This week Nikesh Arora, President of Softbank Corp has been in the news for several reasons. On June 22, he was in Delhi accompanying his boss, Masayoshi Son, Chairman and CEO of the Japanese internet and telecom major, who signed a deal with Bharti Enterprises’ Sunil Mittal for a $20-billion venture in the renewable sector.
But by the end of the week it was another bit of news, which broke on June 20, that was still the subject of debate and discussion in Japan and elsewhere. Two days before Arora and Son flew to Delhi, Softbank announced that Arora, former Google chief business officer, has been appointed as President of Softbank. It also said that the ‘rising star’ was paid $135 million (₹800 crore) in the fiscal 2015.
Good impression
It was the second part of the news – the $135-million bit – that had become the talk of boardrooms across the global corporate world. Especially in the boardrooms in Japan, that are often referred to as the ‘land of bargain-basement CEOs.’ Since 2010, companies in the country have to disclose the names of executives earning more than $1.1 million a year. A report by news blog ThinkProgress said that in 2010, less than 300 people in 3,813 Japanese companies were required to make a disclosure. An average CEO in Japan, added the story, earned only one-sixth of what his American counterpart made.
That might be the reason why news of Arora’s pay was met with more cautionary, and less congratulatory notes. A few even wondered if the Softbank President had done enough to earn his dollars. Bloomberg took the view of Mitsushige Akino, executive officer at Ichiyoshi Asset Management in Tokyo. Akino was quoted as saying: “From a common sense perspective, Arora’s pay is too high. We don’t know what his actual achievements are yet in SoftBank, so this doesn’t give a good impression to the market.”
Arora’s $135-million cheque included a bonus.
Salary vs Performance
The IIT Varanasi-alumnus is now the highest-paid executive in Japan, vrooming past Carlos Ghosn, the President of Nissan Motor. Ghosn, who had topped the CEO pay list in Japan three times since 2010, earned $8 million in the fiscal 2015.
Arora, who has overseen investments of over $1.5 billion after joining Softbank, might also top the global pay scales. According to The Wall Street Journal’s annual CEP pay survey, Michael Fries of Liberty Global was the highest paid executive in the US with his yearly compensation at $112.3 million. Microsoft CEO Satya Nadella was second, taking home $84.3 million in 2014.
In India, Vishal Sikka was in news last year when he became the highest paid CEO in the IT sector after joining Infosys. Sikka has an annual salary of $5.08 million and also receives $2 million in stock options .
Are CEOs' salaries commensurate with their companies' performance? Not always. Over 50 of the 300 CEOs surveyed by Wall Street Journal got handsome increments even though their companies booked negative shareholder returns.
So how is a CEO’s pay decided?
The decision is mostly taken by a company’s Board. The pay package includes base salary, stock options and a signing bonus. Most of the CEOs also get several allowances, such as a ‘company’ house and chauffeured car.
Companies use signing bonuses, like in the case of Arora, to attract talent. Boards often argue that the presence of a star CEO makes for positive sentiment. Remember how the Infosys stock bounced back after its founder NR Narayana Murthy came back to stabilise a rocking ship?
Boards also like to link pay with performance, a concept now widely used in the US and finding takers in India. But many doubt if bonuses or stock options really work. This guide on CEO compensation has a fairly good explanation. Bonuses are often base salary in disguise and stock options actually don’t serve the purpose. A CEO can make money when the stock is on a high, but is also not worse off when the scrip is down.
It is not known how much of Arora’s pay is linked to his performance. But now all eyes are on him to check if his decisions justify the ₹800-crore pay.
An aside: About 3,300 of the over 4,000 companies listed in India have less than ₹800 crore in annual revenues.