The Four Contours of Good Corporate Remuneration Philosophy

The recent debate generated by the compensation recommended to the Chief Operating Officer in Infosys has brought into focus the need for defining the contours of a well-crafted Remuneration Philosophy. While opinions can vary, what needs to be assessed is the consistency with which the articulated remuneration philosophy is practiced. This need is recognized in the corporate law and provisions exist for a clear articulation of the same to ensure consistent practice and dispel unwarranted criticism.

Section 178 (3) of the Companies Act, 2013 among other things requires the Nomination and Remuneration Committee to recommend to the Board a policy relating to the remunerations of Directors, Key Managerial Personnel and other employees. This policy, which is in the nature of remuneration philosophy for the company is on par with the Vision and Mission statement of the company in its contribution to realise corporate goals. But what should the contours of a good compensation policy be?

An effective compensation philosophy should be able to attract, retain and enrich talent required for realizing the business goals and at a minimum meet the following criteria:

1. Be in sync with company’s business strategy and corporate goals by defining compensation structure.
2. Be cognizant of the competitive environment in which it operates by identifying where to position the company on the quantum of compensation.
3. Promote the creation of a conducive corporate culture by defining the range of compensation.
4. Be sensitive to employees’ perception of equity and fairness by taking in to account the contributions of various individuals and groups and defining what to include in benefits that are available to all employees.

Given these criteria, the contours or the four dimensions are encapsulated in the distinct choices that a company makes in designing its employee remuneration. To start with, a company’s business strategy and corporate goals may require it to give a higher weightage to one of the two contrasting choices, namely:

• Current and deferred compensation –based on the gestation period between efforts and results. Projects with long lead time like IP developments and R&D may have a higher deferred compensation.
• Fixed and variable compensation –based on the difference individual efforts make to the final result. For instance, functions like sales have traditionally have a higher variable compensation.

The second element of compensation philosophy is in being cognizant of the competitive position the company has in its industry. The company may need to define where it will place itself in the compensation spectrum. Should it be in the top quartile of the highest paymaster in their industry fighting for the best talent? Or should they be in the third quartile where they leverage their corporate brand to attract the best talent using not just with money but with other elements too or should they place themselves outside the top half of the compensation spectrum with a rationale and distinct appeal for attracting their talent pool.

It is often said that the differentiator between a successful company and a not-so-successful company is its culture. One of the main aspects that contribute to the corporate culture is the remuneration policy. This is because human behavior is influenced not by words but by deeds.  Companies often say that they value team work, but if their remuneration and incentive structure promotes individual contribution, it is not hard to see which will win. Hence the decision on weightage to be given to Team and individual compensation is extremely critical for it shapes the company culture.

A feeling of oneness and unity of purpose is essential in all successful teams. Business is no exception. A critical factor contributing to this is the feeling of fairness and equity felt by the large mass of employees. This is one of the basic reasons why public companies are required to report the ratio that director’s remuneration bears to that of median remuneration of employees.

In short higher weightage to current and variable remuneration, which is in the top quartile with focus on high individual differentiation contributes to creating a high-performance culture. This is excellent in bull markets and when things are going well. But when the markets turn adverse and the going gets tough, it extracts a very high price. While there is no common prescription that suits all companies, each board has to decide for themselves what their company needs and Corporate Remuneration Philosophy is a good place for companies to start defining what they stand for. Communicating this Philosophy to their stakeholder’s make it clear to all as to what the company stands for.