Mumbai, India – A decision by India’s richest man to forgo millions of dollars in salary has brought the sensitive issue of exorbitant CEO pay back to the realm of public debate.
Earlier this month shareholders were told Mukesh Ambani – the 56-year-old billionaire chairman of Reliance Industries (RIL) – had chosen to voluntarily waive an annual pay hike of $36m. He had refused similar increases four times in the past, although the majority of shareholders had approved it.
Reliance Industries said in a statement: “The decision to freeze his own salary reflects his desire to continue to set a personal example for moderation in managerial compensation levels.”
Ambani’s current salary is about $1.5m per month, and his overall fortune is estimated at $21.5bn from his controlling stakes in petrochemicals, oil and gas, textiles, retail and telecom companies. He is currently ranked 22nd on the Forbes list of world billionaires.
Disproportionately high senior management salaries continue to be a sensitive issue for a large chunk of listed companies in India. A recent survey by global human resource outsourcing firm Aon Hewitt shows that average wage disparity between India’s CEOs and entry-level employees is the highest in the world.
The survey found an Indian CEO typically earns 600 times more than a beginner. Where as in US, Europe and China, CEOs make between 200 to 300 times more than an entry-level employee’s salary.
Interestingly enough, despite Ambani’s decision to freeze his salary, he himself had come under fire for a purported excessive show of opulence.
In 2010, the five-member Ambani family moved into what was billed as the world’s most expensive home, a 27-storey luxury high-rise in the heart of Mumbai. The building cost more than $1bn to build and was berated by critics as an utterly wasteful expenditure in a country where millions live in abject poverty.
The decision to freeze his own salary reflects his desire to continue to set a personal example for moderation in managerial compensation levels.
But criticism notwithstanding, Ambani had no pressing reason to cut his personal income. RIL is one of India’s most profitable companies with cash reserves of about $20bn and revenues of more than $66bn. And under Indian laws, he can draw up to 5 percent of the profits of the conglomerate as salary.
Reliance Industries was founded by Mukesh Ambani’s father, Dhirubhai Ambani, and began as a textile company in 1966. Since its inception, the corporation has grown to become one of the largest Indian conglomerates.
The company is ranked 99th on the Fortune Global 500 list of the world’s biggest corporations for 2012.
In India wage disparity is most glaring in companies where promoters often take up salaried positions. A study of India’s highest paid executives undertaken recently shows the top 20 highest paid salaried executives in listed Indian companies are all in fact the promoters themselves.
With a pay packet of $13.66m per month, promoter of steel maker Jindal Steel, Naveen Jindal, is the highest-paid corporate executive in India. He is followed by promoters of Sun TV Network Kalanithi Maran and his wife Kavery Kalanithi, both of whom draw $13.09m per month. Ambani ranks 15th on the list.
Many promoters are also accused of double standards when deciding salaries. According to a recent report by activist advisory firm Institutional Investors Advisory Services, there is often a significant difference in compensation paid to professional CEOs and promoter CEOs.
|Nita Ambani (L), actor Aamir Khan, his wife Kiran Rao and Mukesh Ambani watch cricket [Getty Images]|
The report states that in most family-owned companies, family members on the board are paid more than other directors. For instance, the total remuneration paid to the promoters of Sun TV led by Chairman Kalanithi Maran and his wife Kavery, who is a director in the company, is as high as 69 percent of overall staff costs.
Similarly, in the case of Jindal Steel and Power, promoter-chairman Naveen Jindal’s salary last year was almost 25 times the remuneration of the group vice-chairman Vikrant Gujral.
But experts say that issue ought to be seen realistically.
“There have been instances of excess by promoters,” said professor JR Verma of Indian Institute of Management, Ahmedabad. “But it is the question of intent at the end of it, if a promoter wants to take money out of the company, he will find a way to do so,” he told Al Jazeera.
With rising instances of fraud – such as the 2009 Satyam Computer Services scandal, and more recently the chit-fund [ponzy] scam in India’s West Bengal state – experts say that promoter integrity is a key factor.
“How much a company’s senior management should get paid is ultimately an internal matter of the company concerned,” said Sunil Kumar, former CEO of Britannia Industries.
“But promoters need to keep their compensation in tune with the overall health of company,” Sunil Alagh, adviser to global private equity firm Warbug Pincus LLC, told Al Jazeera.
But there are examples where promoters have done the exact opposite. In June last year, proxy advisory firm Institutional Investors Advisory Services asked investors to vote against Sun TV Network’s resolution seeking to increase remuneration for the promoters.
The firm maintained the promoter action went against corporate governance ethics on all counts, since the company had reported a sharp drop in profits and revenue during the corresponding period.
But such protests end up being largely symbolic because promoters often have majority shareholder backing. “India needs a higher degree of shareholder activism and adequate safeguards to protect interests of minority shareholders,” said Alagh.
But shareholder activism is on rise in India. In the past few years, proxy advisory firms and activist investors have taken on company management on a number of issues.
As more global investors come to India they would want a higher degree of transparency in Indian companies.
Regulators, too, are now taking action. In January this year, India’s market regulator Securities and Exchanges Board of India (SEBI) proposed key changes in the corporate governance norms for listed firms.
The proposed measures include greater authority for independent directors and better alignment of CEO salaries with the performance and goals of the company. SEBI also proposed mandatory disclosure by the listed companies of the ratio of remuneration paid to the each of their directors, and their median staff salary.
“As more global investors come to India they would want a higher degree of transparency in Indian companies, unlike the current breed of minority shareholders who often do not have resources to take on company managements,” says Komal Goswami, a Mumbai-based corporate lawyer.
“But Indian companies have little option but to improve corporate governance standards, if they want to attract foreign investments,” she told Al Jazeera.
While legal checks and balances are warranted, experts say self-regulation is the best way forward.
Critics may dismiss Ambani’s refusal to accept a pay hike as mere public posturing, but it does set a precedent relatively unheard in India.
Follow Deborshi Chaki on Twitter: @deborshi