Are Indian CEOs overpaid?
In this issue:
» Short term debt almost half of forex reserves
» Should the govt go ahead with disinvestment?
» India suffering worst trade deficit in history
» India's gold imports could rise by 20%
» ...and more!
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The answer to this is yes. The pay differential between an entry level employee and a CEO is highest in India. It is even higher than that in countries like US or UK or even China. The differential stands at a whopping 675 times. There are several arguments that would try and justify this gap. One of the most popular ones is that as India Inc expands its global footprint, it needs to pay higher to top talent to not just recruit them but also to retain them. Another argument is that the lack of talent at top level and hence the higher pay.
Though the arguments that favor the higher pay are plenty. But the problematic part is that despite being paid more than their global counterparts, the level of responsibility is nearly half. For example a European firm looking to hire an Indian official to head business worth US$ 250 m had to pay the same compensation that it would to a European person handling business worth US$ 2 bn. The point being that despite the higher pay, the Indian CEOs are not really handling or generating more business. Therefore, the question, why are they being paid so much?
The truth is there is no reason for this the differential. Unless the CEOs start to take up more responsibilities or prove their worth, such unreasonable high salaries are neither justified nor deserved. Particularly at a time when Indian Inc itself is struggling for growth. An option could be for the government to put a cap on the maximum compensation for top management. But that would mean too much interference by the government which could hurt the corporate sector in the long run. A better option would be to link the pay of top management to the performance of the companies instead. That way they make money only if their company does.
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Chart of the day | |
Source: LiveMint
* As on 31st March each year |
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Thus, the disinvestment needs to start right away and in a phased manner so that there is no bunching together of issues. There is also a need to simultaneously work on reforms in the areas of metals, mining and diesel pricing. The current sharp reversal in global crude prices could not have given a better opportunity to undertake reforms on diesel prices. Not to forget the positive impact this would have on the divestment of companies from the energy and commodities space. As can be seen, there is a good deal of scope for reform implementation and reversing the negative outlook towards India. It will be interesting to find out if Mr Singh plays ball.
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Now is there any reason for Indians to not buy gold. Well, our culture still encourages gifting gold in ceremonies and weddings. Buffett may not agree with this. But Indians consider gold's importance as store of value much more effective than its lack of productive usage.
With inflation showing no signs of relenting, all the more reason to hoard on the metal. More so because buying gold has been one of the oldest form of investment in Indian households. Much before stocks, mutual funds and fixed deposits became commonplace. Even today, the rural rich park most of their surplus in gold. Earlier this year, the government had changed the duty structure on gold. That made buying the precious metal more expensive. The government hoped that this would lessen the import bill that gets inflated with large doses of gold purchase. But we believe that the 20% to 30% rise expected in gold imports in 2012 is only a vindication of the appetite for the safe haven asset.
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Then, the question follows- shouldn't FIIs be buying Indian stocks? As it turns out, the answer is not very encouraging. There is a list of concerns that's causing them to shy away from Indian markets. For one, given the high interest rates, they are apprehensive of India's medium term growth prospects. Investments and capacity expansions by companies have also slowed down. The overall slowdown coupled with high inflation is likely to have an adverse impact on earnings. These concerns are certainly valid and are likely to persist in the medium term. But such times of pessimism shouldn't overshadow your long term investment outlook. FIIs are known to be fair-weather friends. They tend to run away at the slightest sign of gloom. Long term value investors should avoid falling prey to such flighty tendencies.
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13 Responses to "Are Indian CEOs overpaid?"
Pratap
Jul 2, 2012I think pay has to be function of business handled and business brought in. Of course we have seen in US also pay dont seem to have any bearing to company profitability. that has to stop and major portion of pay of higher executives should be linked to company profit
Rahul Tandon
Jul 2, 2012Yes, I do believe that in most of the organisations in India CEO enjoy too much of polical power which essentially is result of the prevailing polical enviornment created by the top management only. This lets the CEOs to take undue advantage of their authority by delegating almost everything to their subordinates and not much contributing. I don't particularly feel there is anything wrong in delegation but then a CEO who essentially responsible of entire operations of the company needs to act a like true leader, has to be a visionary and should be very clear about what should be the direction of the organisation. In my view CEOs needs to made accountable for the culture of the organisation as I feel that the manner in which a CEO conducts himself in the company gets propagated through the Business Unit heads across the organisation. So a CEO needs to be dynamic. Lot of CEOs do not make efforts to change the culture of the organisation as a whole so as to make the organisation performance oriented. CEOs focus predominantly on the financial numbers which most of us know can be manipulated. Thus I feel remuneration of a lot of CEOs is too high and is not justified.
Venky
Jul 2, 2012Talking about overpaid Indian CEOs with poor performance, recently Prism Cements Ltd. headquartered in Mumbai passed a resolution to subvert company laws and pay its Directors in crores despite company making loss. Is there any better proof?