Are your company's directors overpaid? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Are your company's directors overpaid? 

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In this issue:
» Jim Rogers on whether Grexit can impact India...
» Chinese stocks wipe out a whopping US$ 2.7 trillion in a matter of weeks!
» ...and more!


00:00  Chart of the day
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).

Are major corporate honchos salary levels justified?

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.

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02:20
As the Greek citizens in a referendum voted to reject the terms of an international bailout offer, the chances of Greece exiting the Eurozone has only heightened. If that happens, Greece will have to begin right from scratch. Or the other alternative could be that some sort of a deal will be reached. Nobody knows. What seems certain though is that a lot of volatility is expected to haunt the Eurozone in the coming months. The effect of which will spill over to the other global markets as well; the extent of this fallout will however differ.

Noted investor Jim Rogers opines that India will not really be hit too hard by a possible Grexit. Given that there has been a fair amount of correction in the Indian stock markets since the start of 2015, the Greek crisis in some part has already been factored in. More importantly, Greece ultimately is a small economy in the Eurozone and as such is not expected to have much of an impact on markets in the longer run. Certainly not the kind of impact a crash in the Chinese stock market is bound to have.

03:35
Speaking of the Chinese stock market, the crash could not have come at a worse time for the global markets, especially when they are grappling with the Greek crisis. As reported in the Business Standard, Chinese shares have shed more than quarter of their value in three weeks. To put this in numbers, about US$ 2.7 trillion in value has evaporated since the Chinese stock market reached its peak on June 12.

The worrying factor is the kind of impact this is likely to have on the Chinese people. For instance, individual investors own four-fifths of China's stocks. This is a far higher proportion than in Western markets, where institutional investors predominate. Further, most of these investors have borrowed money from banks and wherever possible to play the stock market.

Thus, these kinds of losses are bound to considerably eat into savings, thereby curtailing the spending power of Chinese people. And this will have great repercussions for the Chinese economy, which is already reeling under a slowdown. So far the efforts of the Chinese government to prop up the stock market have not really worked. Thus, as is the case in the Eurozone, a big question mark hangs over China as well.

04:45
At the time of writing, the Indian markets were trading above the dotted line with the BSE-Sensex up by about 41 points or 0.1%. Stocks from the banking, pharmaceuticals spaces and consumer durables led the pack of gainers. Mid and smallcap stocks were in favour too with their respective indices up by about 1% each.

04:55  Today's investing mantra
"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing." - Warren Buffett
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This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst) and Radhika Pandit (Research Analyst).

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4 Responses to "Are your company's directors overpaid?"

Prashant Naladkar

Jul 8, 2015

Very interesting & surprising information.
Thanks for sharing.

Like (1)

Vipin

Jul 8, 2015

I didn't take Equitymaster to be a commie rag, but I have to think again now. Similar "Corporate Governance" schemes in other sectors have chased away our best engineers and scientists and now you want to do that to the business community as well!

Shouldn't the markets decide who is overpaid or not on the company's performance?

Vipin

Like (1)

SANKARAN VENKATARAMAN

Jul 8, 2015

You can include this aspect also in your analysis. very difficult to come to any conclusion. If this salary is not paid ,Infosys will never get Sikka and earlier management was lacklustre in their vision to meet fresh challenges.

Like (1)

C.M.PANICKER

Jul 8, 2015

Director's remuneration comprises of salary, perks and commission as a percentage of profit.There should be a upper limit for such total payment to the whole time directors.Since these payments are charged to the income of the company ,any increase or reduction will have its effect on the working results of the company.It is noticed that in some of companies making loss or meagere income, directors are paid huge amount of remuneration and perks.When the Profits are high , the company can declare increased dividend and also build up a high reserve which will strengthen the balance sheet over a period of time.It will be positive for investors in the company.These days one also notices increased remuneration for independent directors of cash rich companies which also deserves attention.

Like (1)
  
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