[Jeroen]

Originally Posted by SmartCat

In the last column of the table, you will see "Ceiling as per the Act" number, as compared to actual remuneration.

Thanks, but it does not say how to calculate the value of shares. You can do that in all sorts of ways. Is there a difference between stock and options? What about the date an option becomes exercisable?

Actually one of the big problem in these CEO/MD pay comparisons is exactly this. How are the various share/stock options calculated/valued. Everybody does it differently. Also, different fiscal rules for everybody. In the netherlands if I get share/ stock options, I will immediately need to pay tax over the value on the day I got them. Even if I can’t use them for the next 3 years.

Originally Posted by SmartCat

But 5% of net profits is pretty reasonable right? If a company generates $100 million in profits, the MD can take home up to $5 million.

I have said it before. I do not believe any CEO/MD of any size company should earn more than one million Euro a year. Everything above that becomes obscene as far as I am concerned. Unless you are the actual owner of the company. But most CEO/MDs are in fact just employees.

There has been lots of research as to the effects of big CEO/MD renumaration on the actual company/stock performance. Again, a big problem is the way to calculate the value of the stock (options) of the CEO in order to compare.

But I have seen more studies suggesting there is no, or at best very little correlation, then I have seen studies that show a positive correlation between renumeration and company/stock performance.

So, the Jury is still out on that one it seems.

Jeroen

[SmartCat]

Originally Posted by Jeroen

Thanks, but it does not say how to calculate the value of shares. How are the various share/stock options calculated/valued. Everybody does it differently.

No clue, I need to look it up. To me, {number of shares allocated x share price on March 31st} seems most logical. After all, when individuals declare their current networth (or current value of assets), we are supposed to consider the value of all shares on the last day of financial year.

Unless you are the actual owner of the company. But most CEO/MDs are in fact just employees.

The pay ceiling on listed Indian companies is primarily designed to protect shareholders, not workers. The idea is that all shareholders are part-owners of the company, and that top management should not 'siphon' off more than 11% of profits or a certain percentage of networth as salary. If top management wants higher remuneration, they always have the option of declaring higher dividend. But then, when a company does that, minority shareholders get benefited too.

As I mentioned before, CEO to median pay ratio has to be declared by listed companies too. This encourages (but does not force) management to raise median wages of company. Because, if the ratio is insanely high, minority shareholders will make a a lot of noise. They actually did that in case of Apollo Tyres (CEO to median pay ratio of 940!).

Victory for minority shareholders in Apollo Tyres: Kanwars to take a 30% salary cut
https://www.financialexpress.com/ind...alary/1381109/

So if top management wants higher pay and still show a reasonable "CEO to median pay" ratio, they do have the option of raising median wages. After all, dividend payout to increase management pay is NOT suitable for companies whose directors own, say, just 25% of shares.

I do not believe any CEO/MD of any size company should earn more than one million Euro a year. Everything above that becomes obscene as far as I am concerned

The problem with fixing CEO salary at $1 million or $5 million is that Govt then needs to keep revising it every X years, because of inflation. Instead, fixing "CEO to median pay" at a reasonable level (say 50 to 100) protects both company/top management interests and employee interests. Plus, no need to keep revising the number every X years.

[SmartCat]

Just a tongue-in-cheek question/observation:

[SmartCat]

Reed Hastings of NETFLIX is talking about highly paid programmers in this article - I wonder if this is applicable to CEO/MD/Top management too:
https://www.cnbc.com/2020/09/08/netf...n-average.html

The rock-star principle is rooted in a famous study that took place in a basement in Santa Monica, California. At 6:30 a.m., nine trainee programmers were led into a room with dozens of computers. Each was handed a manila envelope, explaining a series of coding and debugging tasks they would need to complete to their best ability in the next 120 minutes.

The researchers expected that the best programmer would outperform his average counterpart by a factor of two or three. But it turned out that the most skilled programmer far outperformed the worst. He was 20 times faster at coding, 25 times faster at debugging, and 10 times faster at program execution than the programmer with the lowest marks.

Bill Gates, whom I worked with while on the Microsoft board, purportedly went further. He is often quoted as saying, “A great lathe operator commands several times the wages of an average lathe operator, but a great writer of software code is worth 10,000 times the price of an average software writer.”

In all creative roles, the best is easily 10 times better than average.

[NetfreakBombay]

Originally Posted by SmartCat

I wonder if this is applicable to CEO/MD/Top management too..

The researchers expected that the best programmer would outperform his average counterpart by a factor of two or three. But it turned out that the most skilled programmer far outperformed the worst. He was 20 times faster at coding, 25 times faster at debugging, and 10 times faster at program execution than the programmer with the lowest marks.

In my experience, this applies to both; developers as well as upper management.

1. HDFC , HDFC Bank and Asian Paints: Credit for success in last ~30 years is partly attributable to corporate culture that is driven from the top (and demonstrated by examples)
2. Average fresher commands 3 - 4 Lakh per year , top of the class commands ~50 lakhs. In my experience, output also matches these levels. One needs to be really good to :
   • Clear JEE +
   • Get Comp Sci +
   • Excell at coding + Algo + DS by end of second Year +
   • Be excellent communication skills +
   • Have demonstrable track record of working in teams ( Collage fests, Dance clubs ) +
   • Have portfolio of Apps / Projects

[Samurai]

Bill Gates, whom I worked with while on the Microsoft board, purportedly went further. He is often quoted as saying, “A great lathe operator commands several times the wages of an average lathe operator, but a great writer of software code is worth 10,000 times the price of an average software writer.”

He has mentioned it in his first book "The Road Ahead", which I read long ago. But he never mentions that the great programmer must be paid 10,000 times the average programmer.

Turns out that the great programmer doesn't need to eat 10,000 times or live in a house 10,000 times expensive compared to the average programmer.

Not only that, it takes a large team to monetize what that great programmer has built. Without that team, the output of the great programmer will be wasted.

I don't want to rehash old argument made in this very same thread before. So, I'll just quote them.

Originally Posted by Samurai

Suppose an employee X develops a great product all by himself. Company sells 100 pieces of it and makes 1 million in profits. They give 100K to X and he is happy that he was paid his worth.

Then the company hires a new CEO Y for 500K and he sells 1000 pieces of the product and makes 15 million in profits. Keep in mind employee X has no role in sales. Is the worth of employee X still only 100K and CEO still worth 500K?

What happens in most companies is that the employee X might get a small bump to 120K, while the CEO gets pushed to 2 million. The argument used is that the CEO got the revenues from 1M to 15M all by himself, while the employee did nothing towards that effort. However, it completely ignores that the employee enabled the magical jump from 1M to 15M by creating the product in the first place. This is like a relay race, where the finisher gets all the credit for the win. This is one argument.

Any company is a collection of dozens/hundreds/thousands of teams and divisions, that needs to be channeled towards a common goal. They could be R&D, Marketing, Sales, Manufacturing, QA, Finance, Accounting, Personnel, Operations, customer support, etc. CEO make the overall plan and then monitors that plan (and make corrections) as it trickles down the hierarchy and gets executed all around the world. The scope for misunderstanding and miscommunication is great. Same can be said about the feedback the CEO gets back from the field. It is equivalent to fog of war. Somehow, all of them get their act their together and make the plan a success. Should CEO really get all the credit? His job was to make a plan and get everybody to execute it. It is not like he could have executed it without his employees. It was the synergy between all the teams that made it happen. It was team work.

I am a founder CEO myself, and I know I am nothing without my team.

[NetfreakBombay]

Originally Posted by Samurai

Not only that, it takes a large team to monetize what that great programmer has built. Without that team, the output of the great programmer will be wasted.

Tech is a winner-takes-all field. That's what drives pay for both management and programmers. For example : FAANG and extreme cases like this :

With only 55 employees, WhatsApp’s $19-billion valuation could, in an alternate universe where each employee was given an equal share, fetch $350 million per employee. This is nearly five times what employees of Instagram would have got when that company was bought out for $1 billion in 2012.

WhatsApp CEO Jan Koum owns a 45 percent equity stake, which makes him worth $6.8 billion while cofounder Brian Acton gets $3 billion for his 20 percent stake. Early employees reportedly have 1 percent stakes, which yields each of them $160 million each.

[Samurai]

Originally Posted by NetfreakBombay

Tech is a winner-takes-all field. That's what drives pay for both management and programmers. For example : FAANG and extreme cases like this :

You couldn't have picked a worst example to make your point. I often use whatsapp as an example of how programmers don't matter.

I am an active programmer since 1989, so you can't say I don't understand their importance. It is still 30% of my activity, rest is spent in other stuff. Why? Because I love programming, and don't want to stop having fun.

Whatsapp is not a complex program to write. See what I said in 2015 about Whatsapp:

Originally Posted by Samurai

Whatapp is no cutting edge technology, FB has much better tech. Anyone remember TIBCO? TIBCO allowed millions of stock traders and monitors all over the world stay in sync, by exchanging up-to-the second stock information instantly, since the 80s. Same thing whatapp does 30 years later using the latest communications technology, but for people. Whatapp has no API for developers even now, TIBCO had it in the 80s.

The original version of whatsapp could be written by one guy in one month. Doesn't need a genius either. Remember that the original author was rejected by FB for a programmer position. He was heavily assisted by iOS adding push notification feature. He didn't have to invent a new protocol stack like the Tibco author did 25 years ago.

But things changed because it went viral and picked up thousands of users. That helped him get $250K in seed funding from bunch of ex-Yahoo employees. After this point it was no more about programming, but about operations & marketing, it is easy to guess that is where the fund was used. Two years later, Sequoia Capital added $8 million in funding. Initial employees probably got some stake. By this point, I suspect the programming budget was less than 10% of the total expense. Rest would be spent on operations, support & marketing. And they could easily hire/fire the best programmers, so they didn't matter anymore.

When FB finally bought whatsapp for $19B, they didn't do it because of the brilliance of the software. FB could have built a better app in a month. Even Google and Microsoft could have built a better app in a month. But a product is not just about program. It is also about subscriber base, brand, operations & support infrastructure. In fact, in case of whatsapp kind of application, more than 90% of the effort is in non-programming area.

Google wanted to buy whatsapp for $1B, Microsoft wanted to buy it for lot more (figure is not known). And FB already had a messenger subscriber base larger than whatsapp. So they simply wanted to keep whatsapp out of the hands of Google and Microsoft. They paid $19B to deny Google/Microsoft from getting whatsapp subscriber base.

WhatsApp CEO Jan Koum owns a 45 percent equity stake, which makes him worth $6.8 billion while cofounder Brian Acton gets $3 billion for his 20 percent stake. Early employees reportedly have 1 percent stakes, which yields each of them $160 million each.

And how much did the early ex-Yahoo investors and Sequoia Capital get from that $19B?

Basically the founders of whatsapp didn't get the big bucks for their programming genius, but for doing the right things on the business side. IT world is full of genius programmers who are still working for a salary, and at the mercy of their employers.

But this thread is not about founder CEOs, who built their companies from scratch. Those companies wouldn't exist without them.

Focus of this thread is about professional CEOs, who came in to play a role in a company already doing well. Fair weather CEOs... how much credit should they get?

[Samurai]

Narayan Murthy weighs in on this subject, with a formula. He goes more extreme than I usually do. I am for a sane ratio for CEO:MedianPay, while NRN wants a sane ratio for CEO:LowestPay.

https://www.financialexpress.com/ind...board/2088181/

I don't agree with that, because it makes the cap very volatile, it is very easy to change lowest pay. Median pay is lot more stable, it is impacted only by major shift in overall salaries across the board.

[Samurai]

This news is for those who believe CEO compensation is linked to company performance, without any data supporting that claim.

C.E.O. Pay Remains Stratospheric, Even at Companies Battered by Pandemic

While millions of people struggled to make ends meet, many of the companies hit hardest in 2020 showered their executives with riches.

https://www.nytimes.com/2021/04/24/b...pensation.html

[Chetan_Rao]

Originally Posted by Samurai

This news is for those who believe CEO compensation is linked to company performance...

Funny how the sentiment below doesn't extend from the boardroom to the shopfloor.

“There was a sense in board rooms that if, despite all this, they managed to deliver on the numbers, who are we to cut those payments in a year when everyone worked their butts off?”

[SmartCat]

This is a new record for CEO salary. However, Zerodha has not taken a single paisa from outsiders. The founders built the company from scratch, reinvested all profits and has now reached approx. Rs. 1,200 cr revenues/ Rs. 500 cr profits.

Zerodha co-founders Nithin and Nikhil Kamath to get Rs 100 crore annual salary
Also eligible for the same fat paycheque is newly appointed whole-time director and Nithin’s wife Seema Patil.
https://www.moneycontrol.com/news/bu...y-6953451.html

[nakul0888]

Guess most here if not all understands / appreciates the concept of private property rights.
Just casually throwing out formulas, equations, arbitrary justifications for blatant violation of rights of owners of businesses while sitting in their armchairs.

[Samurai]

Originally Posted by SmartCat

This is a new record for CEO salary. However, Zerodha has not taken a single paisa from outsiders. The founders built the company from scratch, reinvested all profits and has now reached approx. Rs. 1,200 cr revenues/ Rs. 500 cr profits.

Why are you even bringing it up here? They are founder CEOs who can take get that kind of income as dividends, if not salary. As I have mentioned in the last line of this post, this thread is about professional CEOs, and not founder CEOs.

Originally Posted by nakul0888

Guess most here if not all understands / appreciates the concept of private property rights.
Just casually throwing out formulas, equations, arbitrary justifications for blatant violation of rights of owners of businesses while sitting in their armchairs.

That is true. But a forum like this can't be limited only to people who have first hand experience as entrepreneurs and CEOs, or managed/crafted policies for finance, HR, sales at the top level. There are a few of us like that, but getting the viewpoint of others is very important. Policies and strategies should never created in a bubble using book knowledge. One has to understand the sentiment and culture at top, middle, lower management as well as shop floor level. Otherwise one can create and enforce disastrous policies. I have personally suffered under such arm-chair CEOs/SBU-heads/regional-heads, directly and in-directly. People who have climbed the corporate ladder all the way generally have better understanding of this. But those who jumped directly to middle/higher management thanks to their educational pedigree or extraordinary skill in finance/sales don't tend to have this useful experience. Young startup founders also suffer this problem if they are funded very early in the process.

I've been part of multiple top management, two of them as co-founder. But I always like to hear how various stakeholders think about the company, whether they are large or small customers, senior or junior employees, large or small vendors, and large and small shareholders. They can often reveal things which are not visible from my vantage point.

[SmartCat]

Originally Posted by Samurai

As I have mentioned in the last line of this post, this thread is about professional CEOs, and not founder CEOs.

That is not correct. Once a company goes public, there is no difference between professional/founder CEO. If a certain large % of shares is owned by the public, activist shareholders will make their displeasure known if owner CEO takes home XL sized pay. Because that is seen as robbing other shareholders. The right way to reward a publicly listed company's owner CEO is to declare a larger dividend. So that all shareholders (including owner CEO) are benefitted.

Apollo Tyres Cuts Kanwars’ Pay After Shareholder Rebuff
https://www.bloombergquint.com/marke...eholder-rebuff

But yes, all this is not applicable to Zerodha's case, only because it is a private company with no other shareholders (as mentioned in my post). Not because he is the owner/founder.

They are founder CEOs who can take get that kind of income as dividends, if not salary.

From now onwards, more and more owners will try to pull out funds from their company in the form of salaries, rather than dividends. That's because dividends are now taxed at the hands of the promoters, and it is no longer tax efficient.

How promoters will end up paying higher tax on dividends?
https://www.indiainfoline.com/articl...2000310_1.html