Total Rewards Quarterly

Executive Compensation: Running a Tight Ship

“It is not the strongest of species that survives, nor the most intelligent that survives. It is the one that is Most Adaptable to Change.” - Charles Darwin

The quote holds as true for the world economy today as it does in the theory of human evolution. The world is changing faster today than what anybody can anticipate. From change of government in the US to Brexit, world economics has turned upside down and we are possibly in the midst of the establishment of the new world order. Within India, changes in global economic policies, policy restructuring initiatives and a buyer’s market is redefining the way companies do business.

Companies are now looking at new initiatives in order to retain their existing market share in this fast changing environment. As competition becomes fierce and generating every additional rupee of revenue becomes tougher, the role of top and senior management cannot be overemphasized.

Executive pay, which is a function of company size and performance, is witnessing an increasingly higher percentage of variable pay in the total compensation. This trend is gradually emulating the compensation structures in Western economies where a significantly higher proportion of pay is variable in nature (both short and long-term).

Aon Consulting recently concluded its 7th Annual Executive Compensation Study for 2016-17. An analysis of 463 companies across sectors was done to understand how CEO and CXO compensation is structured across companies and how does the compensation change based on different factors like revenue, industry type and ownership.

Composition of Pay

An analysis of the pay mix of CEO and CXO (considering only those companies that provide LTI) highlights the increasing proportion of incentive in the overall pay for CEOs as well as CXOs.

The increase in variable pay is accompanied by a gradual decrease in fixed pay increments. At the top and senior management levels, overall increments to the fixed pay have come down from 9.7% last year to 9.3% this year with projections for the next year even lower at 8.9%

Analysis by Type of Industry

The following chart represents the compensation paid to Chief Executives in India across different industries.

As in previous years, the manufacturing sector is still low on short and long-term incentives (LTI)compared to other industries. The quantum of long-term incentives also depends on factors like listing status of the company, location of listing and the compensation philosophy being followed by companies with respect to who they compare themselves with both from a talent and business perspective.

The above chart 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 this is the fact that functional talent is getting much more mobile across industry sectors.


While higher variable pay forms a significant proportion of executive pay, a comparison of CEO to CXO pay shows that typically CEO pay is at least 2.5 times of CXO pay on total compensation.

Greater differential in CEO and direct reports is created through short and long-term incentives. We see that this trend has been consistent across years and in the future, may widen even more as higher proportion of CEO pay will be in the form of long-term incentives.

Analysis by Revenue Size

Relatively, the size of the company measured in revenue terms shows the highest correlation with executive pay as it reflects the scale of operations required to be managed by the CEO and top management team. We can see a fine progression of pay with the increase in revenue size.

CEO compensation for companies in the first two revenue ranges of `0-500 crores and `500-1,000 crores is observed to be largely inelastic. However, the differential in total compensation increases as the size of the company increase. It is further interesting to note that LTI as a proportion of total pay increases at an accelerated rate for larger companies. Given that in this survey, a higher proportion of bigger companies are listed in India, they link a substantial portion of executive pay to stock-based long-term compensation over 3 to 5 years.

In case of CXOs, the difference in pay is not as pronounced as in case of CEOs. Up to `1,000 crores, the total compensation at CXO level seems to be relatively inelastic in nature. From the next tier onwards, we see a gradual progression in total compensation with nominal increment in fixed pay and differentiation created through incentives.

Analysis by Ownership Type

The recurring theme on analysis of data on different anchors validates the fact that LTIs tend to have a significantly higher weightage in case of companies listed in India. Within this set, India listed organizations are far more competitive on LTI as compared to listed MNCs in India.

In case of private companies, Indian companies are relatively higher on fixed pay and short-term incentives. However, MNC companies are observed to be more aggressive on LTIs given the fact that although the company is not listed in India but executives do get LTI grants from the parent company which in majority of cases is a listed entity in the home country. This LTI component is much lower in Indian private organizations

The differentiation across various ownership structures at CXO level is not as stark as for CEO compensation. For India listed organizations, compensation is marginally higher due to complexities of a listed company and also the fact that it includes Indian organizations that work on a global footprint. It is interesting to see that there is not much difference in the MNC listed and MNC private organizations at CXO levels.Indian private organizations trail the group with compensation marginally.

Pay Mix Analysis

To understand the impact of LTI on executive compensation, we did an analysis of only those companies that provide LTI at CEO and CXO levels. “Pay at Risk” is highest for IT/ITeS sector followed by the services sector and financial services sector respectively.

IT/ITeS companies are aggressive on LTIs as considerable number of companies compete for talent in Western markets and the pay practices and structure tend to be closer to what we see in Western countries. On an average, LTI is more than 100% of fixed pay in this sector for the position of CEO which is much higher compared to others. Services sector includes companies in sunrise and growth sectors where again a considerable amount of pay is linked to LTIs. The story remains similar even at the CXO level across sectors.

Long-Term Incentive Trends

LTIs are being increasingly accepted as an important constituent of executive pay with more companies adopting it. Based on the results of our survey, around 79% companies have a LTI plan in place in the form of cash-based plans or stock-based plans.

Prevalence of Different Types of Instruments

Stock options continue to be the most prevalent LTI instrument across organizations. However, the use of full value instrument like restricted stock and performance shares is increasing. This can be attributed to the convergence of Indian Accounting Standards with IFRS which require expensing of stock options as per fair value method and increased focus on fundamental performance of the company as well as increased volatility.

It is important to note that the type of instrument used by an organization is dependent on many factors such as objectives for an LTI plan, growth of the company, growth of the sector, listing status of the company, etc. As a result, we see different LTI vehicles being used across different industries.

The IT sector is considered as a pioneer of stock based compensation in India. The share of LTIs in IT companies is getting prominent again with major firms on the cusp of change. The IT product companies in this sector mirrors the global plans and we witness an extensive use of full value instruments like restricted stock. The ITeS companies especially those listed on the US stock exchange continue to be aggressive on stock compensation in executive pay following the trend in listed players in the US.

The financial services sector is an aggregation of different sub-industries like banking, insurance, NBFCs, mutual funds, private equity, etc. Given that the dynamics of each sector is different, LTI plans are very different for each one of them.

The Indian Private Sector Banks, regulated by RBI standards on pay, are mostly listed on stock exchange(s) and tend to use the stock option path for LTIs while foreign private banks may follow a cash-based structure or parent company stock-based grants. While the insurance sector has primarily relied on cash-based LTIs, NBFCs again have a higher prevalence of ESOPs given that most companies are listed and are on a high growth trajectory.

In case of the consumer sector, LTI structures are also fairly equally divided across ESOP awards and full value awards like restricted stock and performance shares. The compensation approach in this sector displays a clear focus on value creation and the rewards are not just based on the share price growth but effective implementation of strategy. We see most LTI plans focused on delivering performance on different levers of value creation and there is a priority on lead metrics over lag metrics.

The compensation structure in case of manufacturing sector is still holding on to traditionalist structure i.e. high focus on fixed compensation, relatively low on annual variable and substantially low on LTI.


The approach towards executive compensation is varied across different sectors and the underlying business factors and forces will continue to determine the structure of pay. The most important aspect in executive compensation however, is the governance mechanism around pay structures. The Compensation Committees across different industries need to ensure that the pay structures are not leading to excessive risk taking for short-term gains and are structured to promote innovation, sustainable institution building and value creation for all stakeholders of the firm and not just investors.


Total Fixed Pay (TFP): This represents the summation of base salary, cash allowances, fixed bonus and monetized benefits. This value denotes the annual guaranteed pay.

Total Cost to Company (TCC): This represents the summation of total fixed pay and annual variable payments.

Total Cost to Company with LTI (TCC w/ LTI): This represents the summation of TCC and the annualized value of any long term incentives

Neha Bakshi
Aon India Consulting

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