Executive Compensation: The Year of Cautious Optimism
Pay with a maximum earning opportunity ranging from
1.5X to 2X of target amount. Within the different industry
clusters, the variable pay is highest in the financial services
sector and lowest in the manufacturing sector.
Long-term incentives again show a very wide variance
from 45% of Fixed Pay in a sector like financial services to
68% of Fixed Pay in a sector like manufacturing. Manufacturing
organizations have become much more aggressive on LTI
compared to previous years which is also in some way a
representation of how the industry has been performing.
A larger portion of variable pay is linked to long-term
incentives to ensure that the efforts made by the management
in the years of consolidation pay off in the long run. On an
overall basis, the compensation structure as a whole is
half fixed and half variable and within variable the ratio of
short-term and long-term vary by industry.
For CXOs, the pay mix is also converging across industry
sectors. The total pay at risk across sectors range from
37% to 47% and is observed to be highest in the services
sector. We also see the proportion of LTI in the services
sector is the highest and forms approximately 65% of the
total pay at risk. Sectors like telecom and e-commerce are
quite aggressive on LTI.
Long-Term Incentive Trends
We still call it early days, but we see an increasing maturity
in the way companies are approaching long-term incentives.
Firstly, there are far more companies that are implementing
LTI plans for their executives as compared to a decade
back - and while a lot of these plans have focused primarily
on retention as the key parameter for plan design, many of
them are increasingly focusing on performance as the core
driver. Overall this is an element of pay that in our opinion
is seeing a far greater thinking and maturity across
organizations. While stock options continue to be the
most dominant LTI instrument used by companies, with
convergence of Indian Accounting Standards with IFRS
and increased focus on performance; use of full value
instrument like performance shares seems to be becoming
an instrument of choice amongst corporates.
Conclusion
Executive compensation is about creating the right
balance between expectations, fairness, competitiveness,
performance and sustainability. All these factors should be
considered from both the executive's standpoint and also
from the standpoint of other stakeholders which include
shareholders, customers and other employees. The
Compensation Committees and the Boards have an
unenviable task to find this right balance and ensuring
that the compensation decisions are justified and fair
to all. With the Indian economy on the verge of getting
back to high single-digit growth rate, the expectations
of executives who efficiently lead the organizations will
be to get rewarded in a fair manner. The Compensation
Committees while managing these expectations need
to ensure that performance is real and sustainable.
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