Executive compensation: Why tell all?

D. Sampathkumar

THE Confederation of Indian Industry (CII) has demanded that the legal requirement that companies disclose details of remuneration paid to certain higher-paid executives be done away with.

The requirement, introduced in the Companies Act in 1974, stipulates that companies disclose details of remuneration, educational qualifications and number of years of experience of staff who draw Rs. 36,000 or more per annum.

The amount since then has been progressively hiked in keeping with inflation, and now stands at Rs. 3 lakhs. The Government has, in recent years, been particularly sensitive to the corporate pleas on this count, as revealed by the frequent hikes in the threshold limit post-1991. For, viewed purely in terms of inflation, the Rs. 36,000 stipulated in 1974 is today worth roughly Rs. 2,40,000. But the disclosure requirement has been pegged at Rs. 3,00,000 since 1994.

But for all that, the industry is still unhappy. And with good reason too. For if there is any aspect in the regulatory environment that has irked corporate managements in the country, it is the requirement that companies disclose information on employees whose remuneration exceeds the threshold limit laid down for this purpose.

Companies have for long regarded this as an unnecessary piece of intrusion into their affairs and had fervently wished for its abolition. It forces companies to place in the public domain information they would rather keep to themselves. They would like, for instance, not to have to advertise the fact that their managing director had not got past the school leaving certificate examination, or that some of their technicians and conservancy staff with minimal educational qualifications had, nevertheless, made it to the galaxy of higher-paid staff.

But the law forces these companies to parade such pieces of information in full public view. One could say educational attainments do not matter. And for a while, companies did just that, often claiming that the person mentioned in the list, for all his lack of formal academic qualifications, was nevertheless loaded with general management experience.

It is all very well for someone to claim that the managerial insights gathered in the School of Experience are worth far more than what the Harvard School of Business could hope to teach a person. But there is a danger in this line of argument. It places a premium on performance.

If the company's performance is none too good it gives a handle for someone to argue that the experience could not be worth a great deal if the company is not doing too well. But this did not prove a serious handicap for most companies in the era prior to liberalisation. Thanks to the barriers of entry to fresh competition both from within and without, companies were not hard pressed to show handsome growth in sales and profits year after year. Came liberalisation, past corporate performance was shown up for what it was -- mere stuffing. So, the claim that managerial experience is everything no longer found many takers.

But if liberalisation rid the corporate performance of that aura of invincibility, it also opened up access to training programmes by universities in the West. It is now not uncommon to find senior executives whose names appear in the list under Section 217(2A) of the Companies Act, sporting a new tag. The Secondary School Certificate or the Bachelor of Arts Degree behind their names is now embellished by the letters AMP (Harvard) -- an acronym for Advance Management Programme offered by that venerable institution, Harvard University.

Such niceties as that the `AMP' is merely an executive development programme or that it does not constitute a recognised academic qualification do not seem to bother these companies. They must have reasoned that here is where they leverage an outlay of $100,000, or whatever it is that these programmes cost, to score some brownie points against their competition.

Of course, to be fair to these executives let it be said that they may not have been directly responsible for the inclusion of the fact of their participation in an executive development programme in the list of educational qualifications against their names. It is quite possible that someone in the Accounts Department of the company responsible for compiling this list might have wished to play it safe and so included it.

One does not know if the CII move was prompted by considerations of saving some embarrassment of this nature to its members. But the argument given in support of its repeal certainly does not hold water. The CII contends that the disclosure only helps another company to poach manpower from the company disclosing these details.

We may safely assume that the predator company is not interested in those employees whose educational attainments are of the AMP (Harvard) variety but are actually targeting those with IIT and IIM tags, the qualifications that really matter. Why should the CII mind? After all, the disclosure, assuming the CII complaint to be valid, only helps create a more competitive market for human resources. Now, competition is a good thing, whether it is the factor market for capital or labour.

The entire focus of intervention by the Government in the realm of economics is to create conditions for a greater degree of competition so that customers benefit, and the economy thrives. Surely, the CII is not going to contend that it welcomes a competitive market for capital and other inputs to commerce while preferring a closed market for labour.

Also, it stands to reason that the CII should be indifferent to a unit of labour moving from one company affiliated to the CII to another company affiliated to the same body. Or is the CII worried about poaching by a member of FICCI or Assocham from the labour pool of a company affiliated to the CII? If it is so, then let it be spelt out. Let the CII spell out where it stands on competition or come up with a different reason for wanting a repeal of the disclosure on managerial remuneration.