Undeserving CEOs get 900% salary hikes... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Undeserving CEOs get 900% salary hikes... 

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In this issue:
» Massive impact of power cuts and blackouts
» Banking industry needs to consolidate
» Deadlock for the Indian airline industry continues
» The dubious distinction of Mumbai and Delhi
» ...and more!!

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With the Indian economy slowing down in FY09, many of us felt the pinch in terms of shrinking wallets and rampant cost cutting exercises by corporates leading to the ever palpable fear of job losses. But there were certain people who appeared to have a field day during the year gone by. Yes, we are talking about CEOs of real estate companies, who took pay hikes of nearly 2-10 times despite their respective companies facing a decline in both revenues and profits.

In fact, the salary hikes of some of the top real estate companies were greater in FY09 when their businesses were considerably impacted by the economic slowdown.

We find the intentions of these managements really appalling. Good management practices call for giving due consideration to the interests of shareholders and customers first, but real estate CEOs seem more concerned about building their booty. It did not matter to them that the performance of their respective companies was nothing much to talk about during that year. A strong management is a qualitative factor to be considered while investing in equities. Therefore, while it not simple to attribute any number to the same, certain facts mentioned in annual reports do give some idea.

In fact, annual reports of companies disclose the pay packages that the top brass takes home and should definitely be looked at while studying annual reports. As investors, do you give due consideration to the pay packets that CEOs take home? Tell us.

01:22  Chart of the day
The debt to equity (D/E) ratio, in general, is a key metric one can use to get a snapshot of the riskiness of a business. The fixed charges in terms of servicing high debt obligations can be extremely onerous, especially when business is down. History is full of examples of otherwise good businesses getting overwhelmed by the excessive leverage.

Thus it is pleasing to see today's chart of the day, which shows that companies in India have made the smart move of taking advantage of the upturn in the business cycle to increase the amount of equity financing in their business, thus lowering their D/E ratios from a high of 1.4 at the end of FY03 to 0.8 at the end of FY09. Though FY09 has seen a slight increase when compared to FY08, the long term trend does indeed inspire confidence.

* Represented by 235 of BSE-500 companies (non-banking) that
have released their FY09 annual reports so far
Data Source: CMIE Prowess

An Economic Times report has an interesting take on the incessant power cuts and blackouts faced by us Indians - the cumulative costs of power outages in the entire country adds up to a staggering Rs 1,000 bn, which, if collected from the affected people instead, is enough to add 25,000 MW of power generation capacity every year.

This is a huge figure considering the fact that India presently has a total power generation capacity of roughly 150,000 MW, which has been growing at a painfully slow place. According to the report, Rs 1,000 bn is the total quantum of money Indians spend on power back-up equipment like gensets, batteries and inverters. The government has been shouting about the need to overhaul India's infrastructure but for some strange reason seems lethargic in ramping up the much needed power generation in the country.

While Indian companies are globalising at a rapid pace, are the Indian banks fully geared up to take care of their funding needs? Sadly, as per Mr. O. P. Bhatt, the Chairman of India's largest bank SBI, the answer to the question is in the negative.

Mr. Bhatt is of the opinion that although the Indian banking industry is in great shape right now, it needs to undergo consolidation to increase balance sheet size and become capable to fulfill the funding needs of large Indian companies. It should be noted that SBI, which we consider a banking behemoth in India is ranked a lowly 64 among global banks while China has four banks in the top twenty. This deficiency with respect to the size of the banks also hurt us in the recent financial crisis as none of the local banks were able to come to the rescue of Indian companies that were denied financing by global banks in the face of liquidity problems. Thus, if India were to make its companies competitive, consolidation of the banking sector is a very important condition that needs to be fulfilled.

We have earlier highlighted how aviation is arguably among the most difficult industries from the owners' perspective. Recent developments have highlighted how it is also a classic case of the power of incentives. The airline companies and the civil aviation ministry, which faced losses to the tune of Rs 100 bn in FY09, have been very vocal about the steep cost of aviation turbine fuel (ATF). It may be noted that the fuel accounts for about 40% to 45% of the total operating cost of an airline.

On the other hand, India's largest oil marketing company has flatly refused to reduce the base price of ATF. After all, ATF is among the few products which consistently make money. Finance ministers of various states have refused to cut sales tax on the base price of ATF, a source of revenue for them to the tune of Rs 26 bn. The net result - a deadlock where the airlines continue to bleed. It will take more than mere statements for the airlines to get the cooperation of oil companies and state governments.

We in Mumbai, like most of the other cities in India are feeling the pinch of rising costs of food and housing. But this appears contrary to the recent research conducted by Swiss Bank UBS, which ranked Mumbai and Delhi amongst the least expensive cities in the world.

Surprised? So are we.

But in this survey of 73 cities in the world, Indian political capital New Delhi and financial capital Mumbai, secured the lower spot accompanying cities like Kuala Lumpur, Manila and Jakarta. While the top positions were held by Oslo, Zurich and Copenhagen. All said and done, we believe that just because we can somehow survive on Rs 5 or so worth of 'vada-pav' or 'samosa' and travel in locals or metros, such surveys don't capture the real picture of the rising cost of living in the Indian metros.

While Swiss banks have in no uncertain terms stated that India is not welcome on a name-fishing expedition, Finance Minister Pranab Mukherjee has sought to clear the air by saying that it will begin talks with Switzerland in December for amending the relevant treaty and it was not interested in a 'roving inquiry'. The Finance Minister's objective to unearth all the black money sloshing around is on the right track. But really, with the Swiss not being as cooperative and the corrupt politicians being adept now at stashing away loads of money, we are skeptical about the government's success in cracking down on these defaulters.

Despite alternate bouts of buying and selling, the BSE-Sensex managed to stay well above the dotted line and was trading firm at the time of writing (up around 60 points). Strong gains were seen in IT and metal indices. On the global front, while key Asian indices closed mixed, European indices are trading in the red currently.

04:56  Today's investing mantra
"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett
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22 Responses to "Undeserving CEOs get 900% salary hikes..."

S P Choudhury

Sep 14, 2009

I differ with the Head line "Mumbai and Delhi Cheaper
tthan any other Metro"- Actually they might have
slipped the City Calcutta(Kolkata), As in response to
food, Transport, and staying(lidging )it is still
cheaper than Mumbai as well as Delhi.


P.Sai Babu

Aug 29, 2009

Undeserving CEOs get 900% salary hikes....
which is true and prevalent in all the corporates. The moot question is whether they deserve such a hefty hike. What is their contribution to the company's fortunes or rather misfortunes? when the economy is on the rise, naturally, it is the corporate India that gets benefitted and the first to take advantage is the top CEOs forgetting that it is the economy that benefitted the company and not their roles. When the economy is in deep recession, the company also gets severely affected due to sluggishness in the market & the first step the so called CEO's resort to is to slash manpower by 20 to 30% & stop increments to the lower management staff without even coming forward to reduce their pay packet by the same margin. The management at middle & lower level has no role whatsoever in the fortunes of the company in so far as the market sceneroi is concerned, but stands to get targetted first. I have seen that many skilled officers & workers are forced to opt out by the greedy CEOs particularly in the manufacturing companies whereas IT companies are rightly targeting at eliminating the creamy layer who have no direct role in the prosperity of the company. This is a right step at a right time.

Lastly whther recession or no recession, the company will prosper at all times if it adopts a prudent & conservative aproach - a right person at a right salary for a right job which is absolutely necessary & need based.

Sai Babu



Aug 28, 2009

Its quite disappointing to read that Finance Minister Shree Pranab Mukherjee has sought get back our money lying at swiss bank (to clear the air ?!) by saying that it will begin talks with Switzerland in December.


This is computer-age. And its comparatively easy to create a mass consesus.

Dear AD, why not create a platform on equitymaster.com and let's all sign there. And insist on our PM to immediately visit swiss and if required, by using sham, dam and dand, force swiss govt to reveal all names and get back our money. And in return lets assure him that we will vote for him in all coming elections, just becoz he has proved to be honest.

Wake up, India, wake up.
AD, pl. do something. You are certainly one of hopes!!



Aug 28, 2009

Its easy I feel to catch those culprits having accounts with swiss bank.

Just prepare a list of those high profile ppl who are frequently visiting switzerland. Have some smart and honest spies behind them and thats it!!!



Aug 27, 2009

The views of Shanker Ramani are shocking. If shareholders and public should not keep a tab on CEO income who will? When even a family is facing tough times every one cuts down the exps. Real Estate is realing with unsold flats by 000s, Co.s are amking huze lossess, so at such times to increase their CEOs' salaries is extremely ridiculous.



Aug 27, 2009

The FM will meet the Swiss people in December, by which time all his collegues(politicians - to which ever party they may belong) will find another safe heaven and transfer the monies. At the end of it , the nation will get nothing, the ministers, beurucrats, will have few "holiday" in the Alps. Mazza Karo, enjoy at public cost. Regards.


vijay dalal

Aug 27, 2009

all salaries in private or public sector must be performance based.There was no need for the govt to hike the pay and pension recently. The ceos must exhibit leadership and quality productivity which they lack. Likewise the nonproductive govt employees must be given a well defined task and salary paid on completion. The same yardstick must be applied to the armed forces who are systematically bleeding the nation in the name of internal and external security. In toto the govt is responsible for poor governance with no guidelines on anything.



Aug 27, 2009

IT is nice to know the "Business SAAR" from your articles and helpful to informed in this competing market.



Aug 27, 2009

Dear editor,

I cannot see the complete report in my email. what could be the reason (the report is out of margin!) can you help with hti?

thanks for the great report, day after day!!!




Aug 26, 2009

Please post these real estate companies.

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