One of the countries’ largest cigarette maker, ITC does not have the option to issue stock options, the company declared in a stock market notification. The company has hence decided to increase the salaries of ITC Chairman & MD and a few other executives who are eligible for stock options.
While Sanjiv Puri’s pay may increase by more than 45 percent, salaries of three other executive directors could rise by 30 percent. Puri’s salary per month may increase from Rs 15 lakh to Rs 22 lakh. The basic salary of the three directors – Nakul Anand, B Sumant and Rajiv Tandon – is proposed to be hiked from Rs 10 lakh per month to Rs 13 lakh per month.
The need for restructuring of executive compensation has come up as the number of stock options remaining under the company's employee stock option schemes is limited and the option for introducing another equity based long term incentive scheme is currently not available with the company.
These changes in compensation of four top management executives will be with effect from October till the respective date of their current term of appointment, once it receives shareholders nod.
While for ITC, increasing the salary of these executives was probably the only best option, but the question is how would these leaders benefit with this decision? The debate over whether or not stock options are a form of compensation has been going on for some time now.
The theory was that if a material portion of a CEO's salary were in the form of options, she or he would be incited to manage the company well, resulting in a higher stock price over the long term. But has this been the practice in reality? Substituting options is expected to keep executives driven for the long term since the potential benefit (higher stock prices) would increase over time. However, it instead led to executives focusing primarily on quarterly performance rather than on the long term because they were allowed to sell the stock after exercising the options. And many argue that salary is the easier one than equity as it’s simply cash in pocket today, which can be used at the discretion of the employee. Employees would rather enjoy the freedom of investing their money wherever they wish to.