Executive Compensation: The Year of Cautious Optimism

Anubhav Gupta
Solution Lead,
Executive Compensation

Amit Otwani
Senior Consultant,
Executive Compensation

India Inc. is going through some interesting times. While the overall belief in the fundamentals and long-term performance remains strong, the jury is still out on the short to medium-term results. Sustained period of low inflation, stabilizing fiscal deficit, reform legislations moving to execution mode and the predictions of an above par monsoon should offset the worries associated with a shaky global economic environment.

So what does all this mean from an executive compensation perspective?
In our view, this environment of cautious optimism impacts both the quantum and structure of executive compensation. From a quantum perspective, as per our recently concluded salary increase survey, the projected fixed pay has gone down marginally for top and senior management.

From a structural perspective, organizations have started focusing on rationalization of total compensation by parking a substantial part of compensation to variable pay-dependent on short-term or long-term goals in some way.

The nature of plans that define on what basis executives will receive this payout obviously varies from one company to another. However, a large segment of companies that have traditionally used variable pay instruments with low performance alignment are looking at changing the plan structures to bring in greater performance orientation.

The bottom line is that with overall budgets decreasing or remaining constant, organizations are re-aligning their salary budgets to bring in higher performance orientation.

Executive Compensation Levels
The Companies Act, 2013 introduced a set of parity and performance disclosures primarily for listed organizations in India. These disclosures set out to correlate the parity between compensation paid to CEOs and CXOs vis-à-vis with that of the organization as a whole. These disclosures also set out to show how the pay increases of executives relate to performance of the organization. An analysis of the disclosures made by BSE 100 companies excluding the public sector enterprises show that on an overall basis, the CEO pay increase averaged at about 10.18%. We saw a higher remuneration increase in the case of professional CEOs at an average of 11.03% compared to promoter CEOs which averaged around 9.19%. It is interesting to see that in case of professional CEOs, the average increase for employees other than key managerial personnel was at 9.61%. However, in the case of promoter CEOs, the average increase for employees other than key managerial personnel was at 10.27%. These numbers broadly align with our salary increase survey results.
We also tried to analyze the correlation of salary increase with some business metrics like P/E ratio and market capitalization which are mandated by Companies Act, 2013 (Table 1)

Both these metrics show a low correlation with pay increase. In fact, the R-Squared value for pay increase and increase in P/E is as low as 0.02 and R-Squared value for pay increase and increase in Market Capitalization is 0.12. We believe that the pay increase correlate much well with metrics like revenue growth and improvement in margins.
Let us now try and examine how factors like revenue, industry type and ownership type influence the quantum and structure of executive compensation in India.