As private enterprise gains in strength and influence in the Indian economy, there has been a rapid growth in the number of B-Schools to cater to the huge shortage of managerial talent. Unfortunately, few of them have a genuine vision to align budding managerial talent to the needs of the industry and society at large.
Leaders need to think intuitively and come up with out of the box solutions, while courses tend to follow the gravy train and emphasise on hard number crunching, which is not always the key to long term success for them or the companies they will lead in future. This is not unique to India, as Warren Buffett, Chairman, Berkshire Hathaway, once admitted, “Business schools reward difficult complex behaviour more than simple behaviour, but simple behaviour is more effective.” After all, complex projections by some of the best managerial talent led to the sub-prime crisis. With India’s transition from a closed, savings based economy to a globally integrated capitalistic one, it is as important for Indian B-schools to make their students understand the relevance of sustainability in business and how sustainable business practices can be implemented in the corporate world.
Post slowdown, the Indian economy is recovering phenomenally well. Real GDP has grown at 7.2% during the just completed fiscal year 2009-10, up from 6.7 per cent during 2008-09 and the Reserve Bank of India is highly optimistic of an 8% growth. But the bigger question is whether we are ready for an 8-10% growth, and how inclusive it will be. Will its benefits reach the bottom 80%? Does India have the kind of natural resources or the ability to manage them efficiently to sustain the numbers? After liberalization, our economic model has shifted to export led growth and we have lived almost a century of development in just 20 years. India as an economy needs real planning as it prepares to humble China on GDP growth rates, and we need to develop technology and infrastructure to support the growth levels, keeping in mind limited natural resources, global warming and the growing population. Also, our financial institutions have to grow in size and stature, but also remain systemically strong to absorb the associated risks. These and many similar issues ensure that India Inc. has a far greater role to play, and consequently, so do Indian B-schools. Prof. Sushil Kumar (Centre for Food & Agri Business) of IIM Lucknow tells B&E, “Sustainable development is an important aspect and it should be part of the B-schools in India looking forward to shrinking resources.”
From entrepreneurial education to business policy making to sustainable development, new age subjects should be introduced in the B-school curriculum to introduce aspiring managers to the larger picture beyond financial numbers. Sustainable development is what the economy of India requires to be at the next level where it could be head to head with economies like US and Japan.
In a recent report from Accenture, 766 CEOs around the world have showed a deep rooted interest in ensuring sustainability and have figure it to be a key reason for success in business. 66% of CEOs around the APAC region have taken into consideration that consumers are an important aspect in driving the sustainability revolution in the long run and 50% considered their employees to be a strong driving force to sustainability. Besides these factors, educational reforms, financial reforms and new concepts of value would be critical drivers to help businesses reach the tipping point on sustainability. Ashok Mittal, Chancellor, Lovely Professional university tells B&E, “Sustainable development will certainly give the push to the (Indian) economy in the long term but for that, our tomorrow has to be planned today itself.”
India Inc. has to operate in a fast changing and integrated global economy. So the curriculum should be a reflection on the current state of the global economy and not on the past trends that are no longer relevant. American capitalism can no longer be considered the ideal model on which to base B-school education, as the past recession has proved. Businesses are already waking up to the criticality of sustainable development. It’s time that the courses in Indian B-schools also mirror that trend in the real world and produce world class leaders for tomorrow
Thursday, June 2, 2011
Advertise or Perish!.. Ashutosh Harbola simplifies the fall of Ambassador
Hindustan Motors lost its Pole Position, Just like GM in US, to The Japanese. If it had Invested in Emotional Advertising in The Early 1980s, History could have been Written Quite Differently
Advertising in maturing markets is a question of building brand preferences. But in the growing Indian market, even recall can be a tough ask, considering the plethora of brands in the fray. This was not the case with Hindustan Motors, the pioneer of India’s automobile revolution, when it rose to prominence from the 1950s to the early 1980s. Its Ambassador (Hindustan Motor’s pioneer product) was called “The King of Indian roads” at that time, despite being one of the lesser cherished legacies of the British Raj. There was an absence of both competition and the need for innovation, either in product or in marketing terms. Today, the car and the company are just about history.
Ambassadors have been in India since 1958 with a few modifications and have been based on the Morris Oxford III of the famous Morris Motor Company. Its other claim to fame has been the manner in which politicians and bureaucrats continued to patronise it blindly until the dawn of this century, long after the public had given it a rather undignified burial (as a brand in their perception set).
That decline happened almost instantaneously in 1983, when India’s greatest automotive success story till date first came to life in the form of the Maruti 800. Till then, Hindustan Motors was on a high trajectory. Since then, Ambassadors never made a comeback. The domestic sales for passenger cars in India between April to October, 2010 was 11,05,273 units. Hindustan Motors only managed to sell 6727 units, which even constitutes Lancer and Cedia (Mitsubishi JV) and managed to export only 1 unit. Maruti, in turn, sold a whopping 6,28,378 units in the same period. It has reportedly lost some 50% of net worth in the past few years and is a key BIFR incumbent.
Could the company have spent the past quarter of a century doing anything differently? The answer is simple. Advertising! If Hindustan Motors had advertised its key product well, it could well have become an iconic brand. Anuj Gupta, Senior analyst, Angel Trade, comments, “After Maruti became a success, Hindustan Motors could have still made a comeback by choosing the right mediums of advertising and creating a niche for themselves.” Nostalgia is one of the most exhilarating marketing tools. Volkswagen’s Beetle has worked on nostalgia and consistently reinvented itself through focused advertising perception reinforcements. Hindustan Motors could even have followed even the Harley path to cult glory. Harley is a century old brand that has developed a cult following over the decades, which refuses to wilt irrespective of the competition on any given day.
Hindustan Motors could have highlighted the Indian nature of the car, and positioned it for its features, which separated it from others, like strength and durability. Vishal Oberoi, CEO Market Excel Data Matrix Pvt. Ltd, comments, “Ambassador’s case is stuck in the approach of Hindustan Motors, who have a conservative approach unlike other automobile companies in India.” In this market, you cannot create cult followings unless you develop a stellar communication strategy. Even Apple, which is a marked antithesis to Hindustan Motors in innovation, has found it hard to penetrate into India, largely because of its disdain for advertising and building an emotional connect. The lesson has come too late for Hindustan Motors, but not necessarily for the marketers of the day in India. Like in the rest of the world, even in India, advertising matters!
Advertising in maturing markets is a question of building brand preferences. But in the growing Indian market, even recall can be a tough ask, considering the plethora of brands in the fray. This was not the case with Hindustan Motors, the pioneer of India’s automobile revolution, when it rose to prominence from the 1950s to the early 1980s. Its Ambassador (Hindustan Motor’s pioneer product) was called “The King of Indian roads” at that time, despite being one of the lesser cherished legacies of the British Raj. There was an absence of both competition and the need for innovation, either in product or in marketing terms. Today, the car and the company are just about history.
Ambassadors have been in India since 1958 with a few modifications and have been based on the Morris Oxford III of the famous Morris Motor Company. Its other claim to fame has been the manner in which politicians and bureaucrats continued to patronise it blindly until the dawn of this century, long after the public had given it a rather undignified burial (as a brand in their perception set).
That decline happened almost instantaneously in 1983, when India’s greatest automotive success story till date first came to life in the form of the Maruti 800. Till then, Hindustan Motors was on a high trajectory. Since then, Ambassadors never made a comeback. The domestic sales for passenger cars in India between April to October, 2010 was 11,05,273 units. Hindustan Motors only managed to sell 6727 units, which even constitutes Lancer and Cedia (Mitsubishi JV) and managed to export only 1 unit. Maruti, in turn, sold a whopping 6,28,378 units in the same period. It has reportedly lost some 50% of net worth in the past few years and is a key BIFR incumbent.
Could the company have spent the past quarter of a century doing anything differently? The answer is simple. Advertising! If Hindustan Motors had advertised its key product well, it could well have become an iconic brand. Anuj Gupta, Senior analyst, Angel Trade, comments, “After Maruti became a success, Hindustan Motors could have still made a comeback by choosing the right mediums of advertising and creating a niche for themselves.” Nostalgia is one of the most exhilarating marketing tools. Volkswagen’s Beetle has worked on nostalgia and consistently reinvented itself through focused advertising perception reinforcements. Hindustan Motors could even have followed even the Harley path to cult glory. Harley is a century old brand that has developed a cult following over the decades, which refuses to wilt irrespective of the competition on any given day.
Hindustan Motors could have highlighted the Indian nature of the car, and positioned it for its features, which separated it from others, like strength and durability. Vishal Oberoi, CEO Market Excel Data Matrix Pvt. Ltd, comments, “Ambassador’s case is stuck in the approach of Hindustan Motors, who have a conservative approach unlike other automobile companies in India.” In this market, you cannot create cult followings unless you develop a stellar communication strategy. Even Apple, which is a marked antithesis to Hindustan Motors in innovation, has found it hard to penetrate into India, largely because of its disdain for advertising and building an emotional connect. The lesson has come too late for Hindustan Motors, but not necessarily for the marketers of the day in India. Like in the rest of the world, even in India, advertising matters!
RURAL MARKETING: IT'S TIME TO "EYE THE PIE"...ASHUTOSH HARBOLA DIVES INTO UNLEASHING THE UNTAPPED POTENTIAL OF RURAL INDIA.
So far, Marketers were looking at Rural Markets with Enthusiasm & Speculation. It’s High time they gave up on The Latter
No one denies the fact that pace of change in today’s marketing world is extremely fast. But ‘fast’ proved to be a gross understatement in this case. Micromax launched its mobiles in the Indian market in 2008 with no baggage and a powerful vision. It was tough for a new player, as the mobile market was dictated by Nokia with almost 70% market share and a huge following. But Micromax realised an opportunity, which Nokia failed to address; the company introduced X1i, a mobile phone with a battery backup of 30 days targeting rural India, where electricity was a prime concern. The result was unexpected – within the next three years Micromax is the third largest player in the market and is seriously challenging Nokia’s domination. Micromax’s case clearly indicates the immense potential in the suburban regions of the country.
India has been termed as an agrarian economy, but not much has been done to utilise the massive potential of the rural market. There have been initiatives like AMUL and the Green Revolution, but they were not enough to boost the massive growth of the neglected parts of the country. It is indeed sad that there have been three major industrial policies since independence, but not one for agriculture, which was once the prime GDP earner for the economy. But times are changing as urban markets are almost at a critical stage; and marketers all around are hunting for opportunities in rural India. Arshit Pathak, MD, Kingtech Electronics India Pvt.Ltd (Group Company of G’FIVE International Limited) tells 4Ps B&M, “In the present scenario; cities do not hold much potential for mobile phone brands in terms of market volumes. It is the rural or the upcountry market, which is showing decent traction”.
Demand from rural India has been on a high trajectory and most importantly, the urban market has reached a saturation level with tele-density almost reaching 137.25%; and companies are now making a move to rural India, where telecom players are seeing the future. Tele-density reported in rural India till September 2010 by TRAI was a mere 28.42%. It’s strange that 11 long years have passed since the National Telecom Policy was introduced in India and the rural market has been completely overlooked by the giants. There is even a strong need to develop products that are a value proposition for the rural consumer as his tastes are altogether different from his counterparts in urban India. Sunil Raina, CMO, LAVA tells 4Ps B&M, “We have been penetrating the Indian market via the rural route. For this, we have been making customer oriented handsets with long battery life, entertainment applications and others”. The prime reason for Airtel’s success in the rural market was the launching of a 2 in 1 offer with Nokia by bundling Nokia cell phones and Airtel cards. A massive campaign was introduced to capture 34904 villages. The scheme became a hit and managed to generate Rs.168.2 million in just 12 months.
FMCG players have been looking at every opportunity to penetrate in rural India for years. The consumers here accounts for 60% of the total consumption and moreover, the biggest scope lies in the fact that most of the market is unorganised and handled by local players. Players like ITC have already been very successful here with initiatives like e-Choupal and HUL’s Project Shakti has been equally well known and celebrated. Retail giants were happy catering to urban masses but now, with the development of infrastructure in rural India, they are planning to tap this area. Deepak Mowar, Vice President (Hotels, Retail, Cinemas & Strategic Planning), Parsvnath Developers, tells 4Ps B&M, “It is very important to keep in mind that the rural population gives more importance to basic needs. Thus, the kind of products introduced should be well thought of.”
FMCG major Godrej introduced a nano refrigerator – Chotu Kool – precisely for the urban market. It was so designed that it could even support power cuts. Priced at Rs.3200, the little wonder successfully added 5000 villages to Godrej’s customer base in 2009 only. Such innovations can actually boost the buying power of the immensely value-conscious rural consumer. Even Thums Up started a campaign called ‘Thums Up Jalsa’ targeting rural India, and its sales grew by 37% in 2009 as against 18% in the previous year.
The automobile sector has also successfully forayed into the rural market. In 2007, Hero Honda started the Har Gaon Har Aangan campaign focusing on educating rural consumers on the product. It even targeted festivals in rural areas, which were generally related to harvest season – when farmers are in a buoyant mood. It even tied up with NBFC’s loan schemes to promote buying. Penetration levels in rural India for two wheelers are just 10%. Even Castrol India Ltd. successfully penetrated in rural India by educating farmers about the benefits of Castrol CRB over the competitors. Mayank Pareek, Executive Director, Maruti Suzuki India Limited addresses, “We have been seeing 10% sales from rural customers and the numbers will shoot up in the times to come.”
Even the banking sector has been looking at new ways of penetration. When ICICI entered rural India in October 2008 with its financing portfolio, the journey wasn’t easy for the banking tycoon initially. It had to play with the general mentality of consumers who preferred taking loans from locals rather than from banks, as it asked for a lot of paper work. To overcome the stiff resistance, ICICI started the Kamdhenu Cattle Loan Campaign, which completely changed their game in rural India. Spread over a period of 150 days across five states and 48 districts, the campaign generated the requisite awareness. Post campaign, awareness levels about cattle loan increased by over 20% amongst target group.
There have been many such cases in marketing history that have unleashed the potential of rural India; but obviously, infrastructure issues and the constraints of a scattered market are pressing issues. As the urban market is at a tipping point, it has become all the more difficult for companies to compete profitably if they are in this space alone. The rural market is the platform for companies to turn around businesses now. Another opportunity that stares them in the face is the huge budget allocation granted in the Union Budget to develop agriculture in India. And with it lies the obvious threat. If they are too late to cash in, someone else will. It’s a lesson that Nokia learned the hard way.
No one denies the fact that pace of change in today’s marketing world is extremely fast. But ‘fast’ proved to be a gross understatement in this case. Micromax launched its mobiles in the Indian market in 2008 with no baggage and a powerful vision. It was tough for a new player, as the mobile market was dictated by Nokia with almost 70% market share and a huge following. But Micromax realised an opportunity, which Nokia failed to address; the company introduced X1i, a mobile phone with a battery backup of 30 days targeting rural India, where electricity was a prime concern. The result was unexpected – within the next three years Micromax is the third largest player in the market and is seriously challenging Nokia’s domination. Micromax’s case clearly indicates the immense potential in the suburban regions of the country.
India has been termed as an agrarian economy, but not much has been done to utilise the massive potential of the rural market. There have been initiatives like AMUL and the Green Revolution, but they were not enough to boost the massive growth of the neglected parts of the country. It is indeed sad that there have been three major industrial policies since independence, but not one for agriculture, which was once the prime GDP earner for the economy. But times are changing as urban markets are almost at a critical stage; and marketers all around are hunting for opportunities in rural India. Arshit Pathak, MD, Kingtech Electronics India Pvt.Ltd (Group Company of G’FIVE International Limited) tells 4Ps B&M, “In the present scenario; cities do not hold much potential for mobile phone brands in terms of market volumes. It is the rural or the upcountry market, which is showing decent traction”.
Demand from rural India has been on a high trajectory and most importantly, the urban market has reached a saturation level with tele-density almost reaching 137.25%; and companies are now making a move to rural India, where telecom players are seeing the future. Tele-density reported in rural India till September 2010 by TRAI was a mere 28.42%. It’s strange that 11 long years have passed since the National Telecom Policy was introduced in India and the rural market has been completely overlooked by the giants. There is even a strong need to develop products that are a value proposition for the rural consumer as his tastes are altogether different from his counterparts in urban India. Sunil Raina, CMO, LAVA tells 4Ps B&M, “We have been penetrating the Indian market via the rural route. For this, we have been making customer oriented handsets with long battery life, entertainment applications and others”. The prime reason for Airtel’s success in the rural market was the launching of a 2 in 1 offer with Nokia by bundling Nokia cell phones and Airtel cards. A massive campaign was introduced to capture 34904 villages. The scheme became a hit and managed to generate Rs.168.2 million in just 12 months.
FMCG players have been looking at every opportunity to penetrate in rural India for years. The consumers here accounts for 60% of the total consumption and moreover, the biggest scope lies in the fact that most of the market is unorganised and handled by local players. Players like ITC have already been very successful here with initiatives like e-Choupal and HUL’s Project Shakti has been equally well known and celebrated. Retail giants were happy catering to urban masses but now, with the development of infrastructure in rural India, they are planning to tap this area. Deepak Mowar, Vice President (Hotels, Retail, Cinemas & Strategic Planning), Parsvnath Developers, tells 4Ps B&M, “It is very important to keep in mind that the rural population gives more importance to basic needs. Thus, the kind of products introduced should be well thought of.”
FMCG major Godrej introduced a nano refrigerator – Chotu Kool – precisely for the urban market. It was so designed that it could even support power cuts. Priced at Rs.3200, the little wonder successfully added 5000 villages to Godrej’s customer base in 2009 only. Such innovations can actually boost the buying power of the immensely value-conscious rural consumer. Even Thums Up started a campaign called ‘Thums Up Jalsa’ targeting rural India, and its sales grew by 37% in 2009 as against 18% in the previous year.
The automobile sector has also successfully forayed into the rural market. In 2007, Hero Honda started the Har Gaon Har Aangan campaign focusing on educating rural consumers on the product. It even targeted festivals in rural areas, which were generally related to harvest season – when farmers are in a buoyant mood. It even tied up with NBFC’s loan schemes to promote buying. Penetration levels in rural India for two wheelers are just 10%. Even Castrol India Ltd. successfully penetrated in rural India by educating farmers about the benefits of Castrol CRB over the competitors. Mayank Pareek, Executive Director, Maruti Suzuki India Limited addresses, “We have been seeing 10% sales from rural customers and the numbers will shoot up in the times to come.”
Even the banking sector has been looking at new ways of penetration. When ICICI entered rural India in October 2008 with its financing portfolio, the journey wasn’t easy for the banking tycoon initially. It had to play with the general mentality of consumers who preferred taking loans from locals rather than from banks, as it asked for a lot of paper work. To overcome the stiff resistance, ICICI started the Kamdhenu Cattle Loan Campaign, which completely changed their game in rural India. Spread over a period of 150 days across five states and 48 districts, the campaign generated the requisite awareness. Post campaign, awareness levels about cattle loan increased by over 20% amongst target group.
There have been many such cases in marketing history that have unleashed the potential of rural India; but obviously, infrastructure issues and the constraints of a scattered market are pressing issues. As the urban market is at a tipping point, it has become all the more difficult for companies to compete profitably if they are in this space alone. The rural market is the platform for companies to turn around businesses now. Another opportunity that stares them in the face is the huge budget allocation granted in the Union Budget to develop agriculture in India. And with it lies the obvious threat. If they are too late to cash in, someone else will. It’s a lesson that Nokia learned the hard way.
CEO PAY COMPENSATION ISSUE.. Ashutosh Harbola clarifies the unjust payment structure of CEOs round the globe
While The Global Economy continues to Struggle with Unemployment and Depressed wages, CEOs of today seem to have Exceptional Immunity to all Cycles! B&E’s Ashutosh Harbola dives into The CEO Compensation debate.
“It’s easy to have principles when you’re rich. The important thing is to have principles when you’re poor,” said Arthur Kroc, CEO of McDonalds. But the interesting part about the entire debate on astronomical, even galactical, CEO packages is that shareholders and the general public believe that principles are a fairly common casualty at the corner office!
CEO compensation related issues continuously hog the limelight in US, where the debate on the ‘Say on Pay’ bill, the one that would let shareholders have a non-binding vote on executive compensation has been especially fierce. Consider the recent anger over Pacific Gas & Electric Company (PG&E), whose outgoing CEO Peter Darbee gets a golden parachute of around $35 million. His departure looked imminent after one of PG&E’s natural gas pipelines exploded in a San Francisco suburb last September, resulting in eight casualties and destruction of 38 homes. State officials have been adamant that ratepayers should not pick the tab for Darbee’s retirement, and the company recently announced that the bill would be paid by shareholders instead. But shouldn’t the question have been raised on the value of the compensation package itself, rather than on who pays?
In a number of cases, companies have failed to justify compensations with respect to their financial situation and their perception on what the CEO should be worth. Even the G-20 summit in 2009 managed to sense the unnatural rise in executive compensation and an open house discussion was awarded to an issue, which has been raised by only investors so far. Even Barack Obama addressed his concern on the rising salaries while announcing the bailout package post recession. Russia initiated a move to cap CEO salaries in 2009, which was followed by China. The communist nation put an upper limit of $410,000 for state owned companies.
But capping CEO pays hasn’t gone too far in the US. Data from American Federation of Labor and Congress of Industrial Organizations showed CEOs’ median pay going up by 23% compared to 2.1% for the average worker. The median pay was reported to be $11.4 million, which came from fixed pay, stocks and different stock options of the 299 companies of S&P 500. These huge pay packets ($3.4 billion in all) would have led to the possible employment of 102,325 median workers!
A research report of American Federation of Labor and Congress of Industrial Organizations stated that between 1993 and 2008, the top 1% of Americans, captured a mammoth 52% of income growth in the US. Reports have even stated that the 2008 crisis was a result of the huge pay structure that CEOs have been getting. California-based compensation firm Equilar revealed that seven of the largest companies on Wall Street increased their compensations and benefits to $122 billion in 2007, a rise of 10% yoy. In contrast, aggregate net revenues fell by 6% yoy. These firms suffered mortgage losses of around $55 billion and destroyed some $200 billion in shareholder value.
The issue is vital enough to hold relevance in any period. Ray R. Irani, Ex-Chairman and CEO, Occidental Petroleum Corp. took home a sum of $76.1 million in 2010, almost double his 2009 compensation. Compensation expert David Hook tells B&E, “CEOs and the next layer should have a compensation ratio of 1:3, which in all senses is perfect”. In Ray R. Irani’s case the next layer was only taking home one sixth and he was making 1771 times more than the median wages of derrick operators in the industry. A huge 54% of shareholders voted against the plan and showed Irani the way out. Irani managed to make $857 million in the last decade and was reportedly the third highest paid CEO. Non-promoter CEOs have outshined promoter CEOs in issues of salary and benefits. Steve Jobs, promoter CEO, Apple, has fixed his pay at $1 per annum and is arguably one of the best CEOs of all times. In another instance, Sam Palmisano, Chairman, CEO & President, IBM reported a rise in his annual compensation of 30% from $24.3 million in 2010 (though IBM met share price targets). Not so proportionately, net income went up by 10.45% to $14.8 billion. IBM curbed other compensations of Palmisano by 3%, the 30% rise can be questioned if times change.
Lloyd Blankfein, CEO, Goldman Sachs managed a double pay rise making it to $18.8 million in 2011. Constant pressure from investors compelled the company to cut Blankfein’s salary who was drawing $68 million in 2007 and was responsible for the alleged misselling of toxic mortgage related derivatives for which Goldman Sachs had to pay a mammoth $550 million as fine. Salaries to five top directors ($69.5 million in 2010) have faced the flak even recently in 2011, as a group of nuns who are investors have asked the company to review its policies.
Another research conducted for major corporations of Wall Street found that the median pays of CEOs of top 50 companies have gone up by 30% in 2010. It does not add benefits like luxury retirement plans, platinum plated health care plans and the much talked about use of luxury jets. Total executive pay to these CEOs jumped to $126 million from $83 million in the previous year.
Even their Indian counterparts are not behind. Just like stock markets, companies seem especially optimistic about the future. Recently, V. Vaidyanathan, ex-CEO and MD, ICICI Prudential Life Insurance shifted his base to Future Capital Holdings for a mammoth Rs.500 million and 2 million warrants worth Rs.474 million, which are convertible in February 2012. It has even beaten the salary of Mukesh Ambani (Rs.250 million) and Kalanithi Maran (highest paid CEO last year, Rs.400 million).
There are packages that are well deserved too. Allan Mulally’s compensation increase of 48% to $26 million makes sense as he took Ford Motors through the tough days of recession without even taking a dollar of the bailout package from the US government unlike GM and Chrysler. And indeed, it is tough to monetarily quantify the role of leadership in inspiring an entire organisation to scale peaks or to even control slides. But it is when such ambiguity is misused to encourage excesses and create a bubble of sorts for CEO compensation that companies need to be scrutinised. Read the column by Shelly Karabell, Executive Editor, INSEAD Knowledge to understand a new metric in this area.
“It’s easy to have principles when you’re rich. The important thing is to have principles when you’re poor,” said Arthur Kroc, CEO of McDonalds. But the interesting part about the entire debate on astronomical, even galactical, CEO packages is that shareholders and the general public believe that principles are a fairly common casualty at the corner office!
CEO compensation related issues continuously hog the limelight in US, where the debate on the ‘Say on Pay’ bill, the one that would let shareholders have a non-binding vote on executive compensation has been especially fierce. Consider the recent anger over Pacific Gas & Electric Company (PG&E), whose outgoing CEO Peter Darbee gets a golden parachute of around $35 million. His departure looked imminent after one of PG&E’s natural gas pipelines exploded in a San Francisco suburb last September, resulting in eight casualties and destruction of 38 homes. State officials have been adamant that ratepayers should not pick the tab for Darbee’s retirement, and the company recently announced that the bill would be paid by shareholders instead. But shouldn’t the question have been raised on the value of the compensation package itself, rather than on who pays?
In a number of cases, companies have failed to justify compensations with respect to their financial situation and their perception on what the CEO should be worth. Even the G-20 summit in 2009 managed to sense the unnatural rise in executive compensation and an open house discussion was awarded to an issue, which has been raised by only investors so far. Even Barack Obama addressed his concern on the rising salaries while announcing the bailout package post recession. Russia initiated a move to cap CEO salaries in 2009, which was followed by China. The communist nation put an upper limit of $410,000 for state owned companies.
But capping CEO pays hasn’t gone too far in the US. Data from American Federation of Labor and Congress of Industrial Organizations showed CEOs’ median pay going up by 23% compared to 2.1% for the average worker. The median pay was reported to be $11.4 million, which came from fixed pay, stocks and different stock options of the 299 companies of S&P 500. These huge pay packets ($3.4 billion in all) would have led to the possible employment of 102,325 median workers!
A research report of American Federation of Labor and Congress of Industrial Organizations stated that between 1993 and 2008, the top 1% of Americans, captured a mammoth 52% of income growth in the US. Reports have even stated that the 2008 crisis was a result of the huge pay structure that CEOs have been getting. California-based compensation firm Equilar revealed that seven of the largest companies on Wall Street increased their compensations and benefits to $122 billion in 2007, a rise of 10% yoy. In contrast, aggregate net revenues fell by 6% yoy. These firms suffered mortgage losses of around $55 billion and destroyed some $200 billion in shareholder value.
The issue is vital enough to hold relevance in any period. Ray R. Irani, Ex-Chairman and CEO, Occidental Petroleum Corp. took home a sum of $76.1 million in 2010, almost double his 2009 compensation. Compensation expert David Hook tells B&E, “CEOs and the next layer should have a compensation ratio of 1:3, which in all senses is perfect”. In Ray R. Irani’s case the next layer was only taking home one sixth and he was making 1771 times more than the median wages of derrick operators in the industry. A huge 54% of shareholders voted against the plan and showed Irani the way out. Irani managed to make $857 million in the last decade and was reportedly the third highest paid CEO. Non-promoter CEOs have outshined promoter CEOs in issues of salary and benefits. Steve Jobs, promoter CEO, Apple, has fixed his pay at $1 per annum and is arguably one of the best CEOs of all times. In another instance, Sam Palmisano, Chairman, CEO & President, IBM reported a rise in his annual compensation of 30% from $24.3 million in 2010 (though IBM met share price targets). Not so proportionately, net income went up by 10.45% to $14.8 billion. IBM curbed other compensations of Palmisano by 3%, the 30% rise can be questioned if times change.
Lloyd Blankfein, CEO, Goldman Sachs managed a double pay rise making it to $18.8 million in 2011. Constant pressure from investors compelled the company to cut Blankfein’s salary who was drawing $68 million in 2007 and was responsible for the alleged misselling of toxic mortgage related derivatives for which Goldman Sachs had to pay a mammoth $550 million as fine. Salaries to five top directors ($69.5 million in 2010) have faced the flak even recently in 2011, as a group of nuns who are investors have asked the company to review its policies.
Another research conducted for major corporations of Wall Street found that the median pays of CEOs of top 50 companies have gone up by 30% in 2010. It does not add benefits like luxury retirement plans, platinum plated health care plans and the much talked about use of luxury jets. Total executive pay to these CEOs jumped to $126 million from $83 million in the previous year.
Even their Indian counterparts are not behind. Just like stock markets, companies seem especially optimistic about the future. Recently, V. Vaidyanathan, ex-CEO and MD, ICICI Prudential Life Insurance shifted his base to Future Capital Holdings for a mammoth Rs.500 million and 2 million warrants worth Rs.474 million, which are convertible in February 2012. It has even beaten the salary of Mukesh Ambani (Rs.250 million) and Kalanithi Maran (highest paid CEO last year, Rs.400 million).
There are packages that are well deserved too. Allan Mulally’s compensation increase of 48% to $26 million makes sense as he took Ford Motors through the tough days of recession without even taking a dollar of the bailout package from the US government unlike GM and Chrysler. And indeed, it is tough to monetarily quantify the role of leadership in inspiring an entire organisation to scale peaks or to even control slides. But it is when such ambiguity is misused to encourage excesses and create a bubble of sorts for CEO compensation that companies need to be scrutinised. Read the column by Shelly Karabell, Executive Editor, INSEAD Knowledge to understand a new metric in this area.
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