Corporate Governance and Remuneration of CEOs

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Remuneration of CEOs in
India
In Guidance of Dr. Divya Purohit
Faculty, Corporate Governance
Institute of Management Studies – DAVV
Prepared By:
Chandan Arora
Jasreen Kaur Wilkhoo

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Topics for Discussion
• Corporate Governance
• Remuneration
• CEO’s Remuneration
• Link between Corporate Governance and CEO’s Remuneration
• Your Views…..

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Corporate Governance
• Corporate Governance can be defined as:
• Rules formed to direct and control management.
• To maximise profitability and long term value of firm.
• Principal Players in Corporate Governance are:
• Shareholders, Management, Board of Directors.

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Remuneration
• Reward for employment in the form of pay, salary, or wage,
including allowances, benefits (such as company car, medical plan, pension plan),
bonuses, cash incentives, and monetary value of the noncash incentives.

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COMPONENTS OF REMUNERATION
• WAGES AND SALARY.
• INCENTIVES.
• FRINGE BENEFITS.
• PERQUISITES.
• NON MONETARY BENEFITS.

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Executive Compensation
The compensation program serves three main purposes.
1. It must attract executives with the skills, experiences, and behavioral profile
necessary to succeed in the position.
2. It must be sufficient to retain these individuals, so they do not leave for alternative
employment.
3. It must motivate them to perform in a manner consistent with the strategy and
risk-profile of the organization and discourage self-interested behavior.

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Elements of Compensation
The compensation package includes some or all of the following:
• Annual salary.
• Annual bonus.
• Stock options.
• Premium options.
• Performance-vested (accounting-based).
• Performance-vested (stock-price based).
• Performance-vested (nonfinancial-based).
• Restricted stock.
• Performance units (shares).

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Elements of Compensation
• Performance units (shares).
• Perquisites.
• Contractual agreements.
• Benefits.

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Restrictions on Compensation
Compensation programs might also be subject to restrictions:
• Stock ownership guidelines: Executive is required to own a minimum amount of
company stock, generally expressed as a multiple of base salary (five times).
• Clawbacks: Company provides that it can reclaim compensation in the future if it
determines that the compensation should not have been awarded. Clawback
policies are now required under the Dodd-Frank Act.
• In 2006, only 10% of Fortune 100 had disclosed a clawback policy.
• In 2010, this figure increased to 82%.

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Designing the Compensation Program
• The compensation committee recommends compensation of the CEO and other
executive officers.
• Packages are approved by independent directors of the full board. Shareholders
approve equity-based compensation.

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Determining the Level of Compensation
• Most boards benchmark CEO pay against a peer group of companies comparable
in size, industry, and/or geography.
• Common practice targets cash compensation (salary + bonus) at 50th percentile
and long-term pay at the 75th percentile.
• There are potential drawbacks to benchmarking:
– Might lead to ratcheting.
– Is based on size rather than value creation.
– Is highly dependent on companies included in peer group.
• Companies include unrelated firms in peer group.
• The inclusion of these firms increases pay.

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Compensation Mix
• In addition to determining compensation levels, the board decides how to structure
compensation.
• The mix of compensation should be appropriate to attract, retain, and motivate
executives in the short and long terms.
Stock Restricted Perf.
Salary Bonus Options Shares Plans Other
Top 100 9.2% 17.9% 32.1% 18.3% 19.3% 3.1%
101 to 500 10.8% 18.1% 32.0% 19.7% 15.8% 3.7%
501 to 1,000 13.8% 18.6% 28.1% 23.9% 12.4% 3.2%
1,001 to 2,000 20.6% 15.8% 25.4% 23.6% 9.1% 5.5%
2,001 to 3,000 26.0% 13.2% 23.6% 20.5% 8.1% 8.6%
3,001 to 4,000 40.4% 12.7% 21.6% 15.5% 4.1% 5.7%
1 to 4,000 17.5% 16.6% 27.9% 21.1% 12.1% 4.7%

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Compensation Consultants
• Most companies use a third-party consultant to advise on compensation levels and
program design.
• Compensation consultants might be subject to conflicts of interest if they provide
other services to the company, such as benefits consulting or pension asset
management.
• CEO pay is higher among companies that use a consultant, but evidence
suggests this is due to governance quality, not the use of the consultant.
• No evidence that conflicts influence pay levels. Pay levels do not vary
between companies that use dedicated compensation consultants and those
that use general HR consultants.

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Issues With Compensation Packages
• If CEO holds over 1% of stock, hard to fire
• Bonuses often cause oversight of long term goals

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Who Sets Executive Comp?
• Different for Each Company
• Compensation Consultants
• Compensation Committees
• Board of Directors
• Shareholders

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Board of Directors
• Is it fair for Board of Directors to determine salary?
– “Boards are often quite friendly with the CEOs and find it hard to impose large
decreases in compensation on their friends”
– Boards should usually be made of outsiders to avoid much conflict

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Reasoning
• Board of Directors feel exec’s deserve high salary
– Doing good job in hard times
– Doing more work to manage in a bad economy

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Let’s Look at Salaries…
• Are CEOs paid based on industry?
• Are CEOs paid based on company size?
• Are CEOs paid based on performance?

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Highest paid CEOs in India
• Kalanithi Maran, Executive Chairman, Sun Network
Salary: INR 59.89 crore (2013-2014)
• Kavery Kalanithi, Executive Director, Sun Network
Salary: INR 59.89 crore (2013-2014)
• Pawan Munjal, Vice chairman, Managing Director and Chief Executive Officer,
Hero Motocorp
Salary: INR 37.88 crore (2013-2014)
• Desh Bandhu Gupta, Chairman, Lupin
Salary: INR 37.15 crore (2013-2014)

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Highest paid CEOs in India
• Brijmohan Lall Munjal, Chairman, Hero Motocorp
Salary: INR 36.98 crore (2013-2014)
• Naveen Jindal, Chirman, Jindal Steels
Salary: INR 36.96 crore (2013-2014)
• Sunil Kant Munjal, Joint Managing Director, Hero Motocorp
Salary: INR 35.97 crore (2013-2014)
• Murali K Divi, Chairman and Managing Director, Divi’s Lab
Salary: INR 33.39 crore (2013-2014)

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Highest paid CEOs in India
• Onkar S Kanwar, Chairman and Managing Director, Apollo Tyres
Salary: INR 30.41 crore (2013-2014)
• Sameer Gehlaut, Chairman, IndiaBulls Housing Finance
Salary: INR 29.60 crore (2013-2014)
• Jayadev Galla, Vice Chairman and Managing Director, Amara Raja Batteries
Salary: INR 29.33 crore (2013-2014)

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Lowest paid CEOs in India
• Anil Ambani, Chairman of Reliance Power, Reliance Communications, Reliance
Capital and Reliance Infrastructure.
Salary: INR 5.5 Crore (2011-2012)
• Aditya Puri, Managing Director, HDFC Bank
Salary: INR 5.20 crore (2013-2014)
• Chanda Kochhar, Chief Executive Officer, ICICI Bank
Salary: INR 5.12 crore (2013-2014)
• Shikha Sharma: Managing Director and Chief Operating Officer, Axis Bank
Salary: INR 2.53 crore (2013-2014)

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Lowest paid CEOs in India
• Shinzo Nakanishi: Managing Director and Chief Operating Officer, Maruti Suzuki
Salary: INR 2.8 crore (2013-2014)

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CEO : Average Salary (in India)
• A CEO earns an average salary of Rs 3,324,027 per year.

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Role of Experience in Remuneration of CEO’S

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Impact of Location in CEO’s Remuneration

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Related Job Salaries ,with CEO’S

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Pay Inequity: Executive Officers
There is a large pay differential between the pay granted to the CEO and the pay
granted to other senior executives.
On average, the CEO earns 1.8 times the pay of the 2nd highest officer. The 2nd
highest earns 1.2 times the 3rd.
• (+) Might reflect relative value creation of these jobs.
• (+) Pay inequity provides incentive for promotion.
• (-) Might reflect management entrenchment.
• (-) Discourages executives who feel they are not paid fairly.
• (-) Might reflect lack of internal talent development.
• Some companies limit CEO pay relative to other executives.

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Pay Inequity: Average Employee
• The press often cites the ratio of CEO pay to that of the average employee as a
sign of excessive compensation.
• This figure varies greatly with methodology. It has been calculated as either 180,
300, 400, or 500 in recent years.
• It also varies with industry, size, location, and measurement period.
• It is difficult to interpret. Does it reflect relative value creation, scope of job, or
expendability of the position?
Suggestions…?
• Compensation is best evaluated in terms of suitability for the job. Still, boards should be mindful of
public perception.

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Pay for Performance
• Is there pay for performance in CEO compensation contracts? There is no single
methodology for answering this question.
• The board might consider the relationship between the total wealth awarded to the
CEO (salary, stock options, direct stock ownership, and other incentives) over
changes in stock price.
Relationship Between CEO Wealth and Stock Price
What is the upside?
What is the downside?
What reward is promised?
What risk is encouraged?
Are these appropriate?

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Efforts to Reform Compensation
• More proxy disclosure:
– Disclosure might be too long and confusing already.
• Say on pay:
– Little evidence that advisory vote reduces pay levels.
• Strict limits:
– Potential to drive talent from public to private companies.
• Require longer retention periods for equity:
– Might encourage risk aversion.
• A better approach is to continue to improve governance quality/transparency and
discourage self-interested behavior.
A better approach is to continue to improve governance quality/transparency and discourage self-
interested behavior.

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Conclusion
• Executive Compensation is different
• Much more than just salary
• Always a debatable topic
• Ever-growing issue with the current economy

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