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The year 2015-16 was a mixed bag for the Indian economy. Growth expectations soared as the new government assumed office and started introducing strong policy measures aimed at improving the ease of doing business in India. Accompanied by RBI’s focus on inflation control and foreign direct investments, this brought world attention back to the India growth story. The year also saw specific measures being taken by the government for different sectors to augment growth including renewed focus on manufacturing with the launch of ‘Make in India’ campaign.

While the India growth story looks promising, it cannot operate in isolation. The global economy has been in turmoil due to falling commodity prices worldwide and hard landing of Chinese economy.

As per the data collected from 698 organizations in 20th edition of salary increase survey, there is a slight dip in business expectations for FY 16. Around mid last year there was a general belief that FY 16-17 will be a stronger year than FY 15 – 16. However this expectation of improvement appears to have been pushed back a few quarters.

So what does all this mean from Executive Compensation perspective?

In our view, this 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 (Chart 2).

Chart 2: Executive Compensation Structure

Pay at Risk

Fixed Pay

The nature of plans that define on what basis executives will receive this payout obviously varies from one company to another. However, more and more 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.

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 Company’s 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 in the remuneration for employees other than Key Managerial Personnel was at 9.61%. However, in the case of Promoter CEOs, the average increase in the remuneration 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

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

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 incentive 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 correlations are improving especially for large organizations. The regulatory disclosures required by the Company’s 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 coming years.

The regulatory disclosures required by the Company’s 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 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 the 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 approx. 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 approx. 36% for revenue range greater than ₹300 billion.

2. Analysis Basis Industry

The below chart 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 on fixed pay there is parity across different industry clusters, the financial services is 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 below 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 that is the fact that functional talent is getting much more mobile across industry sectors. Manufacturing sector however lags behind the pack from the compensation standpoint with overall compensation being 20-25% lower than other industries.

3. Analysis by Ownership Type

The below chart represents the compensation paid to Chief Executives in India across different ownership types – compensation paid by India Listed organizations are much more competitive as compared to Listed MNCs in India. It is important to note that India listed figure includes some of the large organizations in India. If we account for the size adjustment, the India listed organizations will still be higher than the MNC listed on Total Compensation basis 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. This LTI component is much lower in Indian Private Organizations.

We can see that the differentiation across various ownership structures at CXO level is not as stark as for CEO compensation. For India 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. Again, it has to be noted that while Indian private organizations are low on long term incentives, majority of MNCs get the grant from the listed parent organization.

Pay Mix Trends

The below chart represents the pay mix across different industry clusters for CEO. From the below graph, it is evident that the “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.