Executive Compensation: How much is too much?

One of the biggest dilemmas of Corporate Governance has been the Executive Packages. With Top Management and CEOs of Multinational receiving multi-million packages even when companies are in doldrums, the debate seems to hold an everlasting tenor. Sony CEO Howard Stringer's $ 4.5 Million plus package has renewed the global debate on Executive Compensation. The CEO received close to 410 million yen in fixed and performance related pay and options worth 500,000 shares(to be exercisable only in case the Sony shares rise). The announcement of whopping package comes at a time when Sony lost almost $ 450 million in last financial year and over $ 12 billion were washed off its market cap in the last three months.


Worldwide, CG Codes and Listing Requirements have tried to keep a check on the reckless payments to Executives especially in times when the global economy is down and the company is burdened with mounting losses.

Compensation Committee or Remuneration Committee was thought to be the panacea of the ill called unjustified Executive Remuneration. First recommended by the Cadbury Commission in 1992, the Committee was expected to rationally and fairly decide the compensation of executives, its constituent components and the manner of distribution. The Committee endeavors not just rewarding the well performing executives, but also recruiting, developing, retaining and mentoring the top talent. A well pronounced recommendation, the concept of Compensation Committee was quickly endorsed by other exchanges across the world. The Canadian guidelines embraced the initiative in 1994.

In India though there is no mandatory requirement of Independent Committees for deciding Executive Remuneration, however, the need for same was emphasized by the Government Committee on Corporate Excellence that released its report in 2000. The proposed Companies Bill, 2009 incorporates the recommendation made in 2000 report and earlier in SEBI(Kumar Mangalam Birla Committee) report to statutorily have committees for listed companies and other categories of companies to be specified in the Bill.

Inclusion of a majority of independent directors was an important step in ensuring independence and transparency in the working of the Committee. In the US, the New York Stock Exchange mandatorily required the listed companies to have a compensation committee consisting of Independent Directors. The NASDAQ listing requirements likewise mandated for independent directors led compensation committees or the independent directors on board fulfilling the requirements of independence.

Back in Japan, according to the latest CG listing requirements, Japanese companies have to reveal the pay to its executives in case it exceeds Yen 100,000,000 or $ 1.1 million. Sony's revelation of its CEO pay comes in the wake of this mandatory requirement. According to a nationwide survey by PWC, only 1.4% of Directors and 8.3% CEOs at listed companies in Japan are paid more then 100 M yen annually. So, that simply put implies that numbers receiving close to million dollar packages but less then the magic number of $ 1.1 million may raise the total figures much higher.

High Executive pay has often been justified on account of Managerial talent and paucity of such talent specially at the top levels. Reasons cited by the External Director for paying Howard more then $ 4.5 million plus stocks go even a step further. He suggested that the CEO needs to be paid keeping in consideration the Global pay levels; companies total revenue of over seven trillion yen(notwithstanding losses 40.8 billion yen), the number of employees at Sony and last but not the least the degree of complexity of business at Sony.

The reasons seem plausible specially when they come from great intellectual minds, but the ever encompassing question is how much if ever is too much and what should be done to cap this corporate greed for exorbitant pays, fat bonuses, stock options and endless perks.