Top talent paid more than CEOs - Norm or exception?
The recent buzz on RBIs Governor Raghuram Rajans compensation has once again provoked a discussion on executive compensation and if they are under-valued in the talent marketplace? We find out!
The fact that RBI Governor Raghuram Rajan was not getting paid a fortune for his role is unsurprising. But the news was abuzz with information that there were others in the institution who were getting paid more than him.
As per the details published by the Reserve Bank of India under the Right to Information Act, Rajan’s total monthly emoluments stood at Rs. 1,98,700 – which included a Basic Pay of Rs. 90,000, Dearness Allowance of Rs. 1,01,700 and other monthly allowances at Rs. 7,000. However, there were three other RBI officials Gopal Krishna Sitaram Hegde (Rs. 4 lakh), Annamalai Arappuli Gounder (Rs. 2,20,355) and V. Kandaswamy (Rs. 2.1 lakh) – all of whom received higher monthly emoluments. While the RBI case certainly piqued the curiosity about executive compensation in the government sector, such cases are not unheard of in the private sector. It was widely reported earlier this year that Apple’s Tim Cook, the CEO of the company was not the highest paid man in his company (not including his restricted stock that the company gave him when he ascended to the role in 2011). Apple’s top executives made at least twice as much as he did – including CFO Luca Maestri and Internet services head Eddy Cure and Angela Ahrendts, who heads retail.
In February this year, the Economic Times reported that in 22 of the BSE200 companies, the highest paid executive was not a CEO or MD or Chairperson. The report also presented notable Indian cases such as Ravi Kapoor, Head of the investment banking at Citigroup Capital Markets earning more than Pramit Jhaveri, the firm’s Managing Director; Anand Radhakrishnan, the Chief Investment Officer of Franklin Templeton earning more than Vivek Kudva; and S. Naren of ICICI Prudential getting paid more than his Managing Director, Nimesh Shah. Speaking to People Matters about the kind of jobs that are seeing increased demand, Bimal Rath, MD of Think Talent Services said, “Increasingly, ‘specialist’ high caliber talent may command premium pricing well beyond their bosses. As an example, CTOs and Architects with deep domain knowledge in technology and digital businesses are in short supply, and will be much sought after. Similarly, product development or R&D managers in specific industry segments which require many years to build expertise, say in chemical or engineering, may also fall in the same space.”
While the trend to reward specialized talent is driven by a supply shortfall, is this trend going to push down the value of CEOs and MD in the talent marketplace? Data suggests that trend is an exception and not the norm.
Speaking to People Matters on the issue, Anubhav Gupta, the Solution Head – Executive Compensation of Aon Hewitt said “If we look at the private sector, there is a considerable difference between the Managing Director and other Executive Director compensation. The level of differentiation is driven by the role performed by an executive director. The Managing Director compensation typically ranges from 1.7 times to 3 times from other Executive Directors”. And even in the financial sector in India, the situation is not very different. “If we look at the private banking sector in India, the ratio of total compensation of MD range is between 1.5 to 2.7 times of their next level. Do note that in private sector banks a substantial differentiation is created through stock option grants” he added.
Despite the fact that the executive compensation came under the scrutiny of regulators in the aftermath of the 2008 recession, it does not seem to have caused an impact in the following years. In fact, at some companies, C-Suite employees make as much as 400 times the average employee. Annual reports of companies for 2014-15 showed that Vishal Sikka of Infosys, Aditya Puri of HDFC Bank, N. Chandrasekaran of TCS and Y.C. Deveshwar each made more than 100 times the median employee salary in their respective companies. Data from global consulting firm Mercer shows a steady rise in executives’ total remuneration from 2011 to 2014 the rise in executive pay for large companies stood at 45 percent, for small and middle sized companies, it was 26 percent and for start-ups, the pay hike was 41 percent. Increasingly, it is observed that the pay depends on the performance of the company.
Performance linked compensation
According to a survey conducted by Aon Hewitt on executive compensation that surveyed 380 companies for 2015-16, CEO compensation in India will get increasingly geared towards performance and results. In fact, according to the study, more than half of an Indian CEOs pay will be linked to performance. While five years ago, less than a third of the Indian CEOs pay was variable. And the fixed pay component is likely to shrink even further. Even as the global compensation structures are markedly result-oriented, here is how the pay scales are structured:
CEO Ratio of Pay
India – 50:22:28 (Fixed: Annual Incentives: Long-term Incentives)
West – 28: 26: 46 (Fixed: Annual Incentives: Long-term Incentives)
United States – 15: 21: 64 (Fixed: Annual Incentives: Long-term Incentives)
(Source: Aon Hewitt)
"Listed organizations are more aggressive in pay for performance, and these would also pay a chunk of CEO salary in ESOPs (employee stock option plans). The upside for listed companies is that markets are funding the CEO compensation," says Anandorup Ghose to ET. According to the study, the salary increments at CEO and CXO levels have seen a marginal drop in fixed pay increase to 9. 5 percent in 2015-16 from 9.7 percent last year.
While niche skills will continue to command a premium pay package, the demand for such talent profiles will also push the supply through niche skills training and development. And the skills of the CEOs of the future will include significant experience leading teams, working in virtual teams, experience in socially conscious work, according to PwC. However, as the payout ratio between the CEO and workers suggests, companies will need to reflect on median employee salary, which has not grown at the same pace as executive compensation.