decoding executive remuneration

decoding executive remuneration

Decoding Executive Remuneration: from ratios to rationale

By Mansee Singhal*

The fascination and the debates around Executive Remuneration continue year on year. Increased disclosure norms are only making these conversations more heated. How much CEOs and CXOs should be paid? Should their pay reflect accountability for results? If yes, to what extent? 

Mercer’s Executive Remuneration survey gathered information on practices as well as quantum from 89 companies across industries in India. About a third of the companies in our survey were from the technology industry, with 27 technology services companies. It is common knowledge that the technology industry has significantly shaped Executive Compensation with focus on long term orientation and wealth creation.

In the following section we are presenting some interesting data points, some observations, and raising some questions for us Rewards professionals, to ponder over.

Industry as a Driver of Executive Compensation:

The following graph presents a comparison of the “Pay Mix” for three levels of Executives among:

1) the overall database of Consumer & Pharma (India subsidiaries of global MNCs) and the Hitech sector,

2) the Hitech companies (IT services, IT products, Engineering Design Service providers and IT captives), and

3) the IT Services majors.

Source: Mercer Executive Remuneration Survey 2016 

Observation 1: Incentivizing annual performance through Short Term Incentives seems to be the focus in All Industries where it is higher than the Long Term Incentives for CEO / CXO levels.

Observation 2: In the Hitech sector, there appears to be a longer term performance focus through an aggressive Long Term Incentive component in the overall pay. This is most accentuated in the IT segment of Service majors where long term incentives range from 25 - 47% of total pay.

Points to Consider:

a) Is talent attraction and retention in non-IT services organizations more challenging and therefore leading to a more guaranteed pay practice? Or is it driven by the fact that subsidiaries of MNCs in India in these sectors may be following a different practice from their home country, especially with respect to long term incentives? Is the STI higher here to keep total annual cash payout more attractive and stay competitive?

b) What is driving the higher performance pay orientation in the IT services companies? Is this business model driven where focus on margins requires keeping base pay optimal while loading short and long term incentives to match growth aspirations?

c) How does the size of the company impact pay decisions?

Mercer view: As indicated in the above graph, in large sized multi - billion dollar organizations, the CEO: CXO pay could be as high as 3.5 times. This could mean that larger organizations work as complex set ups which remunerate the CEOs very competitively for complexity of the role and CXO roles for the large portfolios. However, there is a wider play built in the pay, for incubation of the CEO successor hence the differential between two levels is kept steep. Are the mid-size companies more promoter driven / privately held and therefore the CEO pay is more restricted, which in turn keeps the CXO pay also in check and the differential limited to 2 times? Could the executive teams here need to be working more closely to bridge the billion dollar gap?

d) Finally, could the aggressive LTI in large IT players be driven by the fact that contracts tend to be multi-year deals, or is it driven by a more activist shareholder group demanding alignment of executive pay with their long term returns, or by the cost constraints of IT services companies? Let us examine the prevalence of various LTI instruments in the Hitech industry to try and get some explanations:

Observation: The service based RSUs have the highest prevalence, with almost similar prevalence for Stocks, Stock Appreciation Rights and long term cash. Despite the expected focus on performance, fewer companies have Performance linked stocks! The linkage if at all is more with the past performance; with one of the conditions for grants being past performance but the reward for ongoing performance is more market funded.

Mercer view: It is yet to be examined if it is about the complexity in delivering performance linked LTI or lower perceived value by the recipient which results in lower uptake of Performance Stocks; possibly performance linkage is easier to articulate and administer for cash plans and may therefore has higher prevalence. 

In conclusion, executive remuneration landscape in India continues to be interesting and interspersed with industry based differences; varying business models requiring different levels of variability in compensation and different sizes determining how closely knit or widespread compensation ranges will be. Overall, while, performance linkage is critical for long term sustenance and growth orientation of the corporate, uptake could be better and continued pressure on margins may see more penetration of such plans.

Mansee is a Principal with Mercer and leads Information Solutions for the Hitech cluster including IT, ITES and Engineering Design industries.

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