Govt should introduce a law to rein in ballooning CEO pay

Difficult to justify such outsized pay packages amid growing inequalitiesRashesh Shah, chairman and CEO, Edelweiss Group, and former president of FICCIThe pandemic has changed many established paradigms and rewritten many societal norms. It has also been especially hard on the most disadvantaged segments of society, while being quite beneficial, financially, for people on the other end of the spectrum.As per an Oxfam study, the 1,000 richest people on the planet recouped their Covid-19 losses within just nine months, but it could potentially take more than a decade for the world’s poorest to recover from the economic impacts of the pandemic. It is in this context that we should look at the issue of continually rising CEO pay scales, even as ground workers at the lowest rung see a sharp deterioration in their economic status.The question of excessive CEO pay and capping of the same has been around for several decades, especially in the West. In India, it is a more recent phenomenon, as the impact of globalisation has only in the past couple of decades percolated down to corporate culture and financial performance.As per research by independent agencies, the ratio of CEO-pay to typical worker-pay in the US is up from 20-to-1 or 30-to-1 in the 1960s and 1970s to 200-to-1 or 300-to-1 in recent years. The corresponding number for Indian companies is not much better, coming in at nearly 250-to-1. Proactive action in India could help nip the issue in the bud.medium89484435 medium89484071Ideally, all pay structures, including that of the CEO, should be viewed through two broad filters — whether it is affordable and whether it is fair. Affordability should not be seen in a silo; a much higher CEO pay will also be followed by higher CXO pay structures in the organisation and such a change should take the collateral impact into cognizance.Secondly, fairness, while being subject to the vagaries of individual opinion, is also an important filter. With large swathes of the population in India struggling for two square meals a day, especially in the post-pandemic era, outsized pay packages call into question the fairness of a CEO earning 250 times what the median worker earns.This is not to say that CEOs do not deserve to be well-paid. The success and failure of an organisation rests squarely on the shoulders of the CEO and it is natural for CEOs to expect fair reward when the company does well, as the brickbats of failure will invariably stop at their door. However, the operative word here is ‘fair reward’.Outsized CEO pay packages are often justified on the back of ‘superstar CEOs’ who are supposed to deliver beyond all possible expectations. However, the fact is that they often fail; their personal flamboyance and charisma overshadowing the larger goals of organisation building.This is not to say that superstar CEOs are a myth, but what is clear is that they are no guarantee for success and, hence, justifying astronomical pay on this basis is not just unfair but potentially a case of putting the cart before the horse! medium89484107More from the other side: Let market forces of supply and demand decide how much a CEO is worthSo, how should CEO pay be determined? It is a complex task. A variety of structures exist, some leaning more towards fixed pay with a smaller variable portion linked to performance or some very closely linked with stock market returns (think Elon Musk).However, it is important to recognise that CEOs have a responsibility towards multiple stakeholders and not just shareholders. These could include, among others, employees, clients and regulators.Therefore, the performance of a CEO should ideally be a more holistic view of how they have been able to fulfil their responsibility towards each of these stakeholders — essentially, a focus towards stakeholder capitalism and not just shareholder capitalism.medium89484424This is easier said than done, as each of these vectors is equally difficult to measure. However, it is possible, with some effort to determine metrics against each which could provide a more objective measure of holistic CEO performance and the pay applicable.At the same time, the pay itself needs to have a measure of fairness attached. While it is difficult to define an optimal level of acceptable pay, there has been enough research to say that anything exceeding 150x to 200x of the median pay starts entering the excessive category. This could be in the form of caps, either prescribed or through established guidelines, or through a law.Globally, implementing measures such as these have only worked well when enforced through a law. Though laws enforcing caps are considered, in general, draconian and unfair, it is very much possible to bring forth a law that balances the dual objectives of greater fairness in pay scale across an organisation, as well as ensuring that there is sufficient incentive for the CEO to strive towards corporate success.Such a law could help bridge, to some extent, the extreme inequality that pervades our country, but also do so without disincentivising corporate performance.Illustration by Varani Sahu