Decoding CEO Pay in India: Navigating Complexity and Seizing Opportunities

Over the last decade, CEO pay in India has experienced profound transformations, reflecting the evolving dynamics of the corporate world. Increasing globalization of Indian companies, complexity of business challenges, and rising shareholder expectations have reshaped executive compensation.

However, as CEO salaries have continued to rise, so does scrutiny over whether such pay packages are truly aligned with the interests of all stakeholders—shareholders, employees, customers, and society. To foster sustainable growth, CEO compensation must emphasize long-term value creation over short-term financial performance. In this context, Nomination and Remuneration Committees (NRCs) play a pivotal role in ensuring that CEO pay aligns with organizational goals and stakeholder interests. NRCs also bear the critical responsibility of setting performance goals that drive sustainable growth.

Current Trends in CEO Pay in India

CEO compensation in India has witnessed considerable growth, influenced by globalization, professionalization, and competitive pressures. Key trends include:

• Professional vs. Promoter CEOs: Professional CEOs of India’s top 100 companies have seen annual pay increases of 8–12%, compared to a modest 5–7% for promoter CEOs, whose wealth often ties to stock performance. (1)
• Rising Median Salaries: In BSE 100 companies, CEO median salaries increased by 9.4% this year and 108% over five years. (2)
• Pay Disparity: The average CEO-to-employee salary ratio in India is 200:1, significantly lower than the U.S. ratio of 290:1. (3)

The Role of Pay Mix in CEO Compensation

The pay mix for CEOs typically includes:

• Fixed Pay: Guaranteed salary ensuring financial security but not directly tied to performance.
• Performance-Linked Bonuses: Short-term incentives tied to annual (typically AOP linked) metrics, e.g., revenue or profitability.
• Long-Term Incentives (LTIs): Stock options and performance shares (cash or equity settled) that align with shareholder interests over several years and organization goals over a long term strategic horizon. In recent years, the Indian CEO pay mix has shifted from fixed pay to a 56% focus on variable pay (24% short-term and 32% LTIs). (4) While aligning with shareholder expectations, India still lags behind the U.S., where LTIs make up 65% of CEO compensation.

Aligning LTIs with Long-Term and Short-Term Goals

CEO pay structures have been evolving balance short term and long term goals to prevent ‘Short termism’ and drive sustainable growth over a longer horizon. A typical plan includes:

• Short-Term Goals: These include annual revenue targets, expansion of market share, short term efficiency related matrix amongst others. By linking part of the LTI to short-term metrics, NRCs ensure that CEOs are accountable for the company’s immediate financial health.
• Long-Term Goals: These focus on long term strategic initiatives like innovation, diversification, sustainability, and building shareholder value over several years. Long-term goals are often represented by and tied to stock performance, shareholder return or multi-year profitability and revenue growth.

Judicious use of LTIs can serve as a powerful tool to prevent “short-termism”—where CEOs are overly focused on immediate financial results at the expense of future sustainability. This alignment benefits all stakeholders:

• Shareholders: linkage to shareholder value aligns key executive wealth goals with shareholder returns, driving robust strategic decision making in the organization.
• Employees: long term vision leadership to invest in employee development, retention, and corporate culture, which are critical for long-term business success.
• Customers and Society: leaders incentivized to focus on long-term goals are more likely to prioritize innovation, customer satisfaction, and environmental sustainability, aligning with broader societal expectations for responsible corporate behavior.

Challenges with CEO Pay in India

Despite the increasing sophistication of CEO compensation packages, several challenges remain in alignment with stakeholder interests.

• Pay Disparity – On average CEO pay to average salary stands at ~ 200:1 ratio, this potentially fosters inequity damaging morale and productivity. Alignment with Performance - public perception has also played a role in shaping the debate around CEO pay. Instances of CEOs receiving substantial bonuses during times of poor financial performance have led to a wave of criticism, highlighting the need for greater alignment between pay &performance and stronger governance in the board rooms for decision making on top management salaries.

With the high growth and need for tighter governance the scrutiny of proxy advisory firms has also increased. For example, Institutional Investor Advisory Services (IiAS), one of India’s leading proxy advisory firms, has recommended voting against several CEO compensation proposals in the past, arguing that they are misaligned with performance or excessive relative to industry peers. In 2019, IiAS advised shareholders to vote against the salary proposal for a pharma company’s CEO, pointing out that his pay was disproportionate to the company’s stock performance and peer comparison. These examples highlight the growing awareness among stakeholders regarding fair compensation practices.

The Role of NRCs in Shaping CEO Pay

The Nomination and Remuneration Committees (NRCs) are entrusted with the responsibility of ensuring that CEO pay is fair, competitive, and aligned with the long-term interests of the company and its stakeholders. As per the Companies Act, 2013, and SEBI guidelines, NRCs are required to operate independently and transparently, ensuring that executive compensation policies are in line with the company’s performance and the evolving corporate governance landscape.

NRCs are responsible for evaluating not only performance of the CEO against financial metrices but also their leadership, strategic vision, and the broader impact they have on the company’s culture and stakeholder relations. This requires NRCs to be independent and objective in their assessments, avoiding any potential conflicts of interest.

In addition to the key roles of NRCs to design competitive and fair compensation packages for the CEO, they are also assigned with the responsibility to –

• Define and evaluate measurable, diverse performance goals that reflect the company’s strategy and stakeholder interest.
• Ensure transparency to build trust with the shareholders and drive sound decision making
• Link pay to critical long term performance metrics like sustainability and employee engagement to name a few.

Evolving role of NRCs’ Role in Setting Performance Goals

While NRCs have traditionally played role of determining CEO pay, their role extends beyond determining compensation. NRCs should actively participate in setting the performance goals that CEOs are measured against. Performance goals shape the leadership strategies and operational priorities of the company, and when set incorrectly, they can drive behaviors that may conflict with long-term stakeholder interests.

It is essential for NRCs to understand that effective performance goals go beyond financial targets. These goals should encompass a broader spectrum of metrics that include:

• Financial Goals: Metrics like revenue growth, profit margins, return on equity, and cash flow etc.
• Customer Goals: Measuring customer retention rates, net promoter scores (NPS), and customer feedback amongst others
• Employee focused goals: A focus on employee engagement, turnover rates, and the overall health of the corporate culture.
• Social and sustainability goals: Increasingly, NRCs are under pressure to include goals that focus on the environmental and social impacts of the business, such as carbon footprint reduction or supply chain transparency.

NRCs, in collaboration with the board, should ensure that these performance goals are well-aligned with the company’s mission and long-term strategy. They must strike a balance between financial results and non-financial outcomes, thus preventing CEOs from engaging in actions that sacrifice long-term sustainability for short-term financial gain.

To effectively set performance goals that align with stakeholder interests, NRCs can follow these best practices:

1. Incorporate Multi-Dimensional Metrics: Combine Financial targets with employee well being and ESG goals.
2. Strengthen LTIPs: Link significant ratio of pay to multi-year performance.
3. Engage Stakeholders: Proactively address concerns from shareholders and proxy advisory firms.
4. Promote pay parity: Regularly review internal parity to foster equity.
5. Ensure Transparency: Encourage transparent decision making process welcoming critique to drive informed decisions.

Key Takeaways

1. Balancing short term and long term goals, is critical to ensure CEOs deliver immediate results while prioritizing future resilience.
2. NRCs are instrumental in balancing shareholder returns with broader stakeholder priorities.
3. A balanced approach to CEO pay fosters trust, engagement, and sustainable growth.

In conclusion, as Indian corporations evolve, CEO compensation remains under the spotlight. By emphasizing balanced pay structures and integrating robust performance metrics, NRCs can ensure that CEO incentives align with long-term stakeholder value creation. A transparent and well-structured compensation strategy is essential for building trust, motivating leadership, and achieving sustainable growth.

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Nitin Sethi

Chief Executive Officer

Aon Consulting – India and South Asia

Nitin is a board advisor to late-stage private organizations and post-IPO organizations on People Matters with extensive experience in financial services, consumer goods, technology products, and large Indian conglomerates.

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?References:

(1) Aon Executive Compensation Study

(2) Aon Executive Compensation Study, Annual Reports of BSE 100 companies

(3) Aon Analysis based on annual reports of BSE 100 companies, Economic Policy Institute report

(4) Aon Executive Compensation Study (based on 385 participants)

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References

1Aon Executive Compensation Study

2Aon Executive Compensation Study, Annual Reports of BSE 100 companies

3Aon Analysis based on annual reports of BSE 100 companies, Economic Policy Institute report

4 Aon Executive Compensation Study (based on 385 participants)