Are Indian CEOs overpaid? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Are Indian CEOs overpaid? 

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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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00:00
 
Salaries and pay scales. These are phrases that would catch anyone's attention. Though less talked about, but these are subjects close to every working professional's heart. To the extent that most of us demand that we are paid more. We do not really take a step back and ponder whether the pay we are being given is what we deserve. After all, everyone feels that they are overworked and underpaid. So why is it that we would expect CEOs of companies to be any different? They are after all the highest paid employees in any organization. But a recent study carried out by a leading HR firm questions whether Indian CEOs are overpaid as compared to their global peers.

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.

Do you think Indian CEOs are overpaid? You can also share your comments with us or post your views on our our Facebook page / Google+ page.

01:15  Chart of the day
 
Debt has become a scary word these days. The problems it has brought about in US and Euro zone are not really news to anyone. The latter is still struggling to crawl its way out of the trap. The former is doing no better. Till now India has not really worried about it. But a recent report released by the Reserve Bank of India (RBI) has given us every reason to be worried. This report states that the quantum of debt (at the end of March 31, 2012) maturing within a period of 1 year stands at almost half of the country's total foreign exchange reserves. The scarier part is that this percentage has doubled since 2008. Though most of the constituents of this short term debt are those that are usually rolled over, considering the current time of economic uncertainty and risk, it is not possible to be too sure that this would happen. There could be some defaults if not all.

Source: LiveMint
* As on 31st March each year


02:05
 
There are many things expected of Dr Manmohan Singh in his new role as the country's finance minister. But none is perhaps as urgent as addressing the high fiscal deficit that is staring the economy in the face. Fortunately for Mr Singh, there is a solution at hand. And it answers to the name of disinvestment. With time fast running out, the Government can no longer wait for the market sentiments to improve so that a disinvestment programme could be launched. One never knows, the time may not come at all.

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.

02:30
 
India's external trade balance has worsened to record lows in the recent past. In March quarter, the current account deficit (CAD) stood at 4.5% of the Gross Domestic Product (GDP). For the full year, the same stood at 4.3%. Declining exports due to slowdown in global economy and strong crude oil demand has negatively impacted the CAD. And this has impacted the rupee negatively. It may be noted that the rupee has depreciated by 25% over the last one year. In fact, it touched a record low of 57-58 a dollar recently. While RBI has taken a few steps like easing the external borrowing norms for companies it remains to be seen whether it will have a meaningful impact in curbing the rupee's fall. We believe the best way to do the same is to take steps that shall narrow the trade deficit. Making exports competitive by providing tax sops to exporters is one such step. Policy reforms attract FII/FDI flow into the country. Even that would provide some respite to the falling rupee. Further, falling crude prices also act as a blessing in disguise.

03:00
 
Can gold prices soar to six digit levels? Well such speculations have been rife since 2009. Especially given the pace at which inflation has been eating away into the purchasing power of the rupee. However, that certainly does not show in the gold buying appetite of Indian investors and consumers. Gold does not seem to have lost any luster as far as Indians are concerned.

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.

03:50
 
The rupee has witnessed a steep decline over the last one year. It is close to its all-time low against the US dollar. Moreover, this situation hardly seems like it is going to get better anytime soon. For the Indian economy, a depreciating rupee may be a big challenge as it adds further pressure to our import bills. Let's try and understand how the rupee fall has affected foreign institutional investors (FIIs). For instance, let's consider a hypothetical situation wherein a certain FII invested Rs 100 in a portfolio of Indian stocks. Even assuming no change in the stock prices, the dollar value of the portfolio would have dropped by 20% over the last one year. But that also means that now the Indian stocks are cheaper in dollar terms than a year before.

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.

04:40
 
In the meanwhile, after opening the day in the red, the Indian equity markets continued to trade in the negative zone. At the time of writing, Sensex was down by 44 points (0.3%). Among the stocks leading the losses were Jindal Steel and Hero Motocorp. Barring Korea and Japan, the other major Asian stock markets have closed the day on a high note with Hong Kong and Taiwan leading the gains in the region. Europe too has opened the day in the green.

04:55  Today's investing mantra
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative." - Benjamin Graham
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13 Responses to "Are Indian CEOs overpaid?"

MR.LAKHINDRA RAI

Apr 22, 2013

ulips policy reliance super invest assure plan in,2007 frist i take 2008 this policy and addisinal benefit or income benefit+taxbenefit+80c+80d+10,10,10d and tolat benefit issue govt plan,iam inssurance advsor this company
I paid total 25 thusands in 2013,my fund value 19884,i don,t any benefit,pleas help me i need total benefit
NAGAON ASSAM PIN.782001

Like 

Gangadharan Nair

Sep 26, 2012

Can gold prices soar to six digit levels?
In 1964 the price of Gold was only Rs. 63.50/- per 10 grams and today after 48 years the price has gone up by 500 times to Rs. 30,000/- per 10 grams, making an average compound increase of 15% for 48 years. This makes the GOLD the safest item of store value. It may not take even 9 years to touch Rs 100,000/- per 10 grams of gold.

Like 

Gangadharan Nair

Sep 26, 2012

The Sovereignty of a Nation depends on the strength of the value of its currency. When an executive is paid such a huge amount as his salary, for him the value of the currency is reduced to pittance and NO nation with a sense of National Pride should allow that to happen. Since the Parliament has passed a bill on minimum wage, they should also pass a bill on maximum wage, which should NOT be more than the salary of our President of the nation. If any nation permits his citizen to draw a salary more than the salary of its chief executive, namely the President, that nation is inviting problems and will be in deep trouble very soon.

Like 

Benny Jose

Jul 15, 2012

I agree with the proposal that the CEO's pay must be linked with performance.The government must fix cap on the CEO's pay as a certain percentage of the Taxable profit it generated or the dividend paid to the shareholders.

Like 

BRIJ

Jul 3, 2012

In India no work,responsibility but high pay is the motto of the day. This is happening in all sectors be it govt or private. The difference lies in the security of job which is nil in private sector but 100percent in govt sector so they are the real suckers

Like 

AJ

Jul 3, 2012

Whole world is talking about having gold in your investment portfolio and the prices are really going up. But I go to the local jeweller and tell him, look man I have gold and I need money will you buy. Prompt comes the reply, no we exchange gold only. Give me your biscuit and I will give you jewellery. In the end I end up paying something to him as making charges, etc. After some days walk to any NBFC and pledge the jewellery and take money as loan and pay again for the interest. I really wonder what has happened to we Indians? Are we blind or become zombie when we see gold?

Like (1)

AJ

Jul 3, 2012

Why do we complain about our CEO's in private sector, what is our real CEO's (ministers and mp's & mla's & ias babu's doing). They raise sily issues in parliament and will stop the proceedings but will shed their difference and without any discussion will vote in favour for their wage raise. We are all used being looted whether private or public. Why cry? A host of powerless people happy with a bottle of cheap drink and a food packet, willing to sell my rights.

Like (1)

ssn raju

Jul 2, 2012

Yes they are overpaid when compared to the business results they produce. Not only CEO, the business owner executives also receive fancy salaries with out any contribution. Even people representatives unilaterally increasing their remuneration with out any performance measures to justify that.

Like (1)

Madhusudan Palan

Jul 2, 2012

Sir,
You are right they are paid very much on higher side compared to what responsibility they are carry, they are even not generating business!
They should be paid as per their performance.
Even some are not professionally qualified. They take away credit of their juniors, who have put their blood to growth of company / Business.
Thank you,

Like (1)

Kuldeep Nayar

Jul 2, 2012

Yes, most are definitely overpaid. Indian CEO's and hence Indian Industry does not INNOVATE. There is nothing original about it. Barring a handful, most companies spend pitiful little on R&D and innovation. What they call 'Jugaad' is nothing but a 'Kisi bhi terhan challa lo', a solution that has no lasting value. After 60 years of independence and having paid many billions to buy technology, Indian industry is chugging along by still buying companies & technology. Where is the India's USP?

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