RBI proposal to revamp bank CEO compensation: Companies Act should take a leaf out of central bank’s gesture

Chanda Kochhar, the disgraced and tainted former CEO and managing director of ICICI Bank, got a salary of Rs 7.85 crore in 2017-18, according to news reports. That translated into a whopping Rs 2. 6 lakh per day assuming 300 working days.In a country where Kochhar's daily salary is virtually the annual salary for many, it naturally raised eyebrows, a notch or two more when she was arraigned on charges of corruption. Be that as it may, it is not as if she was the first to indulge in such self-aggrandizement.Indian corporate literature is replete with examples of mind-boggling honcho salaries that outstrip the next in line of command by a country mile. NR Narayanamurthy, the founder of Infosys, caused a flutter in honcho circles by suggesting a cap about a decade ago—the CEO salary should not exceed 15 times the salary of the lowest employee at the bottom of the salary pyramid. Predictably, no one took him seriously.[caption id="attachment_5684541" align="alignleft" width="380"]

Representational image. Reuters.[/caption]But now the Reserve Bank of India (RBI) has taken the issue seriously. It has proposed a cap of 200 percent on the variable salary with reference to the fixed salary as opposed to 70 percent now with the additional condition that the variable component should be a minimum of 50 percent of the fixed salary.The other difference is the extant cap of 70 percent does not include employee stock ownership plan (ESOP) but the proposed cap of 200 percent and floor of 50 percent both include ESOP. The proposal is for both Indian private as well as foreign banks.Cynics would say this is practically shortening the length of the first line so that the second line looks decently longer. In other words, since the public sector bank (PSB) honcho salary is abysmally low, what the RBI is doing according to critics is reducing the salary of foreign and private banks. The proposed move targets all whole-time directors of these banks and not only the CEO.As per the Companies Act, 2013, the managing director’s salary is capped at 5 percent of the company’s profit with minimum salary thrown in when the profits are inadequate in the manner of 'heads I win, tails you lose'.Naturally, it tempts promoters to aggrandize themselves with a fixed salary plus commission based on profits. To wit, if a company makes a profit of Rs 1,000 crore, its honcho can be paid Rs 50 crore, by way of fixed salary or commission or combination of both.What the RBI is planning is for the fixed component to be the pivot around which the variable portion would be woven. If a CEO of a private bank is appointed on a fixed salary of Rs 10 lakh per month, a minimum 50 percent i.e., Rs 5 lakh per month must be variable subject to the condition that this cannot be more than 200 percent, i.e., Rs 20 lakh per month.

Mind-boggling salaries on the back of variable pay has been considered less invidious and scandalous as it is linked to profits on the facile ground that the CEO has worked hard to produce profits and has thus earned his spurs. But this approach undermines collective approach to running a company, the linchpin of the Eastern culture and the antithesis of the CEO-driven western establishments’ culture.

One hopes the RBI also puts in place a limit on fixed salary with reference to the mean salary of the company. Vishal Sikka, Infosys CEO, caused heartburn by taking a salary that was 900 times the mean salary.One also hopes that the government, may be the next, takes a leaf out of the RBI and makes division of the salary pie more democratic even while batting for recognition and encouragement of talent at the top.Commission based on annual profits encourages short-term expedients. If at all such commission is going to stay, it should be based on three to five years’ profits. In other words, a honcho should be made to cool his/her heels for at least three to five years so that business vicissitudes play out fully.(The writer is a senior columnist and tweets @smurlidharan)