Executive pay: How much is too much?

25 May 2007

How much is too much? Excessive executive pay has raised the hackles of investors in the United States. In India, where shareholder activism is not as acute, prime minister Manmohan Singh''s call to corporate executives to avoid fuelling the rich-poor divide through high pay checks and ostentation has triggered a debate on how much is too much, reports CNBC-TV18.

The Indian love of ostentation sits uneasily in a nation of the abjectly poor that also glorifies asceticism and self-sacrifice. The prime minister has added to that confusion by harking to the values of the freedom struggle when it is energetically pursuing those of the free market.

Singh told a CII conference that promoters and top executives should be restrained in pay. But what should be the extent of restraint by say a Sunil Bharti Mittal, the Bhati Group chief and the new CII president, whose remuneration according to Business India magazine doubled to Rs12.6 crore in the previous year, making him the 5th highest paid CEO in the country. Or India''s top billionaire Mukesh Ambani who was the top paid executive in 2005-06.

According to a Forbes survey, with 36 billionaires, India has edged Japan to the second place, with 14 new Indians joining the list last year, a consequence of generous stock holdings and rising valuations in the technology, realty, commodity, energy and media sectors.

Top managers say they are paid for maximising shareholder value, but efforts at linking pay to incremental value created might end up increasing the risk premium, for failing to attract the right candidate.

The more egregious examples of excess might just be just the dramatic ones - according to the Economist most top managers gave value for money and executive pay has bloated at a time when there is increased shareholder scrutiny.

The prime mnister is only amplifying the concern of N R Narayanamurthy of Infosys who earlier at a CII conference said that the top pay should not be more than a multiple of 15 and 25 times the lowest pay.

The executive as philosopher king concerned about the common good is a Nehruvian ideal, but the fat-paid flesh and blood executive with a keen sense of self interest is a reality in the age of LPG, that is liberalisation, privatisation and globalisation. Singh may preach restraint to such executives, but that message will go the same way as the finance minister''s exhortation to cement companies to curb prices.