Donald Trump, himself a billionaire entrepreneur, in his campaign trail as President echoed Galbraith’s sentiment when he called high CEO pay “a total and complete joke” and “disgraceful,” and argued that CEOs stack boards with their buddies who rubber-stamp excessive pay. Even Hillary Clinton, known for her pro-establishment views, lamented: “There’s something wrong when the average American CEO makes 300 times more than the typical American worker.”
In India, no political party or leader has made the CEO pay an issue despite the more distressing scenario in India compared to that in the USA. Look at the statistics in India: All the top 10 CEOs draw a salary more than 300 times that of the median worker of their respective companies. And Vishal Sikka, the Infosys CEO, tops the chart of all -- when his annual salary in 2015-16 was Rs 49 crore, he earned 930 times that of the median salary of his company.
From 2017, Sikka’s salary has skyrocketed to Rs 73 crore – a whopping 50 percent increase. Imagine what would be the ratio now between his salary and the median salary of his company which increased on an average of six percent in the Sikka regime. By international standards, it is atrocious. By the Infosys standard, which in the first 30 years maintained a salary gap of just 50 to 60 times between the highest paid employee and the median worker, it is plain shameful.
No wonder Murthy, who laid the foundation of a cash-rich and prosperous Infosys (he excelled in the performance matrix) and at the same time established a fair and just compensation system for all employees, is enraged by the current developments. Two months ago, he rightly questioned the Rs 23 crore severance package (two-years’ salary) that was handed out to the then CFO Rajiv Bansal, unprecedented in India’s corporate history. He, in fact, wondered if the gossip in corporate circles was true that Bansal was paid hush money to keep quiet about unethical practices in Infosys to which he was privy.
The salary hike to Pravin Rao, chief operating officer at Infosys, is the latest flashpoint. An Infosys veteran whom Murthy had recruited in the '80s, he was given a spectacular raise from Rs 4.5 crore a year to Rs 7 crore a year, an almost 70 percent raise.
To argue that it is performance-linked does not carry conviction. The performance matrix is skewed everywhere – in India and the rest of the world.
It would still be acceptable if the average employee of the company would have got similarly spectacular raise. But when the average increment in the company in the last three years has hovered around 6 percent and the buzzword created by the company for the average employee is ‘sacrifice now for prosperity later’, should the big guns in the company be allowed to run away with the bulk of the booty now, without waiting for the future?
That is a burning question N R Narayana Murthy has propelled us to ponder over.
Updated Date: Apr 07, 2017 11:06 AM