Executive Compensation: The Winds of Change
Regulatory Requirements, Disclosures and Shareholder Activism
The Companies Act, 2013, taking a page out of RBI guidelines, has extended some such requirements to other sectors as well, primarily to the listed organizations in India. In our view, the checks and disclosures required under the Companies Act, 2013 can be divided into two broad themes i.e. parity and performance (refer Table 1). There are set of disclosures that point towards pay parity not only between the CEO pay and other executives in the company but also between the CEO pay and pay levels in the organization as a whole. These disclosures also need to show how the increase in compensation levels for the top management is commensurate with the overall performance of the organization.The impact of growing shareholder activism in India isalso becoming quite visible. Rejection of pay proposals by shareholders in some companies forced them to revise the compensation package for top executives in 2014.
| Performance: Key Disclosures |
- The explanation on the relationship between average increase in the remuneration and company performance
- Comparison of the remuneration of the key managerial personnel against performance of the company
- Variations in the market capitalization of the company, price earnings ratio as at the closing date of the current financial year and previous financial year and percentage increase over decrease in the market quotations of the shares of the company in comparison to the rate at which the company came out with the last public offer in case of listed companies, and in the case of unlisted companies, the variations in the net worth of the company as at the close of the current financial year and the previous financial year
- Comparison of each remuneration of the key managerial personnel against the performance of the company
- The key parameters for any variable component of remuneration availed by directors
|
This activism is bound to grow as more and more global capital enters the Indian system. The shareholders will necessarily bring along with capital, the checks and balances on executive compensation which will ensure that the
remuneration is commensurate with performance. The Nomination and Remuneration Committees of the Board has an interesting and challenging task of balancing what seems to be divergent aspects of executive compensation.
|