Better fixed pay makes Indian executives’ life safe

Top Indian executives may not be earning as much as their Western counterparts. But a significantly high fixed component in their pay structure makes their life less precarious than their peers in US and Europe, where what one is paid is more correlated to his/her and the company’s performance.

According to a recent PricewaterhouseCoopers (PwC) study on executive remuneration in India, though executive compensation levels in the country have become comparable with the West over the years, pay governance for top-level employees is yet to find a place on the board’s agenda.

According to rules laid down by Securities and Exchange Board of India (SEBI), companies are under no compulsion to set up compensation or remuneration committees.

Therefore, they can decide whether they want to have committees to scrutinise levels of executives and compensation packages. This flexibility means some firms end up fixing salaries without the right structure.

According to remuneration experts, in India the decision on executives’ pay packages often rests with the CEO and HR. Anandaorup Ghose, head, executive compensation and governance, Aon Hewitt, a human resources consulting firm, said: “In many cases, we have found that despite having a compensation committee in place, HR decides executives’ salary, which can be biased as HR itself is under the CEO.”

“Very often, HR heads work with us and we guide them the way salary sheets should be structured. However, when the sheets are finally drawn, none of our recommendations is taken into account. Essentially all our work goes waste,” said an expert of a remuneration firm on the condition of anonymity.

The scenario is quite different in the West where each company needs to set up a remuneration committee and the management is not expected to meddle with the way the committee functions.

Also, variable pay component is minimal in the salary structure of executives in India. Variable pay means a part of the salary has direct correlation with performance of the company and the employee.

The heavy fixed-pay salary structure followed by domestic companies ensures that an employee’s salary is not directly linked to his/her performance. Though Indian companies have strengthened the proportion of pay at risk over the last two decades, the pace is slow.

At the executive level, pay at risk now comprises about 40% of the package.

“This is true only for finance and IT industries. For the manufacturing sector, the percentage of fixed pay is still very high. This has got to do with the Indian mindset of getting a secure pay. So even if the management offers a variable pay heavy structure, there are a few takers,” said Neeraj Sagar from Egon Zehnder Internationa, a global executive search firm.

In some cases, stock options are granted as a part of the variable pay. However, even then the quantum of stock options granted may or may not be linked to performance. In such a case, even a variable pay may not translate in reduction in compensation levels when performance is not good.

The scenario is very different with MNCs. “CEOs’ salary is governed by regulators where their incentives can be deferred over a period of three years. Also, their salary is variable pay heavy; hence a lot of what they earn is directly correlated to the company’s performance,” said a compensation expert of an investment bank.

Sagar, however, disagrees that Indian executive pay is not governed properly. “At least, the companies I deal with have excellent pay structure and there is a lot of transparency.”
“We are often blind towards the West. Despite having such a nice pay structure they did face the Lehmann crisis. So everything is not 100% perfect,” said an expert.