Financial Daily from THE HINDU group of publications
Friday, Aug 09, 2002
CEO salaries outstrip growth of profits
JAMSHEDPUR, Aug. 8
IT was always felt but could hardly be proved. Finally, a study conducted by two faculty members of XLRI (Xavier Labour Relations Institute) has concluded that CEOs of India Inc. have increased their pay packets at a faster pace than the profitability of their corporation.
The trend started in 1995, but failed to take other stakeholders along with it. It was found that minority shareholders were not rewarded adequately on their investments, employees were made to remain satisfied with low wages, and donations to social causes were almost neglected.
This might temporarily put to rest some of the debates over the CEOs' pay package. The deprived lot always shouted that the top bosses were going away with thicker salaries than what they deserve.
Prof Ram Kumar Kakani and Pranabesh Ray of XLRI have concluded in their study that the increased remunerations of the corporate bosses have not translated into similar increments in company's profitability.
The study CEO pay packages and firm performance: The ballooning issue is based on the published corporate performance data of 16 large manufacturing firms and is spread over two decades.
The companies are ACC, Arvind Mills, Bajaj Auto, Ceat Industries, Century Enka, Electrosteel Castings, GEC Alsthom, GSFC, Hind Motor, ITC, JK Corp, Kesoram Industries, Kirloskar Cummins, L&T, Siemens and Tisco. The annual reports of these companies from 1979-80 to 2000-01 were also taken into consideration for the study.
The two researchers stated that "CEO packages have increased way ahead of PBDIT, sales and employee wages'' and that is because of the sweeping changes in the Companies Act, 1956. Though the increased remunerations are still "found to be less than the limits specified'', still "there has been a quantum leap from the earlier days of restrictions''.
It was found that in the last 22 years, growth in managerial remuneration was almost five times that of the same in employee wages. Between 1992-93 and 2000-01, the compounded annual growth rate of sales was 11.52 per cent, 13.84 per cent for PBDIT and 9.81 for employee wages. However, managerial salaries grew by 33.1 per cent.
"It appears that the CEO's had fully utilised the removal of restrictions in their remuneration. This would not have been so glaring had the sales, PBDIT or the employee wages had increased correspondingly'', the report stated.
It was also found that welfare expenses and return on capital employed decreased over the year. Even the return on equity dropped sharply between 1995 and 2001.
"It implies that while the compensation for the CEOs has increased, this has not resulted in a positive change in the performance from the point of view of all other stakeholders including equity shareholders. This in fact raises the question of justification in the phenomenal rise in managerial remuneration'', the professors concluded.
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