Irrational promoters’ pay rise irks shareholders

Mumbai Over the years, remuneration levels of promoters and executive directors have been a cause of concern – in the past, remuneration has exceeded revenue and profit growth. During the Covid years, the experience was mixed – while some promoters like Mukesh Ambani and Uda Kotak voluntarily took pay cuts, several others continue to enjoy fat pays even as profits declined, workers were laid-off, and salaries as well as wages were rationalized. These have since moved back to their earlier trajectory, old way of compensating promoters.

What is more, promoters’ compensation structures almost always lack clarity with respect to the expected performance outcome. In several instances, promoters give themselves a fat share of the commission. This is reflected in a handful of promoters paying themselves between Rs50 crore to Rs100 crore in salaries and commissions, independent of the size of their companies. Do shareholders support these?

IiAS’ assessment of 201 remuneration resolutions for promoters presented in 2022 shows that 68 (34 per cent) of these would have been defeated had promoters not been allowed to vote.

Talking to Bizz Buzz, Hetal Dalal, President & Chief Operating Officer, Institutional Investor Advisory Services, says: “Promoters voting on their own compensation has an inherent conflict of interest. Therefore, like other related party transactions, these too should be put to a majority-of-minority vote. This will ensure that NRCs become more thoughtful in setting compensation levels, and articulate the reasons or the basis for the compensation payout.”

In benchmarking their remuneration to market standards (sometimes even higher), promoters are separating ownership from management. In doing so, they must then be subject to the same standards of disclosure and accountability as are most professionals, she added.

Of the S&P BSE-500 companies, in FY21, there were twelve promoter CEOs across 10 companies whose remuneration exceeded Rs30 crore, of which five were paid more than Rs70 crore.

The level of compensation of promoters, the structuring of the compensation, and the disclosure levels in these resolutions remain concerns for investors. That some of these promoters are members of the Nomination and Remuneration Committee (NRC) adds another layer of conflict of interest.

If compensation is expected to reflect an employee’s contribution, some promoters appear to have made clear how much they value their own services vis-à-vis other employees in FY21. Kalanidhi Maran’s remuneration at Rs87.5 crore aggregated 28 per cent of Sun TV’s employee benefit expenses, while Venketrama Raja’s compensation of Rs59.76 crore accounted for 14 per cent of The Ramco Cements’ employee benefit expenses.

Family compensation in Sun TV Limited aggregated 57 per cent of FY21 employee expense, 20 per cent in Balkrishna Industries, and about 17 per cent in Divi’s Laboratories.

Regulators must put promoter compensation to a majority of the minority vote and prescribe a set of minimum disclosures that companies must make on an annual basis while seeking shareholder approval, experts say.