Variable pay and performance-linked incentives have become quite commonplace for middle- and low-level employees in the private sector. But does variable pay apply to their top bosses too? Yes, it does, shows an analysis of changes in top manager compensation, based on Nifty firms. New disclosure rules require companies to put the pay increases to their key management personnel (CEO, executive directors, CFO and company secretary) in context, by presenting them alongside profit growth and increase in stock market capitalisation for the year. These disclosures show that top manager pay in quite a few cases varied with profit performance.
For one, with the ongoing downturn, exorbitant pay increases to top managers were rather rare this year, with a good number of them even taking hair-cuts. Cipla, Dr Reddy’s Labs, Grasim, Hindustan Unilever, L&T, Reliance Industries, UltraTech Cement and Wipro all took compensation cuts to their top management this year.
Both commodity companies and the ones operating in cyclical sectors were circumspect with their pay packages this year given sluggish or falling profits. Grasim, for instance, saw promoters Kumar Mangalam Birla and Rajashree Birla taking pay reductions of 43 per cent and 16 per cent, respectively, with the overall compensation package to key managers shrinking by 6.2 per cent, compared to the previous year.
The company reported a muted 3.5 per cent increase in net profits, though its market capitalisation rose 25 per cent last fiscal.
UltraTech saw a 4 per cent decline in key manager compensation. Reliance Industries trimmed pay of its key managers by 2 per cent this year, after muted profit growth and a fall in market cap. L&T also saw a drop in remuneration to its key managers, led by Chairman Naik. In fact, a few firms in defensive sectors, such as pharma and FMCG, trimmed their top management compensation, despite better profit performance. Cipla led this list, with a 31 per cent cut in its total compensation to key managers, which came about mainly because of hefty cuts of over 30 per cent both in CEO and CFO remuneration. Despite a reasonable year in terms of profits, Wipro’s Azim Premji opted for a 53 per cent cut in his remuneration, while the firm’s CEO received a healthy pay hike.
In many of these cases, compensation packages to the top managers moved with profits due to a direct commission component — a part of pay was structured as commission computed as a percentage of the net profit.
A few firms also had performance-linked incentives in place, with top managers eligible for up to 200 per cent of their base salary as an ‘incentive’ if the Board was satisfied with their performance.
Though stock prices weren’t a direct factor in CEO pay, quite a few companies opted to compensate their top bosses by way of employee stock options or restricted stock units. Infosys, apart from Tech Mahindra, was a key instance of this, with CEO Vishal Sikka granted $2 million in restricted stock units, apart from his somewhat modest pay package of ₹4.6 crore for the year (he assumed office in June). However, comparisons on this count are quite difficult because companies adopted differing methods to disclose their ESOP components.
Some companies, like Tech Mahindra, added the options exercised during the year to CEO compensation, magnifying the number. Others included ESOPs granted in top manager pay. Still others tucked away all information pertaining to ESOPs in the footnotes, deeming it not a part of CEO pay! Do watch out for the ESOP factor if you’re comparing between firms.
The good news (for employees, not investors) is that while sectors which faced economic headwinds did scrimp on their top management compensation, very few firms effected pay cuts for their workforce at large, probably with an eye to retaining talent and making up for inflation.
Average employee pay packets at the Nifty firms edged up 7.7 per cent in 2014-15, with the most generous ones pegging them up 12-14 per cent. Just a couple of the Nifty firms reported a decline in the median compensation to their employees this year. Infosys (5.2 per cent fall) and Tech Mahindra (drop of 11.2 per cent) were the ones that did.