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Are mgmts' remunerations always justified?

Apr 9, 2012

Every once in a while, business supplements and magazines carry articles about the top earnings executives in India. While we attempt to do the same in this article, our discussion will be more to do with how much the directors of the top companies make in tandem with the amount of profits their respective companies earn.

While there can be a healthy debate when it comes to how much a company's directors should be paid, as investors of a company, we would not be happy if the amounts eats into a substantial share of a company's profits. Remunerations can be performance linked or fixed in nature. Both have their pros and cons. On one hand, directors may be incentivized to use malpractices to prop up profits apart from the others pressures and perils that come along with being a publicly listed company. On the other, directors do their best to improve performance and in return, get compensated for it.

But there are also instances where managerial remuneration is not really linked to the company's performance. As such, during difficult years, you may notice that the remuneration numbers may not decline as a percentage of profits. In fact, you may also find remuneration figures moving up in absolute terms despite profit decline.

Having mentioned all this, let us take a look at what the trend has been over the past five years. We have shown the collective data of companies' profits and remuneration numbers in the past five years (of companies forming part of the BSE-200 Index).

Data Source: Ace Equity; Data universe - BSE-200 Index

In absolute terms, managerial remuneration has increased at a compounded rate of 13.9% over the past five years, while profits have increased by 11% over the same time. It must be mentioned here that if one were to look at the managerial remuneration over the long period, the difference is even more.

It must be noted that we have removed companies whose past five-year data was not available to make the calculation more meaningful. In addition, we have only taken the data for standalone companies. In the table 'L' stands for the latest available data, while 'L-4' is the data four years prior to the latest year.

After looking at collective data for the top companies in India, let us take a look at companies in particular. Listed below are companies with the highest director remuneration as compared to profits.

Highest paid directors (as a percentage of profits) in the last five years
Company L-4 L-3 L-2 L-1 L
Punj Lloyd Ltd. 4.2% 5.0% 1.5% 1.7% 38.5%
Jet Airways (India) Ltd. 4.2% -0.3% -0.3% -0.3% 19.0%
India Cements Ltd. 0.3% 2.7% 5.4% 7.6% 18.1%
Pantaloon Retail (India) Ltd 5.3% 5.1% 4.4% 5.4% 16.8%
Sun T V Network Ltd. 17.3% 17.7% 17.0% 13.1% 16.7%
Apollo Hospitals Enterprise Ltd. 10.4% 13.9% 13.4% 13.7% 15.6%
Jain Irrigation Systems Ltd. 6.9% 6.5% 11.6% 11.2% 14.8%
Apollo Tyres Ltd. 11.6% 8.9% 12.6% 9.8% 12.5%
Financial Technologies (India) Ltd. 5.6% 0.5% 4.5% 3.3% 12.5%
EIH Ltd. 7.9% 9.6% 8.3% 14.5% 10.3%
Indian Hotels Company Ltd. 2.6% 2.5% 5.2% 9.2% 9.5%
IVRCL Ltd. 7.3% 7.5% 6.9% 27.2% 9.4%
Godrej Industries Ltd. 4.2% 6.2% 44.3% 12.8% 8.2%
United Phosphorus Ltd. 5.0% 6.3% 5.3% 6.0% 7.6%
DiviS Laboratories Ltd. 8.3% 6.5% 7.3% 7.8% 7.3%

We have sorted companies by the remuneration to profit percentage for the latest year. While there might be a certain amount of spikes in these figures in certain years, these would obviously be due to poor operating performance for the companies in that particular year. However, you will also find this ratio being constantly high in case of some of the companies. A potential red flag for investors? Maybe, maybe not.

We would like to add one point here. Not that it should be considered as a benchmark, but is more of a point to keep in mind. The average directors' remuneration to the profits of all the collected data stood at 0.67% as of the latest year. The same average of the past five years stands at 0.64%.

Agreed, it's much easier to just write about and criticize managements for taking home a higher pay, especially during times when the company isn't performing very well. Pay scales vary depending on the ownership and running of a company - promoter run, professionally run. Also it is known fact that the cash salaries are higher in private company as compared to those of a public company. The director remuneration can also vary on account of the board composition - i.e. the number of whole time directors and independent directors on board. In brief, all we can say is that the percentage of independent directors in the Board is a good thing to look at - higher the percentage, more the autonomy of the Board. It would be good of investors to keep these things in mind before investing into a stock.

Devanshu Sampat

Devanshu Sampat (Research Analyst) has a degree in commerce and nearly 5 years of experience in equity research. He draws inspiration from successful value investors across the globe and constantly endeavours to refine his own unique stock picking approach. While a firm advocate of the principles of value investing, he believes in adapting a versatile investing strategy in response to varying market conditions. Devanshu contributes to our Megatrend investing service The India Letter.

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1 Responses to "Are mgmts' remunerations always justified?"

Sundaravaradan S

Apr 10, 2012

Top Management remuneration:
Suggesting that there should be CAP on Cash Disbursement at (less than 1% of net Profit) and (less than 10% of Net Profit as Stocks in the Company with lock-in period of 3 years).

May be we can also check the well managed Companies like Infosys?

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