Making hay while making losses: HCC chairman's fat pay questioned

CEO packages are in focus once again. With awareness about the issue, resistance to executives getting fat pay checks even if their companies do not perform well, or worse still even make losses, is also increasing.

The latest addition to the list of such senior executives is Ajit Gulabchand of Hindustan Construction Company.

According to a report in the Economic Times, Gulabchand is seeking a pay of Rs 10.08 crore for next three years, at a time when the company is making losses.

Interestingly, this amount is almost double the pay he got in 2011-12. His salary was Rs 10.65 crore in 2012-13, a year in which the company had to undergo debt restructuring, the report notes. However, the approval to this salary was given before the company sought to recast debt.

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The company is to take up Rs 10.08 crore salary proposal at the company’s annual general meeting on 21 June.

[caption id=“attachment_887023” align=“alignleft” width=“380”] Chairman and Managing Director of Hindustan Construction, Ajit Gulabchand. AFP[/caption]

Proxy advisory firms Stakeholders Empowerment Services (SES) and InGovern have advised the shareholders against voting in favour of the proposal.

According to SES, the move shows HCC in poor light. “On the one hand, the company promoters propose to pump in Rs 64 crore under the CDR scheme while on the other, a promoter is seeking remuneration that is not in line with performance of the company,” the ET report quotes SES as saying.

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“In case of HCC, the CDR scheme makes it onerous that Gulabchand should not be paid such high remuneration,” InGovern’s Shriram Srinivasan has been quoted as saying in the ET report.

The company has, however, denied all these allegations. It has said that Gulabchand has insisted that there should not be an increase in his pay and is continuing to get the same pay for the next three years.

However, the ET report says as per the Companies Act 1956, executives of loss making companies with Rs 100 crore capital should not get more than Rs 4 lakh per month. This is applicable only if the company has not defaulted on loans.

By these standards, Gulabchand is way off the mark, even if we consider that the guideline is not taking the present economic realities into account.

CEO salaries have been a hot topic of discussion in India of late.

Resistance to moves by companies to give obscene salaries to their top deck is rising especially due to alerts from shareholder activists and proxy advisory firms such as SES.

According to this article, during September 2011-January 2013, Institutional Investor Advisory Services, another such company, had alerted investors against 39 such proposals.

Earlier, SES had raised concerns about Jindal Steel and Power Chairman Naveen Jindal, who is also a whole-time director on the company board, getting power to decide his own salary. Jindal had drawn Rs about 73 crore salary and was the highest paid executive in 2010-11.

Opposing this, SES had said companies should ideally have a remuneration panel to decide senior level salaries.

Central to the issue is lack of transparency in such decisions. Companies should make more disclosures regarding these salaries and the processes that decide this. Such a move will also help improve corporate governance.

Capital market regulator Sebi has also recently proposed setting up of such a panel to decide the executive pay.

“…Most of the Indian companies are managed by promoters and this brings in the concern of excessive managerial remuneration to executives forming part of promoter/promoter group, which partakes the nature of an abusive related party transaction,” a report in the DNA quoted from a consultative paper by Sebi.

It has also proposed a process wherein minority shareholders too get a say in deciding the salary of a company’s top executive.

The Companies Bill 2012, which has been passed by the Lok Sabha and is pending before the Rajya Sabha addresses some these issues.

An expert panel has also been constituted by the corporate affairs ministry to study the executive pay issue.

According to a PTI report, the government is studying the report submitted by the panel and will take a final decision shortly.