Indian CEOs outperforming the workforce in pay hikes

Indian CEOs are outperforming the workforce in pay hikes as companies have largely been able to pass inflation on to consumers during the post-pandemic economic recovery. This is facilitated by remuneration structures linked to corporate performance that becomes more pronounced as managers climb the hierarchy. The divergence is more pronounced in promoter-led companies that seek to suitably compensate their entrepreneur-managers. India Inc has performed reasonably well, and it is rewarding its top talent for steering the ship through a rapidly evolving environment. C-suite executives are having to acquire new skills as businesses globally rework supply chains and technologies like generative AI change the nature of work. Managers who adapt to these fundamental changes in markets and companies are likely to be rewarded by shareholders.

Managerial remuneration should ideally be structured to incentivise entrepreneurship rather than support bureaucracy. By that token, pay linked to corporate performance rarely achieves its primary goal. CEO salaries are insignificant in terms of company turnover, and the rewards and penalties over corporate achievement do not filter through. Earnings would have to swing on a much higher order for CEOs to be exposed to financial risks shareholders face. This encourages bureaucratic managerial approaches that do not serve investors. Outperformance is, thus, ungrudgingly rewarded by shareholders.

A higher concentration of promoter-driven business tamps down the dissociation between the risk-reward tradeoff of investors and managers. Promoter corporate bosses have more skin in the game than professional managers and carry more conviction among shareholders of their risk management credentials. But this reinforces the case for revisiting CEO pay structures to make them more effective. Arguments over the level of CEO pay, or its deviation from the wage bill, serve little purpose. Managerial remuneration must be aligned closer to shareholder interest for more efficient allocation of capital.