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Board Level Remuneration in Central Public Sector Enterprises: Myth and Reality
R K Mishra, A Sridhar Raj
The advent of globalisation and the resulting integration of CPSEs with the global economy led to skyrocketing remuneration at all levels, more conspicuously at higher levels in the organisation. The skyrocketing remuneration at higher levels was further fuelled by the return of expatriates who evaluated their remuneration in comparison to the dollar. The conspi-
There is a huge disparity between the compensation packages of the board level functionaries of central public sector enterprises and their private sector counterparts. For making these public undertakings more efficient, the remuneration of their top level executives must match those of private industry. This article argues that to avoid the flight of talent, attractive incentives by way of increased pay packets and perquisites will make executive directors of CPSEs perform better and reduce attrition rates.
R K Mishra (ramkumarmishra@gmail.com) and A Sridhar Raj (sridharraj99@gmail.com) are with the Institute of Public Enterprise, Hyderabad.
T
Metamorphosis of CPSEs
The public sector enterprises in India have been ingrained into the social and economic system to such an extent that there is virtually no sector in the Indian economy, where there is no public sector undertaking. Such a philosophy received wholesome encouragement from the then ruling Congress Party which wanted to establish “a socialistic pattern of society” with public sector enterprises occupying the “commanding heights” of the economy. It is this philosophy that guided the establishment of public sector enterprises in India. But suddenly in the era of globalisation and competition, the government took a ‘U’ turn and decided to leave these enterprises to their fate to compete, survive and grow. The onus of the survival and growth of the CPSEs, particularly those exposed to competition from indigenous companies and MNCs, now shifted to the board of directors of these enterprises. On the one hand, CPSEs were expected to strengthen themselves and compete with the professionally managed organisations, enjoying relatively more freedom in all aspects compared to them, and on the other hand, the remuneration levels were kept abysmally low, which can in no way motivate the higher level functionaries.
cuous difference between the remuneration levels in CPSEs and private companies has resulted in the flight of talents at all levels in CPSEs. There is therefore an urgency to address the issue of reducing this gap in the remuneration of public and private sector executives for the simple reason that there is now an increasing focus on attracting and the retention of talent in CPSEs. This is particularly true with regard to those CPSEs which were operating in monopoly business wherein multinational companies (MNCs) and private sector enterprises have made a foray and are constantly luring away talent from the former by offering attractive salaries and perquisites.
Whereas the boards in the private sector enjoy a high degree of independence, the boards in CPSEs act as only a buffer between the government and the enterprise. The board of directors in CPSEs are responsible and accountable for their acts of omission and commission to various external watchdogs like Parliament, Central Vigilance Commission, the Comp troller and Auditor General and their concerned administrative ministries departments. It is an irony that under these limitations the board of directors of CPSEs are required to compete with their counterparts in the private sector enjoying far greater autonomy and remuneration. Whereas, the remuneration of the board of directors in the private sector all over the world is growing by leaps and bounds as dictated by the market forces, the remuneration and other benefits of their counterparts in the public sector enterprises is determined by the admini strative ministries or the concerned departments.
Review of Literature
Compensating the efforts of the board level functionaries has been an important issue in both the public and private sectors
may 3, 2008
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NOTES
| and this issue had been hogging the | remuneration levels are compared not functionaries in CPSEs reveals some |
| limelight for a long time. As the entire | only in terms of the private sector compastartling facts. |
| burden of ensuring the profitability of any | nies but also with the MNCs where the |
| organisation – public or private – rests on | board level functionaries are paid well-in Board Level Remuneration |
| the shoulders of the board members, it is | different forms and ways so as to reward The remuneration of the board level func |
| but natural that their remuneration gets | the capable individuals. K R Gupta (1969) tionaries2 in CPSEs is determined by the |
| the attention from all quarters. The argu | has also suggested that to attract the best government of India, hence there is no |
| ment is that since the board members exert | available persons on the boards of the remuneration committee3 as mandated |
| their energy and experience towards the | state undertakings, the salaries and allowfor the private sector by the Companies |
| growth of the organisation, they should | ances to be offered to the members of the Act 1956. The remuneration of the board |
| be accordingly. | board should be sufficiently high. members including that of chairman and |
| Such a line of argument is subscribed to | V V Ramanadham (1965), while elabomanaging director (CMD) of CPSEs is |
| by W A Robson (1960: 230). Way back, in | rating upon the remuneration in private determined on just one criterion and that |
| the early 1960s, he said that the remuner | organisations, opines that the compensais the schedule into which CPSEs fall. The |
| ation paid to members of the board is | tion may not only be monetary but may be government of India has categorised CPSEs |
| obviously a matter of considerable impor | provided in many other ways. This is into four schedules viz, schedule ‘A’, |
| tance. If men of the highest ability are to | because to a capable executive, the charm schedule ‘B’, schedule ‘C’ and schedule ‘D’. |
| be attracted to the nationalised industries, | of financial incentives begins to decline The classification is based on certain |
| ability to perform should be regarded as | after a certain stage. quantitative and qualitative factors like |
| the crucial test of eligibility and generous | The marked difference between the investment, capital employed, net sales, |
| salaries must be paid to members of the | remuneration of the board level functionaprospects of expansion and competition |
| governing boards. | ries of the CPSEs and the private sector from rival firms. The pay scales of the |
| The remuneration levels of the CPSE | caught the attention of the Arjun Sengupta board members are determined as per the |
| board members have been deliberately | Committee. The committee opined that schedule of the concerned enterprise. As |
| linked to the civil service and this has had | there is presently a considerable gap per the department of public enterprise |
| its effect on the effective and efficient | bet ween the remuneration of the chief (DPE) survey 2006-07, there are 52 sched |
| functioning of CPSEs.1 To counter this | executives and functional directors of ule ‘A’, 87 schedule ‘B’, 54 schedule ‘C’ and |
| problem an argument has been brought | public enterprises and those of private seven schedule ‘D’ companies.4 |
| to the fore that the board level function | sector companies. The committee felt Normally, the terms and conditions of |
| aries in CPSEs should be paid more remu | that there is a strong case for narrowing service of the board level members inclu |
| neration than that of the civil servants. | this gap. With the integration of the ding remuneration are determined by |
| Such a line of argument has also been | public sector enterprises, it has become the administrative ministries controlling |
| supported by Robson who opined that | incumbent upon the government to the various CPSEs. The DPEs ensures |
| the salary of board level functionaries | ensure that such a gap is minimised so uniformity in remuneration levels for |
| should not be compared with the salary | as to make these enterprises more the board level functionaries as per the |
| scale of the top civil servants, since the | competitive by looking at the compensaclassification of CPSEs into different |
| latter enjoy a life tenure followed by | tion package from a holistic perspective. schedules. The Justice Mohan Committee |
| pension, which is usually not offered to | In fact, the same view is expressed by which was established by the govern |
| board members of a public corporation or | Anwar Divecha (1990), who opines that ment to recommend pay scales for the |
| a similar body. | remuneration is a strategic factor deterboard level functionaries and the execu- |
| A H Hanson (1962) too did not endorse | mining the performance of the employees in tives of CPSEs also adheres to such classifi |
| the linkage of the civil service salary with | an organisation, as it has become a vital cation. The progression of CMD pay scales |
| those of nationalised industries as such a | tool in creating a competitive advantage over a period of time is given in Table 1. |
| linkage did not augur well for CPSEs. He | over the rivals. Table 1 clearly shows the progression of |
| argues that great difficulties have been | Hence, in the competitive environthe board level remuneration over a period |
| caused in nationalised industries owing | ment, best practices have to be adopted of 15 years. |
| to the inadequacy of salaries in securing | to have access to superior in-Table 1: Progression of CMD Pay Scales in CPSEs (Rs) |
| and retaining the services of first-rate men | dividuals in the organisation. Progression of CMD Pay Scales (Effective Dates) |
| in top jobs, whether as board members | Milkovich and Newman Schedule August 1, 1982 January 1, 1987 January 1, 1992 January 1, 1997 |
| or as leading executives. He said that it is | (2005) too have expressed A 4,500-125-5,000 9,000-250-10,000 13,000-500-15,000 27,750-750-31,500 |
| important – though sometimes extremely | such a view as they opine that B 4,000-125-4,500 8,500-200-9,500 12,000-400-14,000 25,750-650-30,950 |
| difficult to achieve – that there should be comparability between public and private | best-pay practices ensure preferential access to superior C 3,500-100-4,000 7,500-200-8,500 10,000-400-12,000 22,500-600-27,300 D 3,000-100-3,700 6,500-175-7,550 9,000-300-10,500 20,500-500-25,000 |
| enterprise in respect of the salaries and | employees who in turn can be the source The Mohan Committee did not deviate |
| conditions of staff. This is particularly | of compe titive advantage. A peep into from the established pattern of remunera |
| true in the era of globalisation when the | the remuneration of the board level tion hike.5 However, things have changed |
| Economic & Political Weekly may 3, 2008 | 65 |
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drastically since the Justice Mohan Committee recommendations came into effect on January 1, 2007 with the remuneration of CEOs and the board level functionaries skyrocketing in all sectors of the eco nomy. It is in this situation that the govern ment of India constituted the Second Pay Revision Committee under justice M J Rao to suggest remunerations for the board level functionaries, executives below the board level and non-unionised supervisory employees. The committee is to make recommendations to harmonise the functioning of CPSEs with the demands of the emerging national and global economic scenario (No 2 (10)/06/DPE-WC, GoI 2006). One of the onerous and the challenging responsibilities of the committee is to balance the pay scales of board members in line with the global scenario and it also address issues like affordability of CPSEs to meet the burden arising from such a situation.
The remuneration of the board level functionaries of Videsh Sanchar Nigam (VSNL), once a public sector enterprise, is a pointer to the fact that there is a need to align the remuneration of the executive directors of CPSEs, with the prevailing market conditions, so as to ensure that the expertise and experience does not fly away from these public sector enterprises. The progression of remuneration of the board level functionary of VSNL is illustrated in Table 2, which clearly points out the fact that there is a need for re-designing the remuneration of similar functionaries in CPSEs.
A cursory look at the annual reports of a few “navratna” CPSEs regarding the structure of emoluments of the board level functionaries reveals that there is not much variance between the remuneration among the CMDs of different CPSEs
Table 2: Remuneration of the Board Level Functionary of Videsh Sanchar Nigam (amount in rupees lakh)
| Year | Salary | Perquisites | Commission Total Remuneration | |
|---|---|---|---|---|
| 2002-03 | 18.08 | 7.38 | 12 | 37.46 |
| 2003-04 | 21.89 | 8.34 | 12 | 42.23 |
| 2004-05 | 26.09 | 9.42 | 17 | 52.51 |
| 2005-06 | 44.85 | 3.75 | 25 | 73.60 |
| 2006-07 | 44.56 | 6.41 | 35 | 85.97 |
Source: Annual Reports of VSNL.
except that of National Thermal Power Corporation (NTPC). The CMD of Bharat Heavy Electricals (BHEL) received Rs 12.42 lakh during the year 2005-06 which was slightly more than the remuneration of the CMD of Bharat Petroleum Corporation (BPCL) who received Rs 11.94 lakh during the year 2005-06 which in turn is slightly more than the CMD of Gas Autho rity of India (GAIL) who received Rs 10.55 lakh during the year 2005-06. On the other hand, the CMD of Oil and Natural Gas Corporation (ONGC) received Rs 8.11 lakh during the year 2005-06, whereas the
| CMD | of | NTPC | received |
|---|---|---|---|
| Table 3: Total Remuneration | Rs 21.72 lakh during the | ||
| of CMDs in Select | year 2005-06, which is at | ||
| CPSEs (Rs lakh) Total Remuneration | the higher end of | the | |
| CPSE 2005-06 2006-07 | spectrum. | ||
| BHEL 12.42 | 13.05 | A closer examination | |
| ONGC 8.11 | 12.87 | (Table 3) of the remuner- | |
| BPCL 11.94 | 16.19 | ation of the CMDs of some | |
| NTPC 21.72 | 9.35 | of the navratna compa- | |
| GAIL | 10.55 | 20.49 | nies reveals a marginal |
| Source: Annual Reports. | increase in the pay ex |
cept in the case of GAIL and NTPC. In the case of BHEL, the CMD received Rs 13.05 lakh during the year 2006-07 which was
5.07 per cent more than the remuneration drawn in 2005-06. In the case of ONGC, the CMD received Rs 12.87 lakh during the year 2006-07 which was 58.69 per cent more than what was drawn in 2005
06. The trend of the CMD remuneration was not very different in the case of BPCL in which case the CMD received a remuneration of Rs 16.19 lakh in 2006-07 which was 35.59 per cent more than the previous year. However, in the case of GAIL, there was a sharp increase of 94.21 per cent in the remuneration of the CMD from Rs 10.55 lakh during 2005-06 to Rs 20.49 lakh during 2006-07.
Tables 4 and 5 reveal the total remuneration and its componental break-up in the case of BHEL, ONGC, BPCL, NTPC and GAIL. Tables 4 and 5 show that in 2005-06, the fixed pay component was highest in the case of BHEL turning out around 98.47 per cent of the total pay and the variable pay was just 1.53 per cent. However, during the year 2006-07, the fixed pay component came down to 97.24 per cent and variable pay was doubled to 2.76 per cent. The trend was very similar in the case of BPCL, NTPC and ONGC. All told, the fixed component of salary was on the decline and the variable component was on the rise.
Table 6 depicts another interesting dimension of the relationship of remunerations of the board level functionaries to the net profits of CPSEs. This turned out to be skewed as well as out of line with the existing economic environment in which CPSEs are operating. The net profits of various CPSEs such as SAIL, BPCL, GAIL, NTPC and BHEL for the year 2005-06 was Rs 4,928 crore, Rs 704 crore, Rs 2,310 crore, Rs 5,820 crore and Rs 1,679 crore, respectively. The remuneration of the board level functionaries of these CPSEs for the corresponding period stood at Rs 0.6852 crore, Rs 0.4462 crore, Rs 0.7838 crore, Rs 0.9476 crore and Rs 0.6789 crore, respectively.
The percentage of remuneration of the board level functionaries to net profit was
0.01 per cent in the case of SAIL, 0.06 per cent in the case of BPCL, 0.03 per cent in the case of GAIL, 0.02 per cent in the case of NTPC and 0.04 per cent in the case of BHEL during the year 2005-06. The scenario is not very different during the year 2006-07 as well although the net
Table 4: Percentage of Fixed Pay and Variable Pay to Total Pay of CMDs (2005-06, Rs lakh)
CPSE Fixed Variable Total Fixed Pay % of Variable Pay % of Pay Pay Pay Total Pay Total Pay
BHEL 12.23 0.19 12.42 98.47 1.53
ONGC 7.57 0.54 8.11 93.34 6.66
BPCL 9.73 2.21 11.94 81.49 18.51
NTPC 20.23 1.49 21.72 93.14 6.86
GAIL 9.36 1.19 10.55 88.72 11.28
Source: Annual reports of the concerned enterprise.
Table 5: Percentage of Fixed Pay and Variable Pay to Total Pay of CMDs (2006-07, Rs lakh)
CPSE Fixed Variable Total Fixed Pay % of Variable Pay % Pay Pay Pay Total Pay of Total Pay
BHEL 12.69 0.36 13.05 97.24 2.76
ONGC 10.53 2.34 12.87 81.82 18.18
BPCL 10.16 6.03 16.19 62.75 37.25
NTPC 7.94 1.41 9.35 84.92 15.08
GAIL 19.53 0.96 20.49 95.31 4.69
Source: Annual reports of the concerned enterprise.
Table 6: Remuneration of CPSE Board Level Functionaries and Percentage to Net Profits
(2005-06 and 2006-07, amount in rupees crore)
CPSE Net Profit Total Remuneration of Board % of Net Profit 2005-06 2006-07 2005-06 2006-07 2005-06 2006-07
SAIL 4,928 6,202 0.6852 0.7626 0.01 0.01
BPCL 704 2,356 0.4462 0.8301 0.06 0.04
GAIL 2,310 2,387 0.7838 1.1203 0.03 0.05
NTPC 5,820 6,865 0.9476 0.6676 0.02 0.01
BHEL 1,679 2415 0.6789 0.8065 0.04 0.03
BEL 583 NA 0.7463 NA 0.12 NA
HAL 771 1,148 0.5309 0.9014 0.06 0.07
HPCL 405 1,571 0.73 0.81 0.18 0.05
IOL 4,915 7,499 2.58 2.56 0.05 0.03
MTNL 580 NA 0.341 NA 0.05 NA
ONGC 14,430 15,642 0.869 0.905 0.006 0.005
PFC 971 986 0.7748 1.0086 0.07 0.1
Source: Annual reports of respective enterprise.
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NOTES
profit of CPSEs like SAIL, BPCL, GAIL, NTPC and BHEL increased. In fact in the case of CPSEs like BHEL the net profits increased by 44 per cent. In the case of BPCL the net pro fits increased from Rs 704 crore during the year 2005-06 to Rs 2,356 crore during the year 2006-07 which was 235 per cent higher as compared to the preceding year. However, although the remuneration of the CMD of BHEL increased to Rs 13.05 lakh during the year 2006-07 compared to the preceding year, the increase was only of 5.07 per cent. Similarly, the CMD’s remuneration in BPCL increased by 35.59 per cent during the year 2006-07 from the previous year. The total board level remuneration during the year 2006-07 too did not undergo significant change with the increased net profit.
A cursory glance at the remuneration of the board level functionaries in the private sector reveals the glaring differences which exist while fixing the remuneration for those individuals who are shouldered with the responsibility of spearheading CPSEs in the right direction in a global economy. As per the annual reports of the respective companies, the CEO remuneration in all the sectors of the economy is increasing by leaps and bounds. The salary of the managing director of Tata Steel for the year 2006-07 stood at Rs 59.20 lakh, the salary of CMD of Larsen and Toubro (L&T) was Rs 120 lakh during the year 2006-07 and the managing director of Ashok Leyland drew a salary of Rs 26 lakh during the year 2006-07. Even the perquisites received by these individuals are very high. The perquisites received by the managing director of Tata Steel during the year 2006-07 stood at Rs 18.63 lakh, the perquisites of CMD of L&T during the same year stood at Rs 15 lakh and that of the managing director of Ashok Leyland was Rs 57.28 lakh during the same period.
As per the annual report of 2006-07, the total remuneration received by the managing director of Ashok Leyland stood at Rs 187.28 lakh, the total remuneration of managing director, Tata Steel was Rs 247.83 lakh the total remuneration of CMD of L&T stood at Rs 463.08 lakh (minus retirement benefits) and the managing director, Maruti Udyog drew Rs 210.77 lakh.
As compared to these levels of salaries of the CEOs in the private sector, the total
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remuneration of CMDs of CPSEs was paltry. The salary differentials are acute, incomparable and this calls for a paradigm change to create a level playing field for CPSEs. A H Hanson (1962), analysing this problem in the case of the nationalised industries of the UK, fiercely argued for the remuneration parity with the private sector.
Hence, there is a need to explain to the people as well as to Parliament that in order to make the CPSEs more autonomous and professional there is a need to raise the remuneration levels. This will attract the best talent, on the one hand, and enhance the effectiveness of the talented personnel, on the other. Such a view is supported by V V Ramanadham (1965) as well who opined that people and Parliament must be clearly told that in the interest of efficient administration of their enterprises they will have to reconcile to pay scales that are necessary to tempt the ablest persons available, at least so long as it is not possible for the government to limit effectively the salaries available elsewhere.
In fact, the First Disinvestment Commission Report, 1997 was right in expressing its frank views on the chairman and managing directors’ remuneration expressing that with the increasing opportunities in the private sector, the remuneration levels in CPSEs too should be stepped up to levels comparable with the private sector. In the words of the commission:
With increasing opportunities being available in the private sector, the public sector has, of late, witnessed major exodus of manpower at the senior and middle levels. One widely accepted reason is that the remuneration of PSU managers is generally poor across the board. Specifically, the remuneration (salary and allowances) of PSU chief executives is significantly lower than that for the corresponding position in the private sector. In order to attract and retain talent for these important posts, it will be necessary to raise the salary (basic plus allowances) of CMDs in schedule (A) post to at least Rs 50,000 per month immediately and should be reviewed and brought in line with industry in a gradual fashion.
Concluding Observations
The opening of the economy coupled with the increasing competition from private companies and the MNCs have necessitated CPSEs to fine-tune their human resource management, particularly compensation and reward management. Such a change is further fuelled by the attempt of the government to integrate CPSEs more and more with the global economy. Such an integration of CPSEs with the global economy puts pressure on CPSEs to align their compensation and reward management with the private companies and MNCs as well. CPSEs are caught between the devil and the deep sea. As the senior personnel are being enticed by the private companies by offering hefty remuneration packages, CPSEs are helpless in paying them in line with the competitive market conditions. Adherence to strict limits and ceilings of the board level remuneration has resulted in the flight of talent from CPSEs to the private sector.
Notes
1 For determining fair remuneration in CPSEs, the salaries of civil servants are taken as benchmark, although the nature of work is entirely different in the two cases.
2 Board level remuneration implies the salaries, perks and other allowances paid to whole-time board level functionaries.
3 The companies governed by the Companies Act 1956 are to establish a remuneration committee to determine the remuneration of board level functionaries.
4 The categorisation of CPSEs into different schedules is also being questioned as such a categorisation has outlived its concept as many CPSEs in schedule B are performing well in the recent past.
5 According to Mohan Committee, fair compensation meant alignment and benchmarking with the salaries of civil servants.
References
Divecha, Anwar (1990): Remuneration of a Manager: Dilemma, Dimensions, Dissensions, Dichotomies, Directions, Sterling Publishers, New Delhi, p 4.
Government of India (1997): First Disinvestment Commission Report, Development of Disinvestment, p 42.
Milkovich, George T and Jerry M Newman (2005): Compensation, Tata McGraw-Hill, New Delhi, p 51.
Gupta, K R (1969): Issues in Public Enterprises, S Chand & Co, Delhi, p 205.
Hanson, A H (1962): Managerial Problems in Public Enterprise, Asia Publishing House, pp 80-83.
Khera, S S (1963): Government in Business, Asia Publishing House, Bombay, p 62.
Nigam, R S (1980): Issues in Public Enterprises (ed), Pragati Publications, Delhi, p 88.
Ramanadham, V V (1965): The Working of the Public Sector (ed), Allied Publishers, Bombay, pp 167-68.
SCOPE (1990): Reports/Recommendations of Various Committees on Public Enterprises, Standing Conference of Public Enterprises, New Delhi, p 50.
Robson, W A (1960): Nationalised Industry and Public Ownership, George Allen and Unwin, London, p 230.
