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Ram Kumar Kakani
Pranabesh Ray

ANY discussion on compensation in organisations has always generated considerable heat. Not only because of the unfulfilled desire for money, but also for the existence of differential pay in organisations. While differences are bound to exist in an organisation, the existence of glaring disparities (say, between the highest and lowest levels) will attract attention, if not severe criticism. This has often been the cause of many upheavals in organisational history. Major industrial conflicts between management and labour bear testimony. While the widening gap between the highest and the lowest paid employee is a matter of concern, it is perhaps more important to look into the relationship between CEO pay and corporate performance.

Through the board of directors shareholders retain the services of a CEO to maximise the shareholder value of the firm. Thus, there is every reason to expect a close relationship between CEO compensation and a firm's financial performance. However, research in developed countries suggests that the relationship is either poor, or at best non-existent.

In India the Companies Act is the legislation that primarily shapes the remuneration of top managerial personnel. Until 1993, the Act provided for an upper limit in the amount of compensation to be paid. The need for an upper limit appears to have been the outcome of the socialistic ideology prevalent then.

It had been pointed out that the "regulation of director's remuneration becomes necessary for several reasons, prominent among them being the prevention of diversion of corporate funds for personal use and the impact which an unduly high executive reward has upon the rest of society."

However, over the years, with the shift in India's economic policy towards a market-oriented capitalistic economy, this particular legislation has been amended to increase the maximum pay package limits that are payable to the managerial personnel. While other reforms have taken their time to be incorporated in to the Act, the maximum pay ceiling for CEOs has been increased systematically and more frequently.

One of the main reasons put forward for this regular increase has been the need to attract and retain talent at the senior level. Additionally, it has been argued that the risk and responsibility at the senior level needs to be compensated by a sufficient increase in the pay packet. Needless to mention the risk and responsibilities at the CEO's level pertain to the uncertainty associated in fulfilling organisational objectives. This automatically indicates a strong relationship between the CEO's compensation and organisational performance. Logically the CEO's job should be at stake if the organisational objectives are not fulfilled.

Managerial remuneration and Companies Act

The Companies Act, 1956, contemplates five categories of managerial personnel:

a) An ordinary director, who is the director simplicities; b) a part-time paid director, being a director in the part-time employment of the company; c) a whole-time director, being a director in the whole-time employment of the company; d) a managing director, being a director entrusted with substantial powers of management; and e) the manager, having the management of the whole, or substantially the whole, of the affairs of the company.

The remuneration payable to a director may take any one or more of the following forms: Sitting fee for each meeting of the Board, or a committee thereof, attended by him; monthly, quarterly or annual payments made to him; or a commission payable to him at specified percentages of the net profits of the company computed in the manner referred to in Section 198(1).

Thus, the Companies Act enlarges the ordinary meaning to the word `remuneration' to payment in money or otherwise for services rendered.

A CEO may be paid remuneration by way of a monthly payment and/or at a specified percentage of the company's net profits.

While, some companies prefer not to pay any commission and in lieu thereof absorb the element of commission into the monthly salary so as to ensure a steady income for the CEO irrespective of fluctuations in the net profits of the company from year to year, others go to the extent of linking the CEO's pay with the share price of the firm by issuing employee stock options to him/her.

Consider the remuneration paid to Corporate CEOs (that is, Managing Directors or Chairman in some organisations). Section 198 of the Companies Act, 1956, limits the overall maximum managerial remuneration payable by a public company to persons entrusted with managerial functions to 11 per cent of the company's net profits (percentage of the net profits as contemplated by Section 198 (1) is to be computed in the manner laid down in Sections 349, 350 and 351 in the Companies Act).

This percentage is exclusive of fees payable to directors for attending meetings of the Board or committees thereof. The Section is concerned especially with managerial remuneration payable to managing directors. On the other hand, Section 309 is concerned with total remuneration payable to directors; whatever is the nature of such remuneration, managerial or otherwise.

Obliging to the frequent demands/representations of the different industry chambers and with the shifting economic policy, the Companies Act was amended from time to time. For example, from a salary limit of Rs 90,000 pa in 1969-74, in 1994, the upper limit for salary was eliminated (the only limiting factor being Section 198).

Guidelines issued on managerial remuneration

The above move should have logically helped corporations in substantially raising their managerial remuneration packages. It should have also helped remove the stigma attached in paying large remuneration. However, despite these positive incentives regarding pay packages, one could question its impact on corporate performance. Did such phenomenal increases in the limits of managerial remuneration help raise the performance of organizations?

Were the increases in these limits made to cope up with the pressures of competition and globalisation, or was there something more to it?

(To be concluded)

(The authors are faculty members at XLRI, Jamshedpur.)

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