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Director’s remuneration – aligning it with shareholders expectation (Part 2) - MMJC
In our earlier article we have seen the governance issues pertaining remuneration to whole time directors. In this article we shall have a look at few more governance concerns relating to remuneration to whole time directors.
1.Skewed Remuneration and Unfair Practices:
Skewed remuneration practices occur when compensation disproportionately favours certain directors, often promoters, without clear justification or alignment with performance. Such imbalances can undermine shareholder trust and raise concerns about fairness and good governance.
The following table depicts the rationale given by the proxy advisors on their common meanings or theme are as follows:
| Sr. No. | Concern Type | Description | Examples |
| 1 | Skewed Remuneration Practices | The proposal to authorize the Nomination and Remuneration Committee (NRC) to pay performance-linked incentives beyond the specified limit without further shareholder approval undermines shareholder authority. | A company faced governance concerns over its Chairman and Managing Director’s proposed remuneration, which is more than 3.5 times that of non-promoter Executive Directors. Additionally, there are concerns about the concentration of power due to holding both the Chairman and Managing Director roles, which centralizes authority in one individual. |
| 2 | Skewed Remuneration Policy Favouring Promoters | The remuneration policy is skewed in favour of the Promoter Managing Director, whose pay is significantly higher than all other Executive Directors combined, lacking any variable component for non-promoter directors. | Concerns have been raised regarding the proposed revision in the gross annual remuneration of Executive Directors. The Promoter Managing Director’s pay is nearly six times the average remuneration of non-promoter executive directors, and there is no clear explanation for the remuneration revision. |
| 3 | Multi-Year Guaranteed Bonuses and Skewed Remuneration Practices | Remuneration practices are skewed towards promoter directors, with guaranteed bonuses or commissions that are not linked to performance. | Concerns about remuneration practices include guaranteed bonuses for directors, removing the link between performance and pay. Recommendations suggest that variable pay should be performance-based, determined annually, and approved by shareholders. There are also concerns about governance issues related to the concentration of power due to the Chairman holding an executive position. |
| 4 | Unjustified Pay Increases Despite Employee Pay Cuts | The proposed remuneration lacks an absolute cap on bonuses, giving the Board discretionary power to alter remuneration terms, which undermines shareholder authority. There are concerns over a proposed salary hike for an executive despite significant pay cuts for other employees, raising questions about fairness and governance practices. | Concerns were raised for approval sought for a revised remuneration package for an executive, which includes a substantial pay increase despite significant pay cuts for other employees. |
| 5 | Unfair Remuneration Amid Cost-Cutting Measures | Concerns over excessive remuneration for Executive Directors during a period of cost-cutting measures like employee layoffs and pay cuts. The increases in fixed pay appear to be unfair, and the involvement of an Executive Director in the Nomination and Remuneration Committee raises further governance concerns about fairness and ethical conduct. | Governance concerns were raised over proposed remuneration increases for executive directors despite cost-cutting measures, such as layoffs and pay cuts, due to financial constraints. This is viewed as an example of skewed remuneration, where promoters appear to be extracting an ownership premium from the company, and raises ethical questions about the decision-making process. |
| 6 | Skewed Remuneration in case of two promoter families are controlling business | Remuneration paid to directors belonging to one promoter family is consistently more than the other promoter family. | It was observed that promoters of company were almost of same age (~70 years) and experience of approx. 40-45 years. There was a slight difference in the age and experience of the younger generation of these promoter families. There was an experience gap of few years between younger generation of both promoter families. But it was observed that the remuneration paid to one promoter family in previous two FYs is significantly lower than that paid to other promoter family. Also looking at standalone remuneration of directors leaving families aside, the remuneration of one whole time director is significantly lower than that paid to other two director. Remuneration paid to one director is 17% of remuneration paid to other two directors. Component of fixed remuneration is significantly high when compared to net profits and there is no alignment of the same to the Company’s performance. |
| 7 | Remuneration practice not in line with experience and qualification | Professional director paid less than promoter directors | Concerns were raised on role of Nomination and Remuneration committee when a professional director with much experience was paid less than the promoter directors. It was observed that professional executive director having an experience of 25 years was paid Rs 97 lakhs per annum remuneration as against Rs 67 crores per annum remuneration to promoter director who was associated with the company for 16 years. It was suggested that Nomination and Remuneration committee should guide shareholders as to why the remuneration structure was framed in such a manner. |
Concentration of Power in the hands of whole time director: Governance concerns are raised when same individual who is chairman and managing director are considered for re-appointment. Although this practice is not illegal, it is argued that separating these roles would maintain effective oversight by the Board and prevent potential conflicts of interest.
Concentration of power within a company’s governance structure can raise significant concerns, particularly when the same individual holds multiple influential roles, such as Chairman and Managing Director. This duality can blur lines of accountability, reduce board independence, and increase the risk of conflicts of interest.
Further concerns are also raised during proposed revision of the maximum remuneration payable to its Chairman and Managing Director. Concerns were also raised stating that the combined roles conflict with regulatory framework mandating that the chairperson of top 500 listed entities should be a Non-Executive Director.
Conclusion
Arbitrariness in remuneration is alleged when the remuneration practices are not at parity. Appropriate justification from board of directors in ascertaining remuneration would help in understanding the rationale behind quantum of remuneration. In addition to this following due process prescribed by law, rationale as to how is the remuneration aligned with long-term goals and consistency in these parameters would help shareholders appreciate remuneration packages.
This article is published in Taxmann. The link to the same is as follows:
This article is written by Vallabh Joshi – Senior Manager– vallabhjoshi@mmjc.in and Animesh Joshi – Research Associate – animeshjoshi@mmjc.in