ID pay hikes slim down amid a muted show

The increase in remuneration for independent directors slowed nearly two-thirds in FY17 from a year earlier to 7% from 21%, according to Prime Database.

This was mostly due to lower profitability in certain sectors and a correction after a surge in demand for independent directors as the new Companies Act came into effect, experts said.

The average remuneration of independent directors, which includes sitting fees and commissions, was Rs 6.82 lakh in FY17 compared with Rs 6.36 lakh in FY16. Of about 6,000 independent directors, 100 account for as much as 70% of all commissions, according to Prime Database.

“Corporate results in FY17 were not as dramatically improved over the previous year as in FY16. So the remuneration paid to independent directors was also muted,” said Shailesh Haribhakti, chairman of audit and accounting firm Haribhakti & Co. “There was a general feeling among nomination and remuneration committees that ‘let’s continue with the same sitting fee and commission’.”

Special Commissions were absent in FY17 Haribhakti is an independent director on several boards. In FY16, some companies gave special commissions in addition to sitting fees and regular commissions because of windfall profits, which were absent in FY17. “Commission is dependent on net profit and if that is not up, then it will hit the commission, too,” said Pranav Haldea, managing director, Prime Database.

“A year earlier, the remuneration base of independent directors was much lower, which went up in FY16. As a result, in FY17, the percentage increase was comparatively lower,” said JN Gupta, managing director of Stakeholders Empowerment Services, a proxy advisory firm. The Companies Act 2013 empowered independent directors while increasing accountability and transparency. It held independent directors liable for acts of omission or commission by a company that occurred with their knowledge and stemming from the board’s actions.

Under the Companies Act, independent directors can be paid up to Rs 1 lakh as sitting fees per board or committee meeting. Companies have the flexibility to pay more when it comes to commissions. The total commissions paid to all independent directors in a company can be up to 1% of the company’s profit under the rules.

“In FY16, there was a recalibration of the sitting fee. At the same time, companies also recalibrated the commission as there was a shortage of independent directors,” said Arun Duggal, chairman, ICRA. It was a one-shot correction in FY16 by several companies to bring remuneration to market levels, he said.

“In FY16, companies were trying to figure out what is to be paid to independent directors after the new Companies Act increased liabilities with greater scrutiny,” said Shriram Subramanian, managing director of InGovern Research Services. “Many directors gave up the post, which led to a further increase in demand and correction in remuneration, which was not seen in FY17.”

Navnit Singh, managing director of Korn/Ferry International’s India unit said, “There was a rush in FY16 to hire a lot of independent directors by virtue of changes in the Companies Act. In FY17, there was some stability to that.”

The Uday Kotak-led panel on corporate governance set up by the Securities and Exchange Board of India (Sebi) has suggested that the top 500 firms pay independent directors at least Rs 5 lakh a year. It also recommended that the minimum sitting fee per board meeting for these directors should be Rs 50,000 for the top 100 companies. There is no Sebi rule on remuneration for independent directors in listed firms, which follow the Companies Act norms.

In FY17, taking into account only those independent directors who were on boards from April 2016 to March 2017 (excluding all mid-year appointments and cessations), in 3,755 of the 5,686 independent directorship positions (or 66%), remuneration for independent directors was below Rs 5 lakh, according to Prime Database.

The Sebi panel proposal would mean an additional Rs 132.63 crore payout to independent directors in FY17, according to estimates by Prime Database.

“The top 100 independent directors are taking 60-70% of the commission paid to all independent directors. This makes the number skewed,” said Haldea.

Among the highest paid independent directors in 1,462 of 1,469 NSE-listed companies for which data were available were M Damodaran, OP Bhatt, Aman Mehta, Naresh Chandra, Adil Zainulbhai, Vijay Kelkar, Punita Sinha, Nanoo Gobindram Pamnani, RS Mashelkar and R Seshasayee, according to Prime Database. Their remuneration was in the range of Rs 2.4-3.4 crore across multiple directorships.

The number of independent directors in the Rs 1-crore-plus club stood at 68 in FY17, down from 70 in FY16. In FY15, the number stood at 57 versus 30 in FY14 and 23 in FY13.

Link: Economic Times- 20 Oct 2017