Executive pay, ESOPs and ESG-linked pay

Executive pay is where governance becomes personal. Pay can align managers with shareholders, when it rewards long-term results. It can also do the opposite, when it rewards size, short-term numbers or simply being in charge.

In most Western companies, the worry is that hired CEOs pay themselves too much. In India, a different issue often matters more: promoters who are also executives can set their own pay, and their votes help approve it. Minority shareholders have a few tools to push back, mainly through special resolutions and disclosure rules.

Employee stock options (ESOPs) add another layer. They can be a fair way to share success with employees, but they also cost money and dilute existing shareholders, even when the profit and loss account makes them look cheap.

Legal limits (Companies Act Section 197)

• Total pay to all directors and managers of a public company: up to 11% of net profit (calculated under Section 198)
• Any one managing director or whole-time director: up to 5%; all whole-time directors together: up to 10%
• Non-executive directors together: up to 1%, or 3% if there is no managing or whole-time director
• Pay above these limits needs a special resolution of shareholders, and lenders' approval if the company has defaulted on its debt
• When profits are low or absent, Schedule V of the Act sets the limits

Extra rules for listed companies (SEBI LODR Regulation 17(6))

• Promoter executives: a special resolution is needed if a promoter or promoter group member who is an executive director is paid more than ₹5 crore or 2.5% of net profit in a year, whichever is higher. Where there is more than one such director, the test is whether their total exceeds 5% of net profit.
• Non-executive directors: a special resolution is needed if one non-executive director is paid more than half of the total pay of all non-executive directors.

The nomination and remuneration committee

The NRC must set a remuneration policy for directors, key managerial personnel and senior management, balancing fixed and variable pay and linking pay to performance. The policy must be published.

Disclosure

The board's report must show the ratio of each director's pay to the median employee's pay, the percentage increase in pay for directors and key managers, and the increase in median employee pay. These figures make it easy to compare pay growth with profit growth and with workers' pay.

Say-on-pay in India

India has no general yearly advisory vote on pay of the kind used in the UK or the US. Instead, shareholders vote on pay only in specific cases: pay above the legal limits, high promoter pay, and new ESOP schemes.

ESOPs

Listed company share schemes follow the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations 2021:

• A new scheme needs a special resolution of shareholders.
• Options must vest over at least one year.
• Promoters, members of the promoter group, and directors who hold more than 10% of the company are generally not eligible.
• Under Ind AS 102, the fair value of options is charged as an expense over the vesting period.

Pay in banks

RBI's compensation rules for private sector and foreign banks require a meaningful share of top executives' pay to be variable, with part of it deferred and subject to malus and clawback if risks turn out badly.

ESG-linked pay

Some companies link part of variable pay to ESG goals, such as safety, emission cuts or diversity. This is useful only if the targets are material, measurable and carry real weight in the pay formula.