Inequality in Compensation

IMA India’s just-published 2021 Executive and Board Remuneration Report provides a detailed analysis of trends in top-management and Board-level compensation across more than 2,800 companies, listed and unlisted. It also contains useful metrics on governance practices and female Board representation. A new addition to the 2021 report is data on pay gaps within companies. The ratio of pay at each top-management executive to what is paid out to the average worker (i.e., median company pay) serves as a good marker of ‘inequality’, both at a particular point in time and across years. This paper highlights some key findings in that regard.

The Pay-Gap: A Pandemic Effect?

A high and rising pay-to-median-pay ratio would suggest that inequality between top managers/directors on the one hand and the ‘average worker’ on the other hand, is rising. Our data suggests that while pay is highly unequal, it is not necessarily becoming more unequal over time.

Pay-gaps are on a minor downtrend for most Board levels

CMDs (Chairman and Managing Director), followed by CEOs, tend to earn the highest ‘premium’ relative to the average worker (Chart 1). However, these pay-gaps appear to have peaked in FY17/FY18 and have since declined. From highs of 120x (CMD in FY18) and 79x (CEO in FY17), they dropped to 79x and 73x, respectively, in FY21. For CMDs, the two ‘pandemic years’ have been a leveller, while for CEOs, FY21 saw a small increase in pay-gaps following a big drop the previous year. For CFOs, FY19 was the high-watermark year (46x), but their relative pay now seems to have reverted to mean. The same is true for other Executive Directors (EDs).

Expectedly, non-executive directors earn a smaller, yet still substantial premium over the average worker. Here too, however, pay-gaps have been declining in the last two years, particularly for Non-Executive Chairmen, for whom the ratio has more than halved (Chart 2). For NEDs, the ratio has declined from a peak of 5.7x in FY20 to 3.5x in FY21.

Non-executive directors earn a smaller premium, but trends for them are similar to those for executives

Both absolute pay and inequality are correlated with company size

Pay-gaps by Market Cap

We find that top-management and Board pay rises strongly with company size, whether measured by revenue, market cap or workforce size. Strikingly, though, pay inequality also seems to increase with size (Chart 3). For instance, the average CEO at a large-cap company earns almost 220x as much as median pay, compared to 43x for CEOs at micro-cap businesses. CMD pay-gaps, though, break from trend, being the highest in the mid-cap category (248x). A likely explanation for this is that CMDs in mid-caps are very often the promoters themselves.

It remains to be seen whether these trends persist in the years ahead

FY20 and FY21 data suggest that pay inequality may be ebbing. It remains to be seen how much of this has had to do with the Covid-19 pandemic. This may become clearer as the data for FY22 and subsequent years comes in. What is indisputable, however, is that it is no longer ‘business as usual’ for anyone. Many organisations will find that they will need to reshape their practices, including pay-related ones, in response to the ‘new normal.’