Income inequality alarmingly rising in corporate India

Pay Ratio Disparities

- IIT-B professors carried out a study on Nifty-50 in 2020

- The study found widening disparities in salaries of C level executives and other staff

- The highest pay ratio is 1:752, which means the highest paid person gets 752 times the salary of the median earning employee

- Lowest pay ratio 1:39 was at Maruti Suzuki

Mumbai: Guess what is the annual pay package being drawn by Pawan Munjal at Hero Motocorp? The readers will be surprised to know that Munjal was walking home by drawing an annual salary of Rs84.6 crore, that too way back in 2018. What the median worker earns in a year, Munjal earns

for half-a-day's work.

Pay ratio data has not been studied much in India to understand inequality. Since 2015, a Securities and Exchange Board of India (Sebi) rule requires that publicly traded companies disclose the remuneration to their top management vis-à-vis other employees. The disclosures are mandated under Section 197(12) of the Companies Act, 2013, read with Rule 5 (1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Publicly traded companies have been reporting the median salaries of employees and remuneration paid to ―Key Managerial Personnel‖ (KMP).

The median is like an average, which indicates the salary level at which half of the employees earn below it, and half earn above it. If the median is, say Rs2 lakh per year, it means that half of the employees earn less than that.

The ratio of the median to the salary of the top-paid KMP (or, pay ratio') is a measure of inequality of pay within the company. A pay ratio of 2 means that the KMP is paid twice as much as the median/middle employee – i.e., if the median remuneration is Rs2 lakh per year, the highest paid person gets Rs4 lakhs per year.

In 2020, Meghna Yadav and Reetika Khera (Associate Professor of Economics at IIT, New Delhi) compiled these ratios for 42 private companies in the Nifty-50 list for 2019-20 (the remaining eight are publicly-owned companies that are exempt from this disclosure). Bizz Buzz has a copy of the research study.

Two highlights from the analysis are worth reiterating – the obscene levels of inequality and the lack of diversity among those at the top (discussed later). Even within the Nifty-50 companies there is massive inequality in pay. The highest pay ratio is 1:752 – which means the highest paid person gets 752 times the salary of the median earning employee. The annual remuneration in this case was Rs84.6 crore –that of Pawan Munjal at Hero Motocorp. The lowest pay ratio was at Maruti Suzuki, at 1:39. The average of these pay ratios is 1:259.

The average median salary in the NIFTY50 is around Rs 6 lakh per year, compared to the average of Rs 16 crore for the top paid KMP. These inequalities can only be termed obscene because data from National Sample Survey for 2015 suggest that only 18 per cent of male workers earn more than Rs 10,000 per month. The median salaries in the NIFTY50 are almost six times this amount.

The study, which forms part of Malcolm Adiseshaiah lecture, which was written by Dr Khera earlier this year, also found that in spite of such mind-bogglingly high remuneration for the top paid employee, for 15 companies (out of 37 for which this data was available) the percentage increase in salary of the top paid person exceeded the increase in salary of the median employee! These companies have no commitment to creating flatter remuneration structures.

Did things change due to the economic shock arising from the pandemic?

In India, at least some big private players were more willing to lay off employees or reduce their pay than to touch top CEOs. For instance, Infosys reported performance based exits' and the headcount of employees fell by 3000 in the first quarter of 2020-21.

Salil Parekh, the highest paid person at Infosys exercised stock options worth Rs 17.03 crore in 2019-20, which is as high as the remuneration paid to him. The following year, his compensation, inclusive of stock options, increased to almost Rs 50 crore.

Regulations pertaining to pay ratio disclosures exist in other countries – e.g., from 2020 onwards, companies in UK with more than 250 employees are mandated to make pay ratios public. In the US also, the US Securities and Exchange Commission requires such disclosures to be made since 2015. By this measure too, India appears to be among the worst in the world.

The Guardian reported that the CEOs of the top 100 companies were paid the typical worker's annual salary within 33 hours. In comparison, if Munjal works half a day, his earning already exceeds the annual earning of the median employee.

In the government sector, according to data presented in Vaishnav and Khosla (2016), the pay compression ratio is 12.5. The lowest salary reported there for government sector employees is Rs18,000 and the highest is Rs225,000 per month. This probably understates the differentials because it does not seem to take into account low paid jobs such as those of Anganwadi workers, who are typically paid less than Rs 10,000 per month.