Executive compensation in India: Summing up the Infosys controversy
Soumya Kanti De Mallik (Partner) & Debarupa Agarwala (Senior Associate)
Ever since the global financial crisis of 2008, executive compensation around the world has been caught between the fine balancing act of rewarding performance and inviting public backlash. What makes it even more interesting is when the backlash comes not from the public but from the very founders of the company itself.
The controversy that erupted in Infosys in India over the last one year is a classic example of the latter. Many founders of Infosys including NR Narayana Murthy, with an aggregate stake of 12.75 percent in the company, had publicly raised concerns over the compensation of its CEO, Vishal Sikka and large severance packages given to two departing executives, including former CFO, Rajiv Bansal in 2016. Vishal Sikka had joined Infosys in 2014 as its first non-founder CEO.
The episode started when NR Narayana Murthy decried the board’s decision in 2016 to increase Vishal Sikka’s compensation by 55 percent to $ 11 million a year from the earlier $ 7.08 million. Based on the postal ballot results, it soon became evident that the founders were unhappy with the decision as only 23.57 percent of promoter (founder) votes were cast in favour of the resolution reappointing Vishal Sikka as managing director and CEO and increasing his compensation.
Based on the annual report of the company for 2015-16, Vishal Sikka’s revised compensation of $ 11 million includes $ 4 million to be paid in cash and $ 7 million in stock. The $ 4 million cash component comprises of a base pay of $ 1 million and $ 3 million performance based variable pay. The $ 7 million stock compensation includes an annual grant worth $ 2 million and stock worth $ 5 million to be based on the company’s fiscal year performance. The board has linked the performance based variable compensation of Vishal Sikka to the progress that the company makes in becoming a $ 20 billion firm by March 2021. However, the specific targets based on which Vishal Sikka would be awarded the performance based variable pay have not been made public.
Against this backdrop and considering the countless media reports, it is relevant to examine whether such payments are legally tenable and compliant, and whether the board of Infosys acted within its powers to award the payments in question.
Companies Act, 2013
The Companies Act, 2013 (Act) provides for the payment of total managerial remuneration by a public company to its directors, including the managing director, whole-time director and manager by capping it at 11 percent of the net profits of the company in that financial year. Remuneration exceeding the 11 percent limit may be authorised by the company in its general meeting, with the approval of the Central Government and subject to the provisions of Schedule V of the Act.
However, there is no such cap on CEO, CFO, COO or GC compensation (unless they also hold concurrent positions of a managing director, whole-time director or a manager in the company). This is in line with classic capitalist societies like the US, where the decision by a company regarding the amount and type of compensation to give an executive officer is a business decision and is not within the jurisdiction of any legal body. All that the federal securities laws require is clear, concise and understandable disclosure about compensation paid to CEOs, CFOs and certain other high-ranking executive officers of public companies. Infosys, being listed on the NASDAQ, complies fully with the disclosure requirements in the US.
Under the Act read with the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 (Rules) thereunder, similarly, a listed company in India is required to make disclosures in the board’s report on (i) the ratio of the remuneration of each director to the median remuneration of the employees for the financial year, (ii) the percentage increase in remuneration of each director, CFO, CEO, company secretary or manager, if any, in the financial year, and (iii) affirmation that the remuneration is as per the remuneration policy of the company, amongst other requirements.
Nomination and Remuneration Committee
Another corporate governance safeguard for listed companies is the requirement to have a Nomination and Remuneration Committee (NRC) both under the Act and the Rules made thereunder and the listing agreement with the stock exchanges - now replaced by the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. NRC formulates the nomination and remuneration policy and recommends such policy to the board. All members of NRC are non-executive directors, with the chairperson and at least 50 percent of such directors being independent directors. The erstwhile listing agreement and the listing regulations also prescribe submitting a report on corporate governance in the annual report of listed companies which captures the details of remuneration payable to directors.
These requirements have been followed by Infosys and Part C of its nomination and remuneration policy specifically deals with the remuneration of directors, key managerial personnel and other employees. The annual report of the company for 2015-16 as well as 2016-17 discloses the exact amount of compensation (including relevant breakdowns of each component) to be paid to the directors and key managerial personnel of the company, including Vishal Sikka. Similar disclosures have also been made on a quarterly basis by the company to the NSE and the BSE, where it is listed.
In case of Infosys, NRC evaluates, determines and recommends to the Board, the compensation payable to the directors. All board level compensation is approved by the shareholders and disclosed in the financial statements of the company. It, therefore, appears that the Infosys board has acted in compliance with the applicable laws while authorising the payments in question to its executive officers.
While legally speaking, there are no limits to executive compensation in India barring the 11 percent limit on managerial remuneration in public companies, in reality, the Infosys episode demonstrates the ease with which such seemingly legal and compliant decisions on executive compensation can be questioned. Although full and proper disclosures, and the governance processes as mandated by Indian laws, were made by Infosys and its board acted well within its powers to award the payouts on the recommendations of its NRC, such disclosures did nothing to contain the deep discontent within the founder group and led to a full blown public confrontation, leading to a huge reputational risk worldwide for a company listed on Indian and international stock exchanges, and having significant revenue from global clients.
There is little that laws can do in situations such as this as the very foundation of executive compensation rests on corporate governance which itself is inherently rooted in ethics, fiduciary duties of the directors and self-regulation. It definitely deals a blow to good corporate governance aspirations and worldwide reputation of a company of the stature of Infosys when insiders carry on attacking its remuneration policies in public instead of sorting them out amicably. All said and done, much may be said and expected of corporate governance in Indian companies but the Infosys episode just goes on to show how tricky it is to toe the line of corporate governance in India especially when it comes to insider created situations such as these.