Total Rewards Quarterly

Executive Compensation: The Year of Cautious Optimism

India Inc. is going through some interesting times. While the overall belief in the fundamentals and long-term performance remains strong, the jury is still out on the short to medium-term results. Sustained period of low inflation, stabilizing fiscal deficit, reform legislations moving to execution mode and the predictions of an above par monsoon should offset the worries associated with a shaky global economic environment.

So what does all this mean from an executive compensation perspective?

In our view, this environment of cautious optimism impacts both the quantum and structure of executive compensation. From a quantum perspective, as per our recently concluded salary increase survey, the projected fixed pay has gone down marginally for top and senior management.

From a structural perspective, organizations have started focusing on rationalization of total compensation by parking a substantial part of compensation to variable pay-dependent on short-term or long-term goals in some way. The nature of plans that define on what basis executives will receive this payout obviously varies from one company to another. However, a large segment of companies that have traditionally used variable pay instruments with low performance alignment are looking at changing the plan structures to bring in greater performance orientation.
The bottom line is that with overall budgets decreasing or remaining constant, organizations are re-aligning their salary budgets to bring in higher performance orientation.

Executive Compensation Levels

The Companies Act, 2013 introduced a set of parity and performance disclosures primarily for listed organizations in India. These disclosures set out to correlate the parity between compensation paid to CEOs and CXOs vis-à-vis with that of the organization as a whole. These disclosures also set out to show how the pay increases of executives relate to performance of the organization. An analysis of the disclosures made by BSE 100 companies excluding the public sector enterprises show that on an overall basis, the CEO pay increase averaged at about 10.18%. We saw a higher remuneration increase in the case of professional CEOs at an average of 11.03% compared to promoter CEOs which averaged around 9.19%. It is interesting to see that in case of professional CEOs, the average increase for employees other than key managerial personnel was at 9.61%. However, in the case of promoter CEOs, the average increase for employees other than key managerial personnel was at 10.27%. These numbers broadly align with our salary increase survey results.
We also tried to analyze the correlation of salary increase with some business metrics like P/E ratio and market capitalization which are mandated by Companies Act, 2013 (Table 1)

Both these metrics show a low correlation with pay increase. In fact, the R-Squared value for pay increase and increase in P/E is as low as 0.02 and R-Squared value for pay increase and increase in Market Capitalization is 0.12. We believe that the pay increase correlate much well with metrics like revenue growth and improvement in margins. Let us now try and examine how factors like revenue, industry type and ownership type influence the quantum and structure of executive compensation in India.

1. Analysis Basis Revenue

It is evident that the "Pay at Risk" is highest in financial services followed by services and FMCG/pharma

The above chart represents compensation paid to CEOs across different revenue groups. The compensation remains fairly inelastic in the first two revenue ranges of `0-5 billion and `5-10 billion.  Also, it is interesting to note that at higher revenue ranges representing larger organizations, the difference in pay is attributable more to higher short-term incentives and long-term incentives compared to fixed compensation. We see a much better progression on total compensation as we move above the revenue range `10 billion. This shows that the co-relation is improving especially for large organizations. The regulatory disclosures required by the Companies Act, 2013 will force the remuneration committees to have a more structured approach towards determining CEO compensation which should improve these correlation numbers further in the coming years.


The above chart represents the compensation paid to CXOs across different revenue groups. We see that there is some bit of clustering in the data patterns. Up to `10 billion the total compensation at CXO level seems to be quite inelastic in nature. At the next tier, we see that while the fixed compensation broadly remains at similar levels, the total pay is much higher on account of differentiation created through short-term incentives and long-term pay. We can call this the first inflection point. At `35-50 billion revenue range, the total pay at average level increases by approximately 33%. We again see the clustering till `100-300 billion revenue range where CXO pay remains inelastic to a large extent. Beyond this level, again there is a quantum jump in the level of compensation and the same increases by approximately 36% for revenue range greater than `300 billion.

2. Analysis Basis Industry
The below graph represents the compensation paid to chief executives in India across different industries – while on an average there is parity at the total compensation levels, it is important to note that the financial services does not include the compensation data of banking CEOs which are very aggressive on long-term incentives. It is interesting to see that while on fixed pay there is parity across different industry clusters, the financial services are at a much lower level. However, if we look at the quantum of short-term incentives, it is much higher in financial services compared to other industry clusters. Manufacturing sector lags the pack with the lowest amount of pay linked to short-term or long-term goals.


The following graph represents compensation paid to CXOs across different industry clusters. Evidently, there is not much differential in the compensation level across different industry groups. The primary reason for that is functional talent is getting much more mobile across industry sectors.


3. Analysis by Ownership Type
The below graph represents the compensation paid to chief executives in India across different ownership types - compensation paid by Indian organizations are much more competitive as compared to MNCs in India. It is important to note that Indian listed figure includes some of the large organizations. If we account for the size adjustment, the Indian listed organizations will still be higher than the MNC listed on total compensation by approximately 10%.


If we do a comparison on private organizations, we can see that MNC private organizations are much higher compared to Indian private organizations. The MNC private organizations are on an average 22% higher on Fixed Pay, 24% higher on Total Cost to Company and 41% higher on Total Cost to Company with LTI. A very high differential in Total Cost to Company with LTI can be attributed to a large extent to the parent company LTI grants being made to employees in Indian subsidiaries.

We can see that the differentiation across various ownership structures at CXO level is not as stark as CEO compensation. For listed organizations, it is marginally higher due to complexities of a listed company and also the fact that it includes Indian organizations that work on global footprint. It is interesting to see that there is not much difference in the MNC listed and MNC private organizations at CXO level. Indian private organizations trail the group with compensation at the lowest levels. Compared to their MNC counterparts, Indian private sector companies are 17% lower on Fixed Pay, 25% lower on Total Cost to Company without LTI and 32% lower on Total Cost to Company with LTI.

The bottom line is that with overall budgets decreasing or remaining constant, organizations are re-aligning their salary budgets to bring in higher performance orientation

Pay Mix Trends

“Pay at Risk” is highest in financial services followed by services and FMCG/pharma. This pay at risk is observed to be similar in manufacturing and IT/ITeS industries. However, when we compare this data with Indian IT/ITeS companies that are listed in the US, you will find the US listed companies to be much more aggressive on LTI compared to their Indian listed and unlisted counterparts. The sole reason for that is organizations listed in the US tend to the pay structures that are common in the US companies and are heavily skewed towards long-term incentives at CEO and CXO levels.


Annual incentives range from 21% to 100% of Fixed Pay across industries. These levels are much lower compared to markets like the US where annual incentives for a CEO position is typically in the range of 100-120% of Fixed Pay with a maximum earning opportunity ranging from 1.5X to 2X of target amount. Within the different industry clusters, the variable pay is highest in the financial services sector and lowest in the manufacturing sector.

Long-term incentives again show a very wide variance from 45% of Fixed Pay in a sector like financial services to 68% of Fixed Pay in a sector like manufacturing. Manufacturing organizations have become much more aggressive on LTI compared to previous years which is also in some way a representation of how the industry has been performing. A larger portion of variable pay is linked to long-term incentives to ensure that the efforts made by the management in the years of consolidation pay off in the long run. On an overall basis, the compensation structure as a whole is half fixed and half variable and within variable the ratio of short-term and long-term vary by industry.


For CXOs, the pay mix is also converging across industry sectors. The total pay at risk across sectors range from 37% to 47% and is observed to be highest in the services sector. We also see the proportion of LTI in the services sector is the highest and forms approximately 65% of the total pay at risk. Sectors like telecom and e-commerce are quite aggressive on LTI.

Long-Term Incentive Trends

We still call it early days, but we see an increasing maturity in the way companies are approaching long-term incentives. Firstly, there are far more companies that are implementing LTI plans for their executives as compared to a decade back – and while a lot of these plans have focused primarily on retention as the key parameter for plan design, many of them are increasingly focusing on performance as the core driver. Overall this is an element of pay that in our opinion is seeing a far greater thinking and maturity across organizations. While stock options continue to be the most dominant LTI instrument used by companies, with convergence of Indian Accounting Standards with IFRS and increased focus on performance; use of full value instrument like performance shares seems to be becoming an instrument of choice amongst corporates.


Executive compensation is about creating the right balance between expectations, fairness, competitiveness, performance and sustainability. All these factors should be considered from both the executive's standpoint and also from the standpoint of other stakeholders which include shareholders, customers and other employees. The Compensation Committees and the Boards have an unenviable task to find this right balance and ensuring that the compensation decisions are justified and fair to all. With the Indian economy on the verge of getting back to high single-digit growth rate, the expectations of executives who efficiently lead the organizations will be to get rewarded in a fair manner. The compensation Committees while managing these expectations need to ensure that performance is real and sustainable.

Anubhav Gupta
Solution Lead, Executive Compensation
Amit Otwani
Senior Consultant, Executive Compensation

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