EXECUTIVE COMPENSATION PRACTICES IN INDIA

Compensation or remuneration for the executive managers is different from compensation for
other employees in most the organizations. Executive compensation covers employees that
include presidents of company, chief executive officers (CEOs), chief financial officers
(CFOs), vice presidents, occasionally directors of the company, and other upper-level
managers. These high level employees are paid executive compensation.
Usually only those members of your most senior management team qualify for executive pay.
It is usual the members of the “C-Suite.” (A widely-used slang term used to collectively refer
to a corporation's most important senior executives. C-Suite gets its name because top senior
executives' titles tend to start with the letter C, for chief, as in chief executive officer, chief
operating officer and chief information officer.)

Executive compensation differs substantially from typical pay packages for either hourly
workers or salaried management and professionals in that executive pay is heavily biased
toward rewards for actual results. Hence if a company underperforms, the executives
typically receive a smaller fraction of their potential pay. Conversely, if a company meets its
annual objectives and the stock price responds long term, the executives stand to receive a
much larger payout.  

This section of the site describes the typical Executive Compensation program and explains
the most commonly used terms. It includes several charts, including one below that shows the
share of compensation that is at risk by executives, as compared with managers and hourly
employees.

The pay packages given to the senior executives of corporations often consist of six
components:

 Base salary
 Performance based annual incentive (bonus)
 Performance based long term incentive
 Benefits
 Executive perquisites
 Contingent Payments
Executive pay is structured to reward company performance and align executive pay with
shareholder value. As a result, unlike most other employees, a majority of executive pay is at-
risk; in other words, executives may never receive it. However, if executives and the
company perform well, they along with the company's shareholders stand to gain much more
from superior performance.

Components of Executive Compensation

 Base salary
 Incentive pay, with a short-term focus, usually in the form of a bonus
 Incentive pay, with a long-term focus, usually in some combination of stock awards,
option awards, non-equity incentive plan compensation
 Enhanced benefits package that usually includes a Supplemental Executive
Retirement Plan (SERP)
 Extra benefits and perquisites, such as cars and club memberships
 Deferred compensation earnings

Executive Compensation
Many organizations, especially large ones, administer executive compensation somewhat
differently than compensation for lower-level employees. An executive typically is someone
in the top two levels of an organization, such as Chief Executive Officer (CEO), President, or
Senior Vice-President. As Figure shows, the common components of executive compensation
are salaries, annual bonuses, long-term incentives, supplemental benefits, and perquisites.

Apple CEO Tim Cook's salary doubled in 2014

Apple CEO Tim Cook got a fat cash bonus that brought his total compensation to $9.2
million in 2013. That's more than double what he received in the previous year (2013), as the
company enjoyed a upsurge in sales and profit fueled by the popularity of its new, oversized
iPhone 6 models.
Cook's pay for fiscal 2014 included $1.7 million in salary and $6.7 million in incentive pay
that was awarded by Apple's board after he beat the performance goals that directors had set
for him, according to a regulatory filing. He also received $774,176 in other compensation,
including a 401k contribution, company-paid insurance premiums and security expenses.
Apple reported $182.8 billion in revenue for the fiscal year that ended September 27 of 2014
and $39.5 billion in profit, after seeing record sales last fall. Sales of iPhones rose 21% in the
company's fourth quarter, which made up for a decline in sales of iPads.
Two objectives influence executive compensation:

1. Ensuring that the total compensation packages for executives are competitive with the
compensation packages in other firms that might employ them, and 
2. Tying the overall performance of the organization over a period of time to the
compensation that is paid to executives. It is the second objective that critics of
executive compensation believe is not being met. In many organizations, it appears
that the levels of executive compensation may be unreasonable and not linked closely
to organizational performance.

Elements of Executive Compensation

At the heart of most executive compensation plans is the idea that executives should be
rewarded if the organization grows in profitability and value over a period of years. Because
many executives are in high tax brackets, their compensation often is provided in ways that
offer significant tax savings. Therefore, their total compensation packages are more
significant than their base pay. Especially when the base salary is $1 million or more, the
executive often is interested in the mix of items in the total package, including current and
deferred compensation.

EXECUTIVE SALARIES

Salaries of executives vary by type of job, size of organization, region of the country, and
industry. On average, salaries make up about 40-60% of the typical top executive's annual
compensation total. At times publicly traded company to hike or reduce the salary of
executive based on performance, approval may be needed from  directors and shareholders .
EXECUTIVE BONUS PLANS

Because executive performance may be difficult to determine, bonus compensation must

reflect some kind of performance measure if it is to be meaningful. As an example, a retail
chain with over 250 stores ties annual bonuses for managers to store profitability. The
bonuses have amounted to as much as 35% of a store manager's base salary.
Bonuses for executives can be determined in several ways. A discretionary system whereby
bonuses are awarded based on the judgments of the chief executive officer and the board of
directors is one way. However, the absence of formal, measurable targets is a major
drawback of this approach. Also, as noted, bonuses can be tied to specific measures, such as
return on investment, earnings per share, or net profits before taxes. More complex systems
create bonus pools and thresholds above which bonuses are computed. Whatever method is
used, it is important to describe it so that executives trying to earn bonuses understand the
plan; otherwise, the incentive effect will be diminished.

PERFORMANCE INCENTIVES-LONG TERM VS. SHORT TERM

Performance-based incentives attempt to tie executive compensation to the long-term growth

and success of the organization. However, whether the emphasis is really on the long term or
merely represents a series of short-term rewards is controversial. Short-term rewards based
on quarterly or annual performance may not result in the kind of long-run-oriented decisions
necessary for the company to continue to do well.

A stock option gives an individual the right to buy stock in a company, usually at an
advantageous price. Different types of stock options have been used depending on the tax
laws in effect. Stock options have increased in use as a component of executive compensation
during the past 10 years, and employers may use a variety of very specialized and technical
approaches to them, which are beyond the scope of this discussion. However, the overall
trend is toward using stock options as performance-based long-term incentives.

Where stock is closely held, firms may grant "stock equivalencies" in the form of phantom
stock or share appreciation rights. These plans pay recipients the increased value of the stock
in the future, determined by a base valuation made at the time the phantom stock or share
appreciation rights are given. Depending on how these plans are established, the executives
may be able to defer taxes or be taxed at lower capital-gains tax rates.
BENEFITS FOR EXECUTIVES

As with benefits for non-executive employees, executive benefits may take several forms,
including traditional retirement, health insurance, vacations, and others. However, executive
benefits may include some items that other employees do not receive. For example, executive
health plans with no co-payments and with no limitations on deductibles or physician choice
are popular among small and middle-sized businesses. Corporate-owned life insurance on the
life of the executive is popular and pays both the executive's estate and the company in the
event of death. Trusts of various kinds may be designed by the company to help the executive
deal with estate issues. Deferred compensation is another possible means used to help
executives with tax liabilities caused by incentive compensation plans.
EXECUTIVE PERQUISITES

In addition to the regular benefits received by all employees, executives often receive benefits
called perquisites. Perquisites (perks) are special executive benefits—usually noncash items.
Perks are useful in tying executives to organizations and in demonstrating their importance to
the companies. It is the status enhancement value of perks that is important to many
executives. Visible symbols of status allow executives to be seen as "very important people
(VIPs)" both inside and outside their organizations. In addition, perks can offer substantial
tax savings because many perks are not taxed as income.
PRINCIPLES OF FIXATION OF WAGES AND SALARY

Salary or wage” means all remuneration (other than remuneration in respect of over-
time work) capable of being expressed in terms of money. Wages are defined broadly as any
economic compensation paid by the employer to his labourers under some contract for the
services rendered by them. In its actual sense which is prevalent in the practice, wages are
paid to workers which include basic wages and other allowances which are linked with the
wages like dearness allowances, etc. , but does not include-

(i) Any other allowance which the employee is for the time being entitled to;
(ii) the value of any house accommodation or supply of light, water, medical
attendance or other amenity or of an service or of any concessional supply of food
grains or other articles;
(iii) Any traveling concession;
(iv) Any Bonus (including incentive, production and attendance bonus);
(v) Any contribution paid or payable by the employer to any pension fund or
provident fund or for the benefit of the employee under any law for the time being
in force;
(vi) Any retrenchment compensation or any gratuity or other retirement benefit
payable to the employee or any ex gratia payment made to him;
(vii) Any commission payable to the employee.

Principles of Wage Determination

The basic principle of wage and salary fixation is that it should be based on the relative
contributions of different jobs and not on the basis of who the job holders are. If this principle
is adopted, the first requirement is to identify the likely contributions of different jobs. This is
what job evaluation precisely does. It provides the information about what is the worth of a
job in terms of its contributions to the achievement of organizational effectiveness.

Overcoming Anomalies

Job evaluation, if carried on periodically and objectively, helps in overcoming various

anomalies which may develop in an organization over the period of time with regard to
compensation management. Knowles and Thomposon have identified that there are following
anomalies and evils which may develop in an organization and may be overcome by job
evaluation:

1. Payment of high wages and salaries to persons who hold jobs and Positions not
requiring great skill, effort and responsibility;
2. Paying beginners less than that they are entitled to receive in terms of What is
required of them?
3. Giving a raise to persons whose performance does not justify the raise;
4. Deciding rates of pay on the basis of seniority rather than ability;
5. Payment of widely varied wages and salaries for the same or closely Related jobs and
positions; and
6. Payment of unequal wages and salaries on the basis of race, sex, religion, or political
differences.

As the major production cost, wages affect profits, business investment, competitiveness, and
are a cost push inflationary factor. As the major income in the economy, wages affect
standard of living, income distribution and poverty, and demand pull inflation. As the source
of wage disputes is the employer treating wages as their major cost, and the employee
viewing wages as their major income.

Norms for fixation of wages in industry.

1. While computing the minimum wages, the standard working class family should be
considered as consisting of four consumption units and the earnings of women,
children and adolescents should be excluded.
2. The minimum food requirements should be determined on the grounds of a net intake
of 2700 calories as laid down by Akroyd for a normal adult in India.
3. Clothing needs should be established on the basis of a per capita consumption of
16.62 meters per year.
4. As regards housing, the minimum wages should be determined from the standpoint of
the rent corresponding to the minimum area specified under the government Industrial
Housing Scheme.
5. Miscellaneous expenditure on items such fuel, lighting etc. should from 20 per cent of
the total minimum wage. The resolution further prescribes that the authorities
involved in the issue should justify any deviation from these norms.
The following principles have always been the bases of the wage determination process. All
are economically valid. At different stages they have collectively, and singularly, been used
to determine wage increases.

1. Preserving real income: This is the argument used by employees and Unions
viewing wages as an income. Following this principle usually results in wages being
indexed to inflation. In periods of rising inflation, indexation becomes a problem of
an institutionalized wage-price spiral. Underlying aspects that have also impacted on
real wage preservation arguments have been a "basic" minimum wage, and
comparative wage justice.
2. Labour productivity: A valid economic theory connects wages to labour
productivity. Conflict arises over the measurement of productivity. Rewarding labour
with a wage increase when technology, and/or capital investment, increases labour
efficiency may not be justified.
3. The capacity of business to afford wage increases: This emphasizes wages as a cost
of production, and the threat of wage increases to squeeze profits. This "capacity"
argument is that followed by business owners.
4. The capacity of the Economy to absorb wage increases: This "capacity" argument
views the macro impact of wage increases on inflation, competitiveness, and other
aspects of internal and external balance; as well as the affect on business profits and
investment from 3. This is the main argument of the Federal Government recognizing
the macro policy potential of an Incomes Policy to address external and internal
balance goals to supplement demand management policies, and the effects on income
distribution.
5. Supply and Demand of labour: The labour market conditions or supply and demand
forces operated at the national, regional and local levels, and determine organizational
wage structure and level. If the demand for certain skills and the supply are low, the
result is a rise in the price to be paid for these skills. The other alternative is to pay
higher wages if the labour supply is scarce, and lower wages when it is excessive.
6. Prevailing Market rate: This is also known as the ‘comparable wage’ or ‘going
wage rate’ and is most widely used criterion. An organization’s compensation policies
generally tend to conform to the wage –rates payable by the industry and the
community. It is observed: Some Companies pay on the high side of the market in
order to obtain goodwill or to insure adequate supply of labour, while other
 organizations pay lower wages because economically they have to, or because by
lowering hiring requirements they could keep jobs adequately manned.
7. Living wage: This means that wages paid should be adequate to enable an employee
to maintain himself and his family at a reasonable level of existence. However,
employers do not generally favor using the concept of a living wage as a guide to
wage determination because they prefer to base the wages of an employee on his
contribution rather on his need.
8. Managerial Attitudes: Top management’s desire to maintain or enhance the
company’s prestige is a major factor in the wage policy of a number of firms. Desires
to improve or maintain morale, to attract high caliber employees, to reduce turnover,
and to provide a high living standard for employees as possible also appear to be
factors in management’s wage policy decisions.
9. Psychological and social factors: these determine in a significant measure how hard
a person will work for the compensation received or what pressures he would exist to
get his compensation increased. Psychologically, persons perceive the level of wages
as a measure of success in life, people might feel secure, has an inferiority complex,
seem inadequate or feel the reverse of all these. Sociologically and ethically, people
feel that “equal work should carry equal wages” that ‘wages should be commensurate
with their efforts’ that they are not exploited and “that no distinction is made on the
basis of caste, color, sex or religion.” To satisfy the conditions of equity, fairness and
justice, a management should take these factors into consideration.

Wages in the public and private sectors

If we look at the wage trends in both public and private sectors, we observe that the
growth of regular formal jobs has not been substantial in the post reform period.
Nevertheless, the public sector has been able to absorb more jobs in the form of casual or
contractual work. There is some debate as to whether this means an improvement or a decline
in terms of working conditions, as there is a rise in employment in the public sector without
any social protection and other benefits, that is, a casualization of the workforce. However,
the increase in the share of public work could also mean a movement of workers from the
private to the public sector; some argue that this may not indicate a deterioration in
employment conditions, since wages rose and underemployment declined for those workers
who moved from the private to the public sector (Ghose, 2016).
 Looking at figure 22, we can deduce that real wages increased for all categories of
workers between 2004–05 and 2011–12. Workers in the private sector registered higher real
wage growth in this period than workers in the public sector. The highest growth was for
casual workers in the private sector (59 per cent), followed by regular informal17 workers in
the private sector (42 per cent). Within the public sector, the highest wage growth was for
regular formal workers (38 per cent), followed by regular informal workers (31 per cent) and,
finally, casual workers (22 per cent).

As a result of these trends, casual wages in the private sector (INR 143) have caught up with
the casual wages in the public sector (INR 138), though the average wages for casual workers
remain generally low (see figure 23). These results are quite similar to those noted by Unni
(2005), who also observed that the wage earnings of casual workers in the informal sector are
higher than those of casual workers in the formal sector. Overall, however, despite high wage
growth in the private sector, figure 23 shows that the highest wages in the Indian labour
market are found in the public sector. In particular, regular formal workers (average daily
wage INR 750) and regular informal workers (average daily wage INR 411) in the public
sector are the best-paid categories.18 The wages of workers in the private sector are
marginally higher than those of casual workers in the public sector, but substantially lower
than those of other workers (figure 23)

Table 8 shows that wage differences for regular workers between public and private sectors
have reduced in the secondary and tertiary sectors, but increased marginally in the primary
sector. However, on average, in 2011–12, the wage difference of regular workers in the
public sector was 3.1 times higher in the primary sector, 2.6 times higher in the tertiary sector
and 2.3 times higher in the secondary sector (table 8). Wages of casual workers in the public
sector reduced in the primary sector compared to other sectors, and the ratios are quite similar
across sectors. In short, remunerations are better in the public sector, but only for regular
workers. For the large majority of workers who are casual, wages remain low. All of this
demonstrates that a large majority of workers in the Indian labour market still have low
wages, and lack job security as well as social protection (IHD, 2014; Papola, 2008).

While we observe that there has been an increase in the wages between 2004– 05 and 2011–
12 across different groups of workers in various sectors, how does this increase impact on the
incomes of the self-employed workers? A large proportion of casual workers and a
significant proportion of regular/salaried workers are dependent on self-employment for
various goods and services. To understand the impact, we look at the trends in self-
employment incomes over the past decade using the special informal sector survey conducted
by the NSSO for the periods 1999–2000 and 2009–10. The self-employed comprise almost
50 per cent of the workforce in 2009– 10 and they are to a large extent dependent on local
markets and domestic consumption. Their incomes are to that extent dependent on wage
earners, as mentioned before. Over the past decade, we observed that their incomes overall
have grown, most strongly in transport, storage and communications, and in lowskilled
services (table 9), though self-employed workers in high-skilled services have seen their
incomes fall marginally. The increase in incomes for the self-employed in the manufacturing
sector is largely due to outsourcing and subcontracting arrangements with the formal sector,
which also gave a boost to the transport, storage and communications sector. The increase in
income among the salaried and managerial class led to increased demand for personal
services, which are lowskilled in nature, thus leading to a rise in the incomes of those
providing them.

Figure 22 Evolution of daily real wages, public and private workers (base year 2004–05 = 100)

Figure 23 3. Real average daily wages, public and private sectors (INR, base year 2011–12)
Figure 23 3. Real average daily wages, public and private sectors (INR, base year 2011–12)

Table 8 Wage ratios between public and private workers, by economic sectors

Table 9 Incomes of self-employed in the overall economy, 1999–2000 and 2009–10 (INR in real
terms, base year 1999–2000)