» Business » New Companies Act eases concerns over high pay

New Companies Act eases concerns over high pay

By M Saraswathy
April 23, 2014 13:47 IST
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RupeeIn the past few weeks, institutional advisory firms have been vocal against salary increase to company heads, especially firms undergoing financial stress or under corporate debt restructuring.

Giving specific examples, the advisory firms advised against the remuneration increase for chiefs of Educomp and Suzlon Energy and said salary increase should be backed by improvement in financials.

The problem, however, will be resolved to a great extent with the new Companies Act making it mandatory for firms to make additional disclosures and limit salary increase when a company is staring at a weak balance sheet.

The Companies Act, 2013, which came into effect recently, says the board of directors of every listed company and such other class or classes of companies shall constitute the nomination and remuneration committee.

This committee has to ensure the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully.

Further, the Act says the committee should ensure the relationship of remuneration to performance is clear and meeting appropriate performance benchmarks.

Also, remuneration to directors, key managerial personnel, and senior management should involve a balance between fixed and incentive pay, reflecting short- and long-term performance objectives appropriate to the working of the company and its goals.

“The remuneration payable to any one managing director; or whole-time director or manager, shall not exceed five per cent of the net profit of the company.

If there is more than one such director, the remuneration shall not exceed 10 per cent of the net profit to all such directors and manager taken together,” the Act says.

In March, Tulsi Tanti, chairman of Suzlon Energy, was re-appointed by the company’s shareholders as managing director for three years.

The decision was taken via postal ballot from the company’s shareholders who also voted an increase in his salary to Rs 3 crore (Rs 30 million) from Rs 2 crore (Rs 20 million) a year.

However, proxy advisory firm Institutional Investor Advisory Services advised against the appointment due to weak performance of the company.

“Despite the tough times, the company has managed to retain its prized customers and he remains sanguine about bringing a positive turnaround for Suzlon in the future,” Suzlon said in a press release announcing the re-appointment of Tanti.

However, in mid-2012, Tanti had taken a voluntary pay cut of Rs 1.46 crore (Rs 14.6 million) in compensation.

In fact, his annual take-home reduced to Rs 53.7 lakh (Rs 5.37 million), while he was entitled to Rs 2 crore (Rs 20 million).

However, IiAS was against the pay hike to Tanti as it believed any increase in remuneration should be linked to improvement in performance.

“Under Tulsi Tanti’s leadership, the company’s performance has continued to falter and the company is now under a corporate debt restructuring programme.

IiAS believes that promoters’ interests will also be served by bringing in new management,” the advisory firm said.

Shriram Subramanian, founder and managing director, InGovern Research Services, explained there were many instances where the company has gone into CDR in recent times, yet the chairman or managing director’s salary is raised.

He pointed out that in companies such as Hindustan Construction Company, Jindal Stainless and Hotel Leela Ventures, the chairman and managing director’s salary was increased in FY13 compared to FY12.

For instance, in HCC, the annual salary was raised to Rs 10.66 crore (Rs 106.6 million) in FY13 from Rs 5.88 crore (Rs 58.8 million) in FY12.

Similarly, in Jindal Stainless, the chief’s annual salary stood at Rs 10.08 crore (Rs 100.8 million) in FY13 compared to Rs 8.99 crore (Rs 89.9 million) in FY12.

In Hotel Leelaventures’ case, too, the salary was raised to Rs 2.42 crore (Rs 24.2 million) compared to Rs 2.01 crore (Rs 20.1 million) in FY12.

While HCC and Jindal Stainless declined to comment, Leelaventures did not respond to emails sent by Business Standard.

Subramanian said the public shareholders were also affected as CDR often involves conversion of debt into equity and funds infusion from promoters, which result in significant wipe-out of public stake.

“However, it seems the least affected party is the promoter, who, although being mandated to provide additional funding, is seen to take cash out through higher salaries, while also retaining control and ownership of the company.

“The lenders as well as the public shareholders should hold the promoters and the board more responsible in such cases,” he said.

The international practice in such cases is for the shareholders to take a stronger stance.

In the case of Citi, its former chief executive, Vikram Pandit, was being paid $1 for the previous two years before his proposal of raising his salary to $15 million.

The shareholders voted against the proposal. However, the company went forward with the proposal on the grounds that say on executive compensation was a non-binding vote.

A few months after getting the raise, Pandit left the company.

While the Companies Act has stipulated certain limits on salary during financial stress, it also says the limits can be exceeded if the company makes a request to the Centre after obtaining approval through a special resolution from the shareholders.

Hence, Subramanian said the onus is on shareholders to vote against such proposals and not let the company further drain its funds on increased remunerations.

Amit Tandon, founder and managing director of Institutional Investor Advisory Services India, said, “Pay should be linked to performance. Executives should refrain from taking pay hikes when there is a fall in performance/profitability of the company.

The remuneration should also be in line with industry peers and must not be higher than the remuneration paid during years in which the company made adequate profits.”


How the Companies Act, 2013, changes management remuneration practices

  • Act says the board of directors of every listed company and such other class or classes of companies shall constitute the Nomination and Remuneration Committee
  • The committee should ensure the relationship of remuneration to performance is clear and meeting appropriate performance benchmarks
  • Remuneration payable to any one managing director or whole-time director or manager shall not exceed 5% of the net profits of the company
  • If there is a salary raise during a financial crisis in a company, its board would have to make additional disclosures on the justification for it

(With inputs from Katya B Naidu)

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M Saraswathy in Mumbai
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