How can we solve India Inc's high CEO pay problem?

The median employee salary at India’s largest companies has declined. But the compensation of their CEOs, managing directors and CXOs has been skyrocketing since the end of Covid-19 pandemic.

As of May this year, the median CEO salary in India’s top listed companies was up 2.6 per cent in the past two years, from 11.51 crore rupees in FY19 to 11.81 crore rupees in FY21.

Meanwhile, their median employee salary was still down 0.5 per cent from pre-pandemic levels. An average employee at these companies earned Rs 6.4 lakh in FY21, down from Rs 6.44 lakh in FY19. Clearly, income inequality has widened in India’s corporate sector during the pandemic.  

The widening gap between chief executives and median employee salaries is evident. A recent Business Standard analysis revealed that a typical Indian CEO’s salary in FY21 was 184 times the median employee salary. The ratio was up from 174.3x in FY20 and 179x in FY19. 

Here’s the catch. In 2011, management thinker Peter F Drucker suggested that the pay ratio between CEOs and employees be a maximum of 20-to-1. 

According to Drucker, a 20-to-1 salary ratio was the limit beyond which managers couldn’t go if they didn’t want resentment and falling morale to impact their companies. 

Closer home, NR Narayana Murthy also advocates that CEO remuneration should not exceed 20 to 25 times the average employee’s salary. Needless to say, India Inc breached the prescribed limits of Drucker and Murthy by a very wide margin.  

However, investors are now increasingly pushing back resolutions on the remuneration of top executives. According to data from proxy advisory firm, Institutional Investor Advisory Services India, or IiAS, companies have already seen five such rejections in the first four months of FY23 alone. There were eight similar rejections in the whole of FY22, seven in FY21, and eight in FY20.     

According to IiAS founder and Managing Director Amit Tandon, such rejections reflect investor concerns over rising CXO salaries without enough transparency regarding the remuneration criteria. And that’s probably the first thing India Inc should fix.  

But, what’s the solution? India Inc should voluntarily opt for structural changes that contribute to reining in CEO pay. One way could be allowing worker representation on corporate boards. 

More sweeping measures have also been suggested in a report of the Economic Policy Institute, which relates to how companies design compensation packages for directors. The idea is to introduce contracts that would incentivise directors to restrain CEO pay. The business logic, as far as shareholders are concerned, is, directors should aim to get comparable performance from CEOs while paying them less.    

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Prolonged inaction could invite regulatory scrutiny, since this tends to be an emotive issue in countries like India that is racked by steep income inequality.  

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In 2021, the ‘Tax Excessive CEO Pay Act’ was introduced in the US Senate. The legislation seeks to impose an additional corporate tax on companies where CEOs are paid at least 50 times more than their median workers. For example, companies where CEOs take home 500 times more than the typical employee would have to pay an additional five per cent in corporate tax. 

If corporate inaction leads to such steps in India, it would be a steep price for India Inc to pay for the failings of its nomination and remuneration committees.