There are two numbers that have been unconnected with a company’s financial performance for a while. First is its share price and the second is the CEO’s pay. The share-price – atleast I would like to believe, is not something that the company has any control over. And the market price does periodically correct itself (- or atleast the divergence comes down for a short while). The CEO’s compensation is determined by a tighter group: the board, its remuneration committee, and the shareholders. In a more perfect world, you would expect far greater alignment between performance and pay. But we are seeing this gap increasing rather than coming down. That all promoter-managers get to vote their salary increase, helps explains this.

Although India Inc now has the elements of the pay structure in place – fixed, short-term incentives (cash bonus), long-term incentives (stock-options), they have consistently slipped behind in explaining themselves.

While companies now do make motherhood statements like variable pay will be linked to the company achieving performance linked targets, they continue to shy away from disclosing what these targets are. Boards and promoters want to keep some wiggle room for themselves. And while they could get away with not disclosing targets when the salaries were low, as these have steadily crept-up, and the pay-versus-performance relationship has weakened, they will come under greater pressure to so. The 30% against vote earlier this month, by Wipro’s institutional shareholders on its new CEO’s (appointment), reflects their dissatisfaction with the disclosures.

To provide context, HSBC has 26 pages of its annual report devoted to discussions relating to compensation (Pg 186-210). Importantly, they have specified what they are measuring and the weightage both quantitative and qualitative. PBT (10% weightage), positive jaws (5%), revenue growth (10%), RoTE (5%), strategic (30% - accelerate revenue growth from Asia, turnaround US business), and so on. On what parameters was money paid, is also discussed. For example, one of the strategic objectives was deliver revenues from international business. The boards assessment: Revenue growth from international clients of 2.0% was below the full-year target range of 3.5 to 7.5%. This measure carried a 5% weighting and has not resulted in any payout.

And this level of detail is not just for banks. Pick-up the annual report of any widely institutionally held company, and you will see page after page after page discussing the salary for the CEO, the executive management and even the board about why it is paying itself what it is. And if global companies can do so, why can’t India Inc.?

Compensation is payment for what has been done. Performance is all about what has been achieved. Both can be measured. Surely, it cannot be so difficult to link the two and pay for performance.

This blog appeared in Business Standard on 23 July 2020.

You can access it by clicking this link:

https://www.business-standard.com/article/opinion/shouldn-t-pay-be-for-performance-120072301904_1.html

To read full report click here