Are major corporate honchos salary levels justified? - Chart Of The Day 7 July 2015 - Equitymaster
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Are major corporate honchos salary levels justified?

On This Day - 7 July 2015
« Are major corporate honchos salary levels justified?

With the new Companies Act and SEBI's latest Corporate Governance Code coming into force, Indian firms have begun disclosing information such as ratios of salaries of the top management and the average staff. With this development, comparisons between salary levels of head honchos and the median salary levels have come to the limelight.

As the Business Standard recently wrote, salary levels of major corporate honchos stood at very high multiples of the average median salary of their employees. The ratios stood anywhere between 19x to a whopping 439 times!

Today's chart of the day shows the highest ratios of salaries paid to the honchos to those of the median employee salary in the respective company. Ranking first in this aspect is Mr. Y. C. Deveshwar (top brass of ITC) followed by Navin Agarwal (Vedanta) and Mukesh Ambani (Reliance Industries).

Discussing the same topic, an article in Firstpost mentioned how epitome of corporate governance Mr. Murthy had earlier mentioned that the salary between the top executive and the median salary of the employees should not be more than 15 times. However, the irony is that in the chart above, one sees Vishal Sikka's name as well (116x). The author of the article also wrote - "The Ministry of Corporate Affairs should step in and amend the relevant section of the company law to restrict Honcho salary to 15 or 20 times the median salary." - as a way to reduce this drastic gap. If this was to be enforced, it would require either of the two - a sharp jump in average employee salaries or a substantial cut in the salary of the top brass. Both options would be difficult to implement.

The second point the author made was that of profit based salaries (if at all) "should be allowed by taking a long enough time horizon, say five years." as sharp jumps in profits and accounting tricks can help in propping up the bottomlines and in turn remuneration for the top guys.

Keeping these points in mind, the question of how to gauge salary levels (as to understand whether they are higher or not) arises. And more importantly, what can investors do about it? For the latter, long term trends in business fundamentals and salary levels can be a good aspect to study.

For the former, we thought it would be a good idea to compare directors' remunerations with the total employee expenses. For calculating this, we ran a query on the companies forming part of the BSE-500 index and compared the past 5-year averages of these two figures. It turns out that our database software only threw up numbers for about two-thirds of the companies, which is still good enough a number to conduct an analysis on.

The following chart is a result of this exercise.

Are your company's directors overpaid?
Data source: ACE Equity, Equitymaster Research

We have put the data in different buckets. For example, if directors' remuneration formed about 0.45% of the total employee costs, it would fall in the '0% to 0.5%' bucket in the chart.

As you can see, a major chunk of the companies fall in the less than 2% buckets; about 73% to be precise. As such, one could consider this as a benchmark. What is surprising is that there are quite a few companies whose directors get paid more than a fifth of the total employee costs. And in very rare cases, the remuneration paid to directors is more than what is paid to all of the employees in totality. While there may be exceptions wherein executives could command high salaries - considering they would have a lot to bring to the table, such cases would however be very rare.

Corporate governance is very important when it comes to investing. While maintaining transparency and having policies in place are some of the ways to gauge the same, investors would do well to keep away from companies whose executives continue rewarding themselves irrespective of how the business is performing.

Do you make it a point to gauge the salary levels of senior management of the companies you invest in? Let us know your comments or share your views in the Equitymaster Club.

Data source: Business Standard

This Chart Of The Day was published in The 5 Minute WrapUp - Are your company's directors overpaid?
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