High top management compensation hints at ever-increasing inequality between the rich and the poor

Unless honest and patriotic leaders replace cynics and crooks, inequality will only increase in India

The Indian state itself has turned predator. “Bribery and nepotism is what it now takes to succeed,” laments NR Narayana Murthy. Ratan Tata warns, “There is every possibility that India could slide down the path of becoming a banana republic”.

Mr Murthy is worried that we are heading to a cataclysmic display of violence by the poor who have lost hope. He rightly draws our attention to US president John F Kennedy’s statement: “A society that cannot help the many that are poor cannot save the few who are rich.”

Toral Munshi, the head of India Equity Research of Credit Suisse Research  releasing its fourth Annual Global Wealth Report 2013, on 9th October, says that the number millionaires in India is expected to jump over by 66% by 2018 even as 94%  Indians have wealth below $10,000. “As the world’s largest democracy with a strong federal structure and vibrant markets, Indian wealth has seen rapid growth since 2000 when it rose by 135% from $2,000 to $4,700 in 2013 at an average annual rate of 8%. India has 2.54 lakh members of the top 1% of global wealth holders.” Contrary to this the numbers of the so-called super rich of India released by the the government of India merely running into a mere 48,000 seem totally absurd!

According to the Hurun India Rich List 2013, ranking rich Indians, around 9% of the 141 who made it to the list of the wealthiest, each with over $300 million/Rs1,890 crore in assets the numbers of those residing in Dubai went up from just one person on 2012. The share of those living in Delhi, Mumbai and Bengaluru has dwindled by 3%—7%. This year saw the rise of 91 self-made millionaires among the 141. It also lists 31 Indians who donated more than Rs10 crore, with Wipro’s Azim Premji most generous donating Rs8,000 crore and HCL’s Shiv Nadar who gave away Rs3,000 crore. 

Calling for reforms, the Nobel laureate-economist Dr Amartya Sen, at the launch of his new book An uncertain Glory: India and its Contradictions, rightly lamented, “We believe that India is in a very difficult situation now and the glitter of achievements might well hide that. Educated and healthy workforces bring economic growth and for that we need a fundamental change...India’s subsidy structures are biased, as much as 2% of India’s total GDP is spent on power subsidies for the relatively privileged, even as 1/3rd of India’s households have no electricity connections at all... It’s an effort to engage and tell India how and why it has ended up behind an economically far weaker country like Bangladesh.”       

In New York Times, the American economist Nobel laureate Paul Krugman makes valid observations that though referring to the US are extremely relevant to the conditions now prevailing in India as well.  He writes: “A few days ago, The Times (New York Times) published a report on a society that is being undermined by extreme inequality...The children of the wealthy benefit from the opportunities and connections unavailable to children of the middle and working classes. And it is clear that the gap between the society’s meritocratic ideology and its increasingly oligarchic reality is having a deeply demoralising effect. The report illustrates why extreme inequality is destructive, why claims ring hollow that inequality of outcomes doesn’t matter as long as there is equality of opportunity. If the rich are so much richer than the rest that they live in a different social and material universe, that fact, in itself makes nonsense of equal opportunity. “

The entire New York Times article can be read here:

NR Narayana Murthy, considered a lone sane voice against staggering CEO pay packets recently wrote in Economic Times titled ‘CEO package: How much is too much?’  He begins with discussing pros and cons by justifying what he considers to be “decent globally competitive compensation.”  Earlier speaking from the CII platform Mr Murthy had opined that the gulf between the highest and the lowest should not be more than 15 times; he always held that honchos should receive moderate compensation. He laments, “Over 800 million people in India live on less than $2 (Rs100) a day. Most of them do not have access to basic education, shelter, nutrition and healthcare. In such an environment, leaders from every walk of life have to conduct themselves properly shunning profligacy and ostentatiousness. The only way we can solve the problem of stark poverty is creation of decent income jobs leveraging the power of entrepreneurship.” 

Mr Murthy goes on to write: “embracing compassionate capitalism with fairness, justice and liberalism... to communicate with the  vast majority of the poor that we are partners in the journey of economic emancipation of the country… to lead by example.. Economic sacrifice and simple living... taking huge global-level compensation in the midst of poverty does not seem right…No leader can succeed in a vacuum. He needs the hard work and dedication and sacrifice of thousands of his people to succeed… Therefore, giving huge salaries - exorbitantly high compensation - to just the CEO does not make sense.” This very aptly responds to the so-called justification to pamper a small lot with exorbitant remunerations while retrenching thousands in the guise of downsizing.

The Economic Times piece can be accessed here:

BS Raghavan writing for Hindu BusinessLine titled ‘Corporate top brass too highly paid’ rightly laments, “the stratospheric soaring of corporate compensation packages...“ Mr Raghavan goes on to report that CEO’s compensation is on an average 675 times of the minimum wage of an entry-level employee, followed by the US (423 times) and China (268 times). It is many times more than that of his immediate deputy.
Naveen Jindal, MP, the Chairman and Managing Director of Jindal Steel & Power is reported to get 25 times over the next highest paid Board member. The Ambani brothers caused a flutter by helping themselves to Rs45cr per annum each. This is true of most of our listed companies that are family owned where most members of the families including sons-in-laws draw whopping pays and perks.

The entire article can be accessed on Hindu BusinessLine here :

Indian corporate law has very decent regime that mandates 5-10% of the net profits towards managerial remuneration. It even provides for minimum compensation in the event of loss or inadequate profits. The head honchos get paid while leaving the stakeholders high and dry, in a situation of heads-I-win-tails you lose as rightly put by an expert.  

A decade back the General Electric head honcho, Jack Welch, had to back down in the face of  stakeholders resentment when he by wrangled for himself an extremely generous  exit pay of $400 million, including lifelong tickets to Wimbledon and other  major sporting events.

In the Euro-zone countries, this obnoxious trend has been assigned a new term abzockerei or fat cat phenomenon. Sixty eight percent of Swiss voters approved of the proposal to seek a binding shareholders vote on top executive pay. Britain is planning to follow suit. This stakeholders-say-no-pay movement is gathering momentum.

Like the Occupy Wall Street campaign or Arabian Spring, it is bound to spread like wild fire across the globe to reach the Indian shores to awaken the lethargic Indian shareholders out of their apathetic attitude of chalta hai to give company managements a leeway as long as they are given dividends and bonuses.

The prime minister’s warning to the captains of business and industry not to be ostentatious and avaricious in feathering their own nests has not conveyed the message. Getting alert shareholders into the act now remains the only alternative.  

The stake holding shareholders with their apathetic attitude share the blamed for not making an issue of these bumper bonanzas.  In India, even the SEBI mandated so-called Independent Director headed Remuneration Committees do not bring themselves to put their foot down because they are themselves softened with alluring privileges by the companies, writes Mr Raghavan.

The shareholder apathy, compounded by substantial majority of promoter-family holdings through family trusts and closely held private investment companies, lets the Indian corporates to get away with blue murder.

The term the super rich/ultra high net worth—UHNIs—applies broadly to those extremely rich individuals enjoying great wealth and power, heirs to great fortunes, top industry tycoons and celebrities. In the absence of any official definition for the term, the finance minister in his 2013 Budget speech said, “Those who are relatively well placed in society and have incomes above Rs1crore to levy a surcharge of 10% on taxable incomes exceeding Rs1 crore and hiking basic customs duty on imported motorcycles with 800c and more, cars with engine capacity exceeding 3000cc for petrol and 2500cc for diesel and CIF value exceeding $40,000.”

Our finance minister, Mr P Chidambaram, says he has reasons to believe that the Income Tax department of the number of the All India super-rich of 40,000+ can be those in south Delhi alone! So much for the intentions—altruistic or otherwise—of our powers to be!

There is absolutely no doubt that India Inc has been paying exorbitantly high remuneration. Most of it camouflaged in what is denominated “confidential payroll” – that is audited only by the senior most in the statutory audit team. In addition to the basic remuneration there are plethora of reimbursements against vouchers (merely for tax purposes)— household help, rent/deposit to spouse/parents, gas, electricity, phones, more than one chauffer, home entertainment, liquors, groceries, meats, massive luxury hotel and club bills, cross country personal domestic and foreign  travels—billed as ostensible business expenditure are just  few of the many that are passed for legitimate tax-free perks that skip the scrutiny of the tax gatherers.

The post-liberalisation era has been a witness to an absolutely vulgar increase of remuneration to another class going by the nomenclature non-executive and/or independent directors on the Boards of listed corporations. The Companies Act, 1956 for a long time had a cap of Rs250 for sitting fees to all directors. Now we see phenomenal hikes running into thousands of rupees per meeting. Add to this the fees for the audit, remuneration and other committee meets. Invariably all these meetings do take place, back-to-back at the same venue, and yet they get paid separately and may possibly be reimbursed for separate travel for each!

What takes the cake (?) are the absolutely fabulous, across the board, commission payments to directors including non-executive directors. These amounts for each director run into crores. One fails to understand the significance of contributions in terms of production or sales by these non-executive directors, individually or collectively. In reality they ought to have been linked to measurable individual performances or productivity. There is more justification to pay the same amounts to much large stakeholders, like those employees down the line in their companies, who have slogged all through the years and whose performance is measurable unlike that of the directors.

Post-liberalisation era has certainly made the rich richer. The unearned income of the super-rich business tycoons in the form of dividends, ESOPs, bonus shares and capital gains are virtually free of taxes.

At the same time any small increases in the bank interest income for the middle class pensioner or widower attracts deduction of tax at source that takes years to collect refund. At times the pensioner even dies before its receipt! The pensioners, widows, middle-class salary earning men and women trying to make both ends meet in times of mounting food inflation are subjected tax deductions leading to lower disposable incomes. This is grossly discriminatory and will not be taken lying down for long. In 2012 the then finance minister created a ‘super senior citizen taxation’ category for those aged 80+. Our prime minister is said to be one of the only 15,000 assessee-beneficiaries in a country of over a billion!

The ‘World Ultra Wealth Report 2013’ by World-X  that  focussed solely on those with a net worth with $30 million and above in investments in shares in public and private companies. Notwithstanding the economic gloom, India has recorded the largest increase in its UHNI club among the BRIC nations with a total of 7,850 super-rich with a collective net worth of $935 billion. India also boasts of the highest number of female millionaires numbering 1,250 with a combined fortune of $95 billion. With a population growth of 1.6%, India added 120 more UHNIs. Most of them living in the top 10 cities, more than 50% based in Mumbai and Delhi.

Our netas, mantris-shentris, babus and business tycoons are too accustomed to be classified as very privileged citizens even to break queues in the Parliament House canteens, leave alone at airport check-ins when not travelling in their private Lear jets. This is moving them all farther and farther from ground realities and soon need be brought down to earth. The gang-rape protesting boys and girls, all first generation voters along with their white collared parents and grand parents in candle light march, will exactly do this in the upcoming elections. If this doesn’t happen they will have no choice but to employ other modes to achieve it.

The powers that be in India are sadly mistaken if they choose to believe that this cannot happen in India because Indian economy is insulated and robust enough having weathered the earlier South-East Asia and Mexican monetary crises and the subsequent economic meltdown in the US and Europe. The Compassionate Capitalism that Mr Murthy has written about has virtually ceased to exist, just as earlier the death knell of Marxist Socialism post-perestroika and glasnost.

Here in Mera Mahaan Bharat, in November 2013, prices of everything that the aam admi uses almost every day continue to soar unabated – food, fruits, vegetables, salt, footwear, movie tickets, household remain in the grips of inflation. Life is more difficult for the poor and middle classes with fixed incomes. Reflecting the upward trajectory of food prices, the retail food inflation in October rose to 12.56% as against 11.44% in September, with vegetables the main drivers in the food section their prices rising 41% all as a result of supply chain inadequacies – a euphemism for hoarding (?)  by black marketers. Overall the CPI edged past the double-digit at 10.09% taking the retail price soaring to its highest in seven months. The Index of Industrial Production barely moved by 0.5%. The investment climate remains sluggish the capital goods sector shrunk by 14% in the last two months. Consumer durables are slow to fly off the store shelves – clearly the runaway inflation in food and fuel prices left little surplus in household spends. The rupee is moving in the reverse gear. The continuing infrastructural bottlenecks and poor economic policy are pushing the currency down and unsettling the share markets down reflecting overall lack of confidence in the economy. The business and industry leaders, netas-mantri-shantris-babus sadly have their blinkers on – the widening the fiscal and current account deficits can only be contained by radical measures.

(Nagesh Kini is a Mumbai-based chartered accountant-turned alert concerned citizen/ activist.)

9 years ago
The political class in India is I think by design interested in retaining the entitlement mentality amongst the poor. This I think is the sure way to ensure that they keep entitlements increasing and or retained ie right to food,right to work,etc so that the politicians can loot the economy and also keep the poor constantly dependent on such doles. This ensures votes. Besides I do not see any benefit. The governments if they are serious in uplifting the poor should spend more of the GDP in providing education/scholarships for further studies, training in vocational skills etc which will growth.
MG Warrier
Replied to Bhaskar comment 9 years ago
The points made in both the comments recorded by Bhaskar are worth pondering.Beyond keeping the majority poor and helpless, the ‘political consensus’ about keeping a large section of the population illiterate and ‘unskilled’ by design is worrying me. As regards the ratio between minimum and maximum salaries, in India, immediately after independence, there was an ‘unwritten understanding’ when President’s emoluments were fixed at Rs10,000/- that maximum salary would be nearer to 10 times the ‘minimum’ earnings of a worker. Our misfortune is, we forget our own history fast and search for examples elsewhere.
9 years ago
Switzerland is going for a referendum on limiting the salary of a top paid job in a corporate to 12 times the salary of the lowest paid job in the same corporate. There is revulsion amongst the public in the recent years as to how CEOs of Swiss banks have abused their positions
MG Warrier
9 years ago
This well-researched article puts together enough food for thought, if only the people whose thought matter are willing to think. The rich and the powerful in India have cornered most part of the country’s resources (Politicians who manage Government, corporates, religious bodies included) and our country’s dilemma is not comparable with the problems of developed countries like US. Perhaps there may not be any parallel to the following situations elsewhere:
a) A family (husband and wife together) drawing an annual salary of 100 to 128 crore consecutively for last few years from a small company.
b) Authorities pleading helplessness about waiver of 90 per cent out of Rs1 lakh crore loans by banks being in favour of ‘rich’ clients.
c) Every year a few lakh crores of tax being waived in favour of corporates and other bodies at the time of presentation of Budget Estimates itself.
d) The country’s central bank’s effort to assess the domestic gold stock with organisations being thwarted even before the initiative takes off.
e) On (b) and (d) please read the following, an edited version of which appeared as a letter to the editor in Business Standard today(November 21, 2013):
Final diagnosis
This refers to the report “Banks wrote off Rs1 lakh crore in 13 years: Chakrabarty”( November 19). It is heartening to find that though late in the day, a debate on who favours whom is getting initiated at the highest level. This is good for the health of the economy. For treating any ailment, diagnosis is the most important and perhaps, crucial, step. It cannot be different for an ailing economy. Indian economy has enough resources to restore its health.
Revelations like the one now made by RBI Deputy Governor about write offs in favour of wealthy by banks and annual waiver of taxes payable by corporates(that could be several multiples of one trillion, if the figures during the last ten years are added up ) while tabling Budget Estimates in Parliament, will give a rough picture of how the rich is becoming richer. May be the government or any organisation at national level should compile this information as also create an inventory of estimated domestic stock of gold and other precious tradable resources. Bringing transparency in these areas will prove to the world that India is not poor, though its people are.
M G Warrier, Mumbai

Free Helpline
Legal Credit