CEO salaries are back with a bang - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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CEO salaries are back with a bang 

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In this issue:
» Gold is not in a bubble stage yet
» Replacing dollar not an easy task
» India to keep options open on regulation of inflows
» India is the second largest net importer
» ...and more!!


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00:00
 
On a much broader level, there are similarities between the expectations that one has from any CEO and the captain of the Indian cricket team. For instance, a string of strong performances will win the captain and his team accolades. But come one bad tournament and heaps of brickbats are showered upon them. What also then come into focus are the exorbitant salaries being doled out to them. And the accusations that billion dollar endorsements have taken precedence over performance.

In some sense, the same could be said with respect to the role of the CEO. And in this regard, the global financial crisis has been a strong example. Chief executives of several top notch US and European financial firms were asked to step down for allowing risky practices to be carried out. Not just that, what also irked everyone were the obscene bonuses paid to them. And that too at a time when the financial health of these companies left a lot to be desired.

Indian CEOs, thankfully, have not met the same fate as their US and European counterparts. True, at the height of the global crisis, many CEOs had to contend with some quiet years but the scenario in India now seems to have changed. With hiring back in focus, Indian CEOs are negotiating for higher salaries. The rising talent crunch along with rapid industrial growth in India have only strengthened their case. The average increase in CEO salaries has been about 9%. But certain sectors such as pharma , power equipment manufacturers and banking have seen CEO salaries rise 14% plus.

Donning the mantle of a CEO is not an easy job. It requires great business acumen, ethics and the ability to withstand pressure. And hence the demand for higher salaries. But at the end of the day, CEOs are as accountable as the employees of a company. Which means that they have to deliver on all counts (both performance and ethics related) if they want to justify the high salaries being meted out to them.

Do you think Indian CEOs must have long term performance linked bonuses? Share with us.

01:24  Chart of the day
 
The Indian community is established all across the world. And so the remittances that India gets from Indians settled abroad plays an important role in augmenting the current account balances of the country. As today's chart of the day shows, India leads the pack in terms of the amount of remittances it received in 2009 and expected to garner in 2010. China has followed a close second.

Data Source: The Economist

01:57
 
For those who are worrying about the fact that gold is in a bubble stage, here's another denial on the issue. And it comes from none other than Ajay Mitra, MD of the World Gold Council (WGC). In a conversation with a leading finance portal, Mitra opines that the factors that drive demand for gold are very well spread currently. Thus, it will be very difficult to argue that gold demand is being driven by just one set of consumers or consumption. Furthermore, he argues that no central bank in the West has sold gold even as central banks in the East have ramped up their gold purchases. Mr Mitra is also of the belief that inflation has got nothing to do with gold price rise. "The rise in demand and price is nothing but the value you prepare to pay for safe investment", he noted.

We would tend to agree with Mr Mitra that gold may not be in a bubble stage just yet. According to us, bubble among other things, is characterised by prices breaching previous highs in real terms. Thus, as far as gold is concerned, this level is still some distance away. Furthermore, gold buying frenzy is yet to reach its peak. When even the most naive investor asks you to buy gold, perhaps that would be the time to exit the yellow metal. On second thoughts, a small part of one's investments should always be in gold we believe.

02:37
 
Managing capital inflows has been a priority for most central bankers in emerging markets. Especially ever since the US Fed took it upon itself to supply ultra cheap liquidity to global markets. The likes of Brazil also introduced taxes on excess capital inflows to avert asset bubbles. However, the seemingly conservative Indian central bank has so far shown inaction when it comes to curbing excess forex inflows. A large current account deficit is cited as the key reason. But in an interview to a business daily, former RBI governor Dr. Y. V Reddy has opined that it is in India's interest to keep all options open. Especially, when it comes to regulating fund flows. That said he confirmed that taxing capital inflows should be one of the instruments for the RBI to avert asset bubbles. Dr. Reddy has been credited with safeguarding Indian banks from the global financial crisis in 2008. And given such credibility, his views on the hazards that capital inflows are posing to the Indian economy, are indeed worth reckoning.

03:03
 
Often China has been looked upon as the world's factory and India its back office. However, Jeff Sinclair, leader of McKinsey's global manufacturing practice, offers a fresh perspective. According to him, India is at an inflection point and has all the ingredients that manufacturing needs to grow - aggressive and smart entrepreneurs, and a huge and growing domestic market. China has a problem of high labour cost, high inflation and talent constraint and has progressed on the back of bulk large-scale manufacturing of simple products. On the other hand, India with its entrepreneurial spirit and a strong engineering base, will see a sweet spot of skill intensive, medium-volume complex manufacturing. Generic pharma, specialty chemicals, auto components and electrical machinery are some sectors to start with. Though scale will continue to rule in commoditised products, the economic dynamics are changing in skill intensive areas where the game is about winning with speed and innovation. This has opened opportunities for people with smart ideas as they can remain economically viable with small quantities.

But all will depend on how India fixes its education, infrastructure etc. The solution lies not only in the policy domain but also how industry bodies and the governments together can start catalysing the journey to change.

03:42
 
Along with China, India has now emerged as a major player for creating demand in the global scenario. China is the world's largest exporter of goods with a net export of US$ 349 bn in 2009. On the other hand, India has emerged as the second largest net importer, after US, with a net import of US$ 69 bn in 2009. Through its imports, India has injected the much needed demand in the global markets. In turn, it has also helped in creating employment opportunities. It has hence provided a helping hand in sustaining the global economies.

India has always been a net importer and this has historically been viewed as a negative sign. However, with the onset of the crisis, there has been a huge demand imbalance in the global economy. And India has emerged as a new balancing force.

04:02
 
Is a replacement of the famous greenback with another currency in order? The global meltdown, poor recovery in the US, huge deficit and the rise of other currencies versus the US dollar has raised this question. But according to RBI Governor D Subbarao, replacing the dollar as a reserve currency will not be an easy task. The sheer size of the American economy and its major share in global trade are deterring factors.

The US dollar has however been falling steeply versus other currencies for a while now. The Indian rupee in fact has gained more than 5% against the dollar. While this is good for our import bill, exports of software, etc have been affected. Since there is no worthy replacement yet, the dollar shall continue to have its premium place as the world's reserve currency. Whether we like it or not.

04:41
 
At the time of writing the Indian markets were trading deep in the red with India's benchmark Index (BSE-Sensex) trading lower by 500 points, down 2.5%, led by losses in stocks from the realty, banking and metal spaces. There was a sharp sell off during the post noon session. The reason for the same is believed to be 'knee-jerk reaction' to the tense situation in Korea. Asian markets ended the day on a weak note, barring Japan which ended higher by about 1%.

04:54  Today's investing mantra
"We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person." - Warren Buffett
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12 Responses to "CEO salaries are back with a bang"

Vinesh

Dec 7, 2010

Yes indeed. CEO's are responsible more for the growth of a company than its current situation.
I place this as 25% current and 75% growth.
SO it wd make a lot of sense if the growth is shared with the CEO as handsomely as possible.
Only then will CEOs feel more ambitious to grow businesses they lead.

Like 

Manoj Kumar

Nov 27, 2010

There is no problem in anybody getting anything till the time there is justification for the same like performance or risks involved etc. and enough cash with the paying company.

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SHAILESH GANG

Nov 26, 2010

Yes ,the salary package of a CEO should be directly proportional to the revenue growth yoy.Also CEO is the leader in the organisation who is steering the Board of Directors & committee of Directors month on month basis.
The vision of CEO should on priority be revenue growth.So it is important that the CTC of CEO is on profit sharing basis.

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Theeyarath

Nov 24, 2010

I agree with the comments of Mr.CF Joseph. However, it is difficult to judge the performance of a CEO in short term say one to three years.He should be given sufficient time to prove his worth in the organisation. 05 years can be a reasonable time to assess the performance. The Board oo Directors may even reward a good performance retrospectively.

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Asha

Nov 24, 2010

Yes, ofcourse.

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Abhishek Rai

Nov 23, 2010

At the CEO level,risk is quite high as there decisions can make or break organization.Hence the remenuration has to be a good mix of fixed and varibale to the proportion 60:40 i.e 60% fixed and 40%variable.Also 360* appraisal should be the criteria for there PMS as it would get the best feedback for them and will ensure postive impact on the leaders perforamnce.

Like 

V S Gurumani

Nov 23, 2010

It will not be possible for India to ever attend to its long term, core priorities like education, infrastructure, regional imbalances, internal security issues, terrorism... Not until we are able to find a way to fix what seems to have become an integral part of our DNA: get rich quick through corruption, rentiering and systematically deny that we have allowed these to be come crippling, life style diseases. The PM, who is described as the Good Doctor by most of the media, is completely at sea because he is more of a physician than a surgeon and is incapable of wielding the scalpel. He is also clueless when it comes to using the resources he has with him in the form of a capable second line. We do not have a systemic crisis, we have a major, debilitating leadership crisis. Alas, the alternatives to him do not enthuse us either. But that does not mean that his bluff should not be called, does it?

Like 

Jeevan J Panda

Nov 23, 2010

Yes, as a visionary and the key driver of the company growth, the remuneration must be linked to the company growth on a long term basis. Probably the achievable target and modus of operandi should be decided and reviewed on time to time basis to keep things in track.

Like 

S.K.Damani

Nov 23, 2010

Two things: The Japanese markets were not up, but they were closed and the rates reflected on business channels is that of Monday close. They will react tomorrow - in negative.
Important point about Gold: Though many of the Western countries are in trouble: "NOBODY IS SELLING THEIR GOLD HOLDINGS". Amazing. Doubtful that Gold will ever come down. Another article in ET states the increase in volumes of Gold ETF.
Thanks - Damani

Like 

A.K.Jain

Nov 23, 2010

Dear Sir,

Yes. But it should have two parts fixed and performance linked. Performance of a particular sector depends not only on individuals drive but also on the environment in which he or she is asked to perform.

I have myself passed through such ordeal for a time spanning over ten long years when strenuous long working hours, with all intelligence applied and all resources utilised,family left to themselves, the net result was negative- mainly becauce of the prevailent Govt. policies which in fact ruined that particular industry as well as the industrial growth of the country. The industry came on block open to acquisition by foreigners irrespective of the credentials of the house running the show.

Therefore CEOs have to be duely compensated not only for the performance but for the sufferings of their families. Today our country's GDP is driven by the industrial houses headed by these CEOs in their respective capacities. Govt is only a deterrent. It is shamefull to make hue and cry on this issue atleast from the political circle where the leaders are induldging into broad daylight robbery of the innocent public money with no accountability only build their own accounts in India and abroad.

Thanks

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