CEOs, top executives likely to take home single digit raises in 2013

By Rajeshwari Sharma
5/12/2012

The compensation of CEOs and their top executives is set to increase by a modest nine and 9.4 percent respectively in 2013, according to the annual Top Executives Compensation Report 2012-13 by global management consultancy, Hay Group. The increase reflects a sharp dip from the double-digit growth witnessed in previous years.

The Top Executive Compensation Report 2012-2013 features insights from about 158 organizations in India across the sectors of Auto, Chemicals, Basic Resources, Oil and Gas, FMCG, Retail, Construction and Materials, Telecommunication, Utilities, Industrial Goods, and Transportation. It is designed to enable organizations to understand prevailing compensation practices and trends in India.

Top executives at leading financial services group, Religare Enterprises Ltd, too, can expect single digit growth in their paychecks. Kamlesh Dangi, Group Chief People Officer, Religare Enterprises admits some of the common extravagance in compensation practices such as guaranteed bonuses or sign-on bonuses have vanished. “There is more realism and I see a lot of executives willing to change jobs for almost the same salary in order to get the ideal role or company they are looking for,” says Dangi. There is thus lesser market pressure on organisations to dole out top monies to attract key talent.

The report also finds companies are placing higher value on the role of the CEO for achieving overall business results as compared to the top management team – CEOs are paid three times more than all other senior executives. This multiplier goes up to more than four in industries such as Basic Resources and Retail, while it falls below the average in industries such as Transport and Logistics, and Construction and Materials, as shown in Figures 1 and 2.

Figures 1 and 2

Sridhar Ganesan, Rewards Practice Leader, Hay Group India explains, “Hay Group research has found that markets, strategy, culture, and ambitions are the four real drivers of modern-day executive compensation. This is important to keep in mind as data analytics on executive compensation have to be interpreted beyond just the stated numbers.”

Statistical analysis between the Hay Level (proxy for job contour in terms of scope, scale, size and complexity) and Total Cost to Company (CTC) found a co-relation of 0.26 – indicating that other factors, besides just the organization’s state affect CEO compensation.

Sridhar qualifies, “CEO pay can be contextualized into four potential context clusters – the Carers, the Contractors, the Cultivators, and the Fundamentalists. The Carers are companies that operate in an environment of social capitalism, while the Contractors have a clear focus on extracting business value from contracts and terminating them in case of failure. On the other hand, the Cultivators have the ability to spin a compelling story and inspiring investors and employees with their energy to take risks, while the Fundamentalists believe in an environment of continuous innovation without compromising on the company’s identity and cultural strengths.

Adding further, he said, “Tata Group’s approach is of a Carer – where the organization uses social and environmental consciousness to create a powerful employee and customer brand – thus the CEO pay will reflect the organization’s long-term ideals. On the other hand, current CEOs of online portals such as Flipkart and Jabong mark the Cultivator approach, reflecting dynamism and highly leveraged payout norms.”
The four approaches are explained below:

Modern-day approaches to executive compensation

The survey findings also reveal that organisations have a strong preference for leveraged pay or pay for performance in the overall compensation philosophy – for the top team executives including the CEO. Around 30 to 44 percent of the overall compensation mix, for the CEO and the top team, comprises incentives. Increasingly, companies in India are addressing salary increases by moving higher parts of the increments into pay for performance.

The report also finds variable pay, as a percentage of CTC (excluding Long-Term Incentives or LTI), to be the highest in the Retail sector at 29 per cent, followed by Utilities at 26 per cent, as depicted in the figure below:

Highlights:

•   Executive compensation expected to rise moderately by nine percent in the coming year
•   Markets, strategy, culture, and ambitions are the four real drivers of modern-day CEO pay
•   Increasing external recruitment of CEOs in evolving sectors such as Retail and Basic Resources. “Ready-made CEOs” as the mantra for success also means higher compensation and larger differentiation between CEOs and Top Executives’ pay
•   30 to 44 per cent of the overall executive compensation mix comprises incentives – both short and long-term.

Rajeshwari Sharma is an Editor at SHRM India