Senior Executive’s Fat Cheques – Not so Unjustified After all !

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Let me drive you a little more than a couple of year back, at a time when the world economy was going on gung-ho and any news related to astronomical top-management salaries were met with exclamatory remarks such as ‘Oh!’ or ‘Wow!’ Don’t you agree?

Okay, now back to current era, post witnessing the pain of the great recession and any such similar news of soaring salary hikes are seen with suspicion, agony and as being illogical figures. Why so?

When ever the news comes out that some senior executive took home crores of salary, everybody is getting excited and thinks it’s vulgar. Even Government is actively involved in this kind of issue and asks companies to limit salaries.

CEO-Salary

If you are not aware, number of top management personnel getting a pay package running into crores of rupees has crossed the century mark (105 to be precise!).

The fundamental question is what’s wrong in a particular group of employees or management staff taking home a fat pay cheque?

An untrained worker gets his salary as much as he is worth. Similarly a technician, foreman, supervisor, engineer and a manager gets salary as per their output. In fact, occasionally during the shortage of these particular skill sets, there is premium in their salary structure depending upon the supply dynamics for such postings.

Same way if someone takes big salary what is wrong in it? After all, most of such hikes are backed with the ratification from a majority of the company’s shareholders, who are nothing but owners of these companies to the extent of their holdings.

Similarly, if a senior executive takes home a big salary, why everybody has to cry? It is equivalent of sorts that a poor man crying just looking at the posh bungalow of a rich man. Being rich is not a crime, nor is it illegal, nor undesirable, nor unethical.

Now, take the case of Mukesh Ambani. He has become a public figure. Looking at the present resentment among public, he has curtailed his salary to just 15 crores though he is eligible for 40 crores. We can understand his case from two angles. The difference of 25 crores per annum is peanuts to Mukesh (compared to his net worth). Also he thinks by sacrificing 25 crores, he is trying to get into good books of the crying people.

But at the same time, why any other person has to curtail their salaries? If they are not worth, companies are not stupid to pay them that kind of salary. Then how can the law enforce salary of ‘certain people’?

If the government thinks it can meddle with salaries of employees, why don’t they propose salary cuts to middle management and, especially, lower category workers? They know that if they do, they can not stand against the union actions, media exposure, politician criticism and public uproar or even all put together.

If they can not interfere with ordinary people, how can they interfere with only senior level executives? The reason why senior executives not opposing this issue is they do not want to be in the public glare. Just because someone is reluctant to contradict, will it give Government / moral up-keepers / people with inferiority complex a moral stand in this issue?

How many of you would agree with my above views? No many, I guess.

  1. Arun Prabhudesai says

    (Note this comment is by Aditya…I am reproducing it here)

    Hi Viral,

    You have opened up a can of issue long been pending to discuss and especially for people who aren’t getting what other are. I see no issue with what a top management executive earns and gets as perks or incentives, however the point to make is ..is it coming in the right way ? Entrepreneurs are never crazy for money and this is something people should understand. The example you have given here from the Ambani family is an apt one. Money is nothing for them. But yes end of the day they slog to earn it. Every person works hard to earn money and if someone earns more than the other they had it. Have you noticed how surprising it is that there are always a few you will find who can bad mouth others ?

  2. shebeeb says

    100 Percent I am agreeing with this. Most of the poor people consider rich people as unethical and unlawful. Actually it’s because of their jealous and unwillingness to work hard to become rich. Instead of blaming rich people, Why can’t they try hard to become themselves rich.
    Because of this jealousy poor people are joining unions and attacking companies and investors to make them less rich and this can also be viewed as a major reason for why india is not developed.

  3. Rahul says

    Basically, how much any particular company pays its employees (CEO is an employee too) is between them and the company.

    If you own stock in a company that pays the CEO as much as the janitor – SELL!

    The root cause is the perverse incentives created by various compensation tools (options / bonuses etc) in the short term. They say that the average tenure of a CEO at a large company in the US is 5 years. Now if the CEO knows that he will be gone in 5 years he has every incentive to game the system and post short term returns – which could come back to haunt management at a later time. This is a moral hazard which Compensation Committees etc have not been able to effectively address.

    IIRC Warren Buffet and Charlie Munger refused to pay out the golden parachute to ex CEO of Salomon – under whose stewardship the company fell into trouble and WB and CM came on board to help!

    Such behavior was the exception then as it is now! Has Lehmans, Goldman’s chief paid back bonuses from the years 2003 – 2008? Has CITI’s? AIG? anyone?

  4. Altaf Rahman says

    @ Madhav and Ankit,
    Now you guys are really scaring me off. If I set up a company, can’t I get the salary I want? Waaaaaaaaaaa (I am crying. I dont know how to cry in comment) A suggestion to Arun! Pls provide option for emoticans so that we can express.

    I note the point of Mr. Madhav that the package consist of a base salary plus a bonus linked to performance. Thats fair.

    However still I am unanswered. With the above package, still its an internal matter between company and its employee. Where does the Govt, media, politicians, public gate crash into the happy party?

    I still prefer it to be a private affair between company and employee.

    Coming to the question of “How the poor shareholders are suffering”, have you seen any poor shareholder sticking to a single company from start to finish? There are two kids of share holders. One is promoters, the otehr is investors/traders. Except for the promoters, 99% of all shareholders keep changing stocks like underwear. Very few stick to a company. So the look out of majority of the shareholders is at what price to buy a share and at what price to book profits. Now if we are talking about promoters as sufferers, they themselves are blamed for taking fat salaries. So as shareholders promoters have no issues. Except for hypothetical cases, no other shareholders looks into the day to day operations of companies. There are company law boards to check unethical practices of companies.

    Reading what Madhav written, I wish I had a brother or uncle on whose back I could ride into borad and be able to scratch others backs :-)

    Over all still I support “Hands off my fat salary” policy :-)

    1. Madhav Shivpuri says

      Hi Altaf,

      If you are a privately held firm you don’t have to worry about us public shareholders debating your compensation. Honestly, I don’t know how a private company is run versus a public one. The only difference I would think is that for the public cos the shares are publicly tradable on the exchange and there would need to be public disclosure of accounts and following rules of SEBI etc. If a owner or CEO of a firm needs to pay himself fat paychecks, they don’t have to take the company public and invite scrutiny on their incomes.

      Without contradicting my earlier comment, I am NOT uncomfortable if CEOs of big firms like Reliance and Icici draw an equivalent of $X Mn dollars as long as it is justified. Just because the company is in India does not mean one has to draw less. What is important is the scale of the company, revenues, profits, risks undertaken etc. Reliance is a $72 Bn company (http://in.news.yahoo.com/137/20100607/736/tnl-newsmaker-anil-ambani-seeks-investor_1.html) which is a tad higher than Goldman Sachs at $70 Bn(http://www.google.com/finance?q=NYSE%3AGS). Should the Reliance CEO not even make as much as the Goldman CEO?

      1. Altaf Rahman says

        Hello Madhav,
        I really thank you, Mr. Ankit and Mr. Viral for providing a platform to discuss a very interesting and fundamental issue.
        First of all, I am not a company. I am a salaried employee of a company (not even in the ranks of the people whom we are discussing here). My way of thinking is purely for basics. I agree with all of what is said above (in your comment as well as Mr. Ankit comments) I am of strong belief that the salary of anyone, CEO included to be in line with the earning he is bringing to the company. But that is a company responsibility. We have a mechanism for finding base rates for blue collered jobs. It depends on peer company payments, demand for specific jobs. What I want to point is for the higher up salary structure, there is no such mechanism. As long as it is not there, there is a grey area. As long as the grey can not be well defined as black and white, senior execs continue to get the justified/unjustified packages depending on perspective.
        I would also like to point that the health of the company is not solely dependent on how much they pay to execs. Think of the kick backs purchasers (in some companies) get to buy inferior/expensive material (always they have justification for that). Think of the claims every other guy makes of the company (always justified). There are so many other cover ups each specific to different company.
        All these factors combine to make a company financially green or blue.
        So just the exec salary is not a demon acting alone.
        Anyway, I think we have discussed this issue for quite long time. I will not post anymore and spare readers :-) (Unless some one thinks that this is a fundamental, concept topic and comes forward for discussion)
        Sorry Viral, for taking this discussion too long.
        But I still support “Hey, Hands of my fat salary” cause :-)
        I never know may be tomorrow I will have my own company. I dont want to forego my future right to choose my salary :-)

  5. Ankit says

    Madhav, u nailed it!! been wanting to say something on those lines but clarity of words eludes me :-)
    The whole thing looks like a scene from the movie ‘Wall Street’ which actually delves on the whole company ownership-shareholder angle. “Greed is Good”- Gordon Gecko :D

  6. Madhav Shivpuri says

    Very little has gone unsaid on this thought-provoking post and comments. However, just a couple of thoughts from me on renumeration.

    1. Executive pay should have both basic plus bonus components. The bonus itself should have (for listed companies) stock linked bonus – options or not, when to vest etc., could be debatable. What is more important is that the basic remuneration and bonus should be linked with the unit of risk that is taken to deliver the results. As an example: If Goldman Sachs CEO made tens of millions in 2007, it should be linked to the risk which was under taken like the value of CDO’s underwritten.
    Another example could be where the CEO decides to drop the quality of the products to make them cheaper so boost sales. In the short run, the revenues will be extra-ordinary but customers will stop buying and sales will fall in the mid-to-long run.

    So if the compensation is not linked to risk, CEO’s can milk the company by taking bold risks and delivering short term revenues and share prices which could harm the company in the long run. The CEO will take his pay home and one fine day move on to bigger and better things in life!

    2. The concept of directorship and compensation committees in listed companies should change. At many companies directors are nothing but family members and friends who are executives from other companies who scratch each other’s back and pay themselves thousands of Rupees for each meeting they attend. They hardly question the compensation the CEO draws because its the CEO and his team who nominate directors to the board and also pay their bills.

    Even though Directors are elected by the shareholders, shareholders get to choose from a handful of options provided by the CEO. So its a vicious circle at the board and executive level. What a shareholder can do is just assume that the rot exists at all firms irrespective of the extent of the same and continue to invest in company or stay away from the stock market.

    My 2 cents.

    1. Viral says

      Hello Madhav,

      Excellent comment as to how ‘the extra part’ of the compensation can be linked with the underlying asset, which in turn determines the risk and returns that influences the earnings of the company.

      In fact, that’s one way by which the ‘investors’ in the company can take heart from the fact that implies, ‘The senior executives are eating the same food that they’re serving to others – and hence safer to eat.’

  7. Altaf Rahman says

    Ha ha Ankit,
    I was thinking “what if tomorrow I start my own company and what if some one comes along and says, Hey, you cant have that much salary” I was scared and was strongly supporting Viral. (Protecting my interest ha ha)

    Cheers!!

  8. Ankit says

    Viral and Altaf! Point taken, thats why i was in agreement with Viral that no one should set the limits but someone needs to be accountable.

    As for the public or the company part, i guess accountability to the company is good enough but then shareholder cannot be left alone, can he. So public accountability is needed.
    There should be no bar on what salary one can extract is something that i completely agree. Everything else is as u mentioned rant and possibly pure Jealous instincts.
    But, if company lays out fat packages based on short-term performance alone then i have a problem cos it only makes the top honchos rich and the sharholders (aam-admi) is left lurking. I know that wasnt completely relevant but i thought i would add something anywas. Thanks to both of you for insightful discussion

    1. Viral says

      Hey Ankit,

      Your point was quite sensible and logical. There, indeed, is a grey area to this subject as well. But, as you’ve pointed out that somewhere down the line that bit of ‘jealousy’ factor also creep-in to people’s mind, though it is not proper to generalise on this aspect.

      But, what I mean to say is a part that you mentioned is somewhat covered in my article. You say that over short-term some executives are squeezing in illogical payments. The point is akin to shortage of supply of skilled person, who demands a premium on supply-side concerns in the market and the market forces have to embrace such short-term pops.

      In fact, over the longer duration, the evil part of the story has to do away with the premium, as the forces of economics, led by recessionary or slowdown era, play their role in dragging these spurts lower.

  9. Altaf Rahman says

    Hello Ankit,
    Just for debate.
    The case in point you mentioned is a reasonable. Your last sentence regarding CEOs need to be accountable is also true. But the question is accountable to whom? To the company or the public? If it is to the public, how public can account? However dont you think, its an internal company issue? If a company is paying its execs without thinking, its the company which is wrong and should face the law. I am not supporting those heartless marketing executives who caused mayhem in markets, be it the home loan packagers or the executives who played Crude oil futures in 2007. The question is how the Govt can interfere in company matters? How can they set guidelines on the salary structure? Its a pure interference in company internal matters.

    Right now Govt is just making rants about it and the scared companies are declaring voluntary reductions. Even now if some one want they can make an issue about Mukhesh salary. They can say “How can he take home 15 crores while 15 crore indians cant get 2 square meals?” There is no limit to it. The day some brash executive stands up and start questioning nobody will have answers.

  10. Ankit says

    Ah, so many positive comments already. I am going to take the high road here though i am not sure where exactly the discussion stemmed from.

    My reasoning is based on the executive salary cuts ( especially bonuses) that were planned and i think even if government interference may not be justified, intervention is indeed necessary.

    The fat checks that CEO’s receive have a major component as variable (performance bonus, perks and what not). Now, all that is good but IMO for a position as high up as the CEO, the performance bonuses should be linked to a longer timeframe than they are now.
    Case in point: Those ivy league celebrity CEOs at various I-Banks made a killing with the introduction of packaging of housing loans. Short term profits were off the roof and the CEOs received their fat checks. But, then when things turned ugly it is the customer who faced the wrath.

    A vague co-relation but then CEOs need to be accountable for the kind of perks they receive.

    1. Viral says

      Hello Ankit,

      Nice to hear the other side of the story from you.

      In fact, the concept of fat cheques needs a more justifiable blaming in case of loss-making units or corporatiosn where profits is inexistent due to poor management. One can argue against fat cheques for those depressed units in west, where they have been bailed-out by the public money.

      But, certainly, in fast growing and competitive countries like India, remuneration should come in form of encouragement for more performance-linked packets for the top-level executives, especially mid-level professionals who look over the crux and technical part of the job at hand.

  11. Altaf Rahman says

    I too totally agree with Viral.
    Executive positions come with great responsibility. Though we may never quantify the work, it is more than the productivity of blue collor jobs.
    E.g. Lets say a company is producing 100 units per year of a product X. It is selling each unit @ 10 Rs (the market rate). It is making a turnover of Rs.1,000/-. and makes a profit of Rs.100 (@ 10%)
    Then an executive joins the company who has a nack of identifying lucrative options. He identifies a customer who is ready to pay Rs.12 for the same product X. The equation then becomes turnover Rs.1,200 and profit Rs.300. The sales executive has single handedly increased the turnover by 20% and profit by 300% with out any investment in expansion, any new technology.
    Now whats wrong if the company decides to pay the executive more than standard market rated salary?
    Then what is wrong if the executive demands such salary upfront knowing his capability?
    Where does Govt comes from? On what basis it ask the company not to pay its deserving employee? If it can do so, what incentive the employees have to be more proactive and work hard to bring success to the company? With out such opportunity, everybody will try to spend 8 hours in work place and behave like a government employees.
    I hope some one in higher ups are reading this article and it will create a food for thought in policy matters.
    Great ‘concept’ article!!

  12. Satinder says

    I completely agree with Viral. Govt. should not interfere in any of the company affairs.

    You have given the example of Mukesh Ambani, i guess people who outcry about his salary does not know how much efforts/work he has to do. How much Mental pressure he has to undergo everyday?

    Even a small businessman has to put More efforts/work than his employees (be it lower/middle management). Amount of pressure he suffers from Employees, Share Holders, various laws ..etc. Its not a child’s play to run a company and make profit in today’s world where competition is soo stiff.

    1. Viral says

      Hello Satinder,

      Glad to read a positive view in favour of what I’ve written above, to start with. And, I almost agree with your views mentioned above and have little to add as of now.

      Well, I’m expecting some contrary views from the readers as well, as this is not the view that most of them shall back with conviction. The topic of discussion remains debatable.

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