Gulabchand is the group chairman of the Hindustan Construction Company, a conglomerate whose subsidiary Lavasa Corporation Ltd got into trouble for flouting environmental norms while setting up a gentrified hill city near Pune – a project that is still incomplete. HCC has been in debt for several years and currently owes Rs 5,000 crore to government and private agencies. Gulabchand’s remuneration came under scrutiny after proxy advisory firms (who serve as executive pay watchdogs, among other things) pulled him up for drawing a massive salary at a time when his company is still trying to pay off its large debts.
The pattern isn't unusual. Disproportionately large salaries for top executives are increasingly becoming the norm in corporate India, where wages of ordinary rank-and-file employees do not grow at the same rate.
The great divide
In 2013-'14, the average annual compensation of chief executive officers in India’s top 100 listed companies grew by 12% from the previous year, while the average profit of those companies rose by only 6.9%.
The two highest paid top executives that year – Kalanithi Maran and Kavery Kalanithi of the Sun TV Network – earned Rs 59.8 crore each. In 2013-'14, close to 700 senior executives in India made more than Rs 1 crore per year.
Not only are these figures several times higher than the amount CEOs earned in the early 2000s, they also often increase at a rate much higher than that of the general employees in the company. In 2013-'14, for instance, Lupin Pharmaceuticals increased its CEO's pay by 69% compared with the previous year, while employee compensation increased by just 16%. Likewise, Indiabulls Housing Finance raised its CEO's salary by 27%, while its employees got just an 8% increase in pay.
It’s not that the wages of company owners and top executives are not regulated. All companies in India are governed by the Companies Act of 2013, which places a cap on the amount that corporate heads can draw as personal remuneration. The Act states that a managing director or whole-time director or manager cannot be paid more than 5% of the net profits of the company.
If this limit is exceeded – as in the case of Ajit Gulabchand – without prior sanction of the central government, the excess sum has to be refunded to the company.
“In larger companies, top executives can draw abnormally large salaries even if they comply with the 5% cap,” said Debanik Basu, a consultant at Institutional Investor Advisory Services, a proxy advisory firm.
Accountability to shareholders
Companies are also accountable to their shareholders, who also have the right to approve or reject the remuneration being paid to senior executives and promoters (the people who have over-all control over a company). These approvals are made through resolutions at shareholder meetings.
“But most companies in India have high promoter holding, with promoters often holding 75% of the shares,” said Pranav Haldea, managing director of Prime Database, a market monitoring company. “In such cases, their voices will easily prevail in a shareholders’ meeting.”
This is why Tata Motors made headlines in July, when shareholders rejected the compensation being paid to three of its top directors for being in excess of the 5% government cap.
Around the globe
Massive salaries for company heads is hardly unique to India. In most Western countries, CEO salaries are significantly higher than those of their counterparts in India, with the United States topping the list. Chief executives in the US reportedly earn 400 to 500 times more than the average salaries of their rank-and-file workers. In 2012, at least a hundred American CEOs were paid more than $15 million – around Rs 95 crore.
Western nations, too, regulate CEO salaries in ways similar to India, but Europe fares better than the US when it comes to concern for ordinary employees. France, for instance, has placed a cap on the ratio between CEO pay and the wages of the lowest-paid workers and in Germany, corporate boards of directors include both shareholders and representatives of labourers – a move that allows workers to raise employee pay along with overseeing CEO salaries. In the US, on the other hand, workers are left out of boardrooms.
In India, say experts, there is a wide pay gap not just between company heads and low-ranked workers, but also between the heads and the middle-management.
“Company owners, especially those who have inherited a family business, often claim they deserve a certain high salary on the grounds that they bring talent and skill to the company,” said Gautam Mody, secretary of the Delhi-based New Trade Union Initiative. “But on what basis can they make such a claim? At least those in managerial positions have worked their way up through their skills and talents.”
Ideally, says Basu, CEO salaries should increase if there is a corresponding improvement in the company’s performance, but in India, this is not always the case. “There have been quite a few instances when CEO salaries have shot up dramatically even without the performance to show for it,” said Basu. “The link between performance and pay is not really regulated in India, and some companies misuse this. At those times, we raise red flags.”
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