Cheques & Balances: Performance to sign off on CEO pay hikes

Indian corporate boards and their nomination and remuneration committees (NRCs) are poring over the compensation increases of CEOs at a time when macroeconomic headwinds, geopolitical risks, and stubborn inflation loom large on the horizon, senior board members and C-suite consultants told ET.

In the last four quarters, an average of about 90 companies (per quarter) in the NSE 500 index have reported decline in revenue, while over 175 companies reported fall in net profit, according to an ET analysis.

Compensation of several CEOs are coming under the scanner with a much stronger focus on linking the CEO's pay to company's performance, financials, and valuation (m-cap growth for listed companies), they said.

"There may be a moderating influence on CEO salary even in companies where the performance is on a steady or "regular" trajectory, besides in places where the company's performance has been poor," said Shailesh Haribhakti, chairman of audit and accounting firm Haribhakti & Co, who is also an independent director with several Indian companies. "Far more due diligence is being applied when it comes to giving pay hikes to the CEO and his next in line," said Naina Lal Kidwai, senior advisor, Rothschild & Co, and a non-executive director on several boards. "There is definitely a more careful and closer scrutiny of the pay hikes driven by proxy advisories, investors, shareholders as well as the boards." The scrutiny is stricter in companies whose performances have plummeted or has remained more or less the same across several quarters. "Discussions are surfacing about clawback of bonuses, cutting down of perks, stagnation of basic pay and modest approach to increment (not allowing it to be above the average pay rise across the board)," said Haribhakti.

"The performance parameters of a CEO or CXO are set right at the beginning of the year but in a tough economic environment a next level of scrutiny could happen. Boards are also looking at what is the pay trend in the market and competition benchmarking is becoming increasingly important," added Kidwai.

The average pay increase of professional CEOs/MDs in FY23 was 6%, according to an ET analysis of 149 of the BSE 500 companies for which data is available. This compares with the pre-Covid average hike of 7.5% in FY20. In FY23, the average pay of MDs and CEOs was ₹10.3 crore, versus ₹9.71 crore the year before and ₹9.33 crore in FY21. Arun Duggal, chairperson of ICRA and an independent director on many boards, said: "There is focus on a stronger linkage of the CEO compensation to company's performance and the financials."