[SmartCat]

INTRODUCTION

During US presidential election, one of the rare issues where both Trump and Clinton had similar views was on high salaries of CEOs and income inequality within corporations.

Quoting Trump:

It’s disgraceful. You see these CEO guys making enormous amounts of money. It’s a total and complete joke

Quoting Clinton:

We need to get back into the habit of actually rewarding workers with increases in their paychecks for the increases in productivity and profitability that they have helped to bring about. You know, Warren Buffett has said it, but so have a lot of other people: There's something wrong when the average American CEO makes 300 times more than the typical American worker

Basically, a typical CEO of a large publicly listed American corporation earns 200 to 300 times more than the median wage of employees in the company. Naturally, one would assume that most CEOs deserve such huge salaries because they drive strategy and are responsible for profits generated by the company. But this is actually a recent phenomenon - till the 1990s, CEO's pay used to around 20 to 30 times median wage



To be more specific, this is essentially an American problem. In most developed countries, CEO pay to median wages ratio is reasonable.



Basically, wages of an average worker in United States has increased at inflation rate (or less) but CEO pay (includes salaries, commission, stock options etc) has shot through the roof.



To reduce income inequality, economists recommend a CEO pay to median wages ratio of around 20 to 30. But the above graphic indicates that the debate in United States about high CEO wages is running on a wrong track, with some recommending a cap on CEO salaries. The problem is not high CEO wages - the problem lies in low worker wages whose income has not kept pace with even inflation rate.

Anyway, there is no point in Government fixing a low "CEO pay to median wage ratio" by introducing a law - because company can artificially increase median wage by outsourcing or by setting up a separate company for manufacturing operations.

[SmartCat]

INDIAN AUTOMOBILE INDUSTRY, EMPLOYEES & WAGES

The Indian automobile industry literally employs millions of people. However, unlike other manufacturing industries, it has seen some extremely violent and disturbing episodes in recent times -

1) GM HR of Maruti killed by workers in 2012
2) VP HR of Pricol (maker of instrument cluster for cars & bikes) killed by workers in 2010
3) India CEO of Graziano Trasmissioni (gearbox manufacturer) killed by workers in 2008

It is clear that there are some serious structural issues with workers - management relationship in the automobile industry. To see if we can figure things out, I have analyzed FY17-18 annual report of major listed automobile companies in India



COMMENTS:

1) Like the United States, there is a huge disparity between median employee wages & CEO/MD pay in the Indian automobile industry. The average ratio for the above sample of listed companies is little under 300.

2) CEO pay and its comparison with median wages is slowly getting publicity in India. Many listed companies disclose this disparity in their annual report. Business newspapers have started reporting this number too.

3) CEOs of Indian automobile companies have smallish basic salary + percentage of profits as commission.

4) Some Indian companies hire professional CEOs while others are run by promoters. Note that in addition to salary/commission, the promoter MD/CEO gets a huge amount as dividend income. However, this is not considered as remuneration and hence not included in calculations.

5) Since TATA JLR is essentially European and MARUTI is Japanese, their CEO pay to median wages ratio is reasonable, and in line with the number in their respective countries (see 1st post).

6) Tata JLR median salary is huge for obvious reasons (50% employees outside India, huge R&D spend, factories in Europe, Brazil and China). Tata Motors India's median salary is Rs. 7.5 Lakhs. Here is the breakup of Tata Motors India's median salaries for "blue collar" (factory workers) and "white collar" employees (sales & marketing, product development etc)



7) Hero Motorcorp's Pawan Munjal drew a remuneration of Rs. 75 crores last year! But then, it looks like Hero Motocorp looks after their employees too. Their median pay is the highest among listed Indian companies. This 2013 article suggests CTC of experienced shopfloor worker is around Rs. 50,000 per month

8) Incredibly, around 50% of employees are contract or temporary workers with low pay (compared to permanent employees), no job security and no benefits.



9) This article suggests that Maruti pays Rs. 16,000 per month to temporary employees. However, it is unclear if this salary goes to temporary employees or to labour contractors (who take a cut and then pay the workers). The CTC of entry level permanent employees is approximately double that of temporary or contract labour.

10) Maruti's total employee costs are just 3.3% of sales. It is a lot lower (in percentage terms) than others (4.5 to 10% of sales) because Maruti does little or no R&D in India. If a company has Rs. 1,000 crores as R&D expenses, approximately 70% of that is people costs while the remaining 30% goes into purchasing materials, machinery etc.

[SmartCat]

CONCLUSION

Shop floor employee cost as a percentage of sales is extremely low because of widespread automation in a modern assembly line. It is clear that assembly line workers' wages are just 2 to 2.5% of sales for most automobile companies going by Maruti's numbers (simple sales + manufacturing operation, no R&D), Tata Motors' disclosure and random statements about wages & negotiations with unions by company management in business newspapers.

• That is, when we pay Rs. 10 Lakhs for a car, just Rs. 20,000 to Rs. 25,000 is the cost attributable to workers + supervisors on the assembly line. It means a wage increase of 40 to 50% for shop floor workers can be absorbed by raising prices by just 1 to 1.5 percent! Increasing prices is normal activity - we know for a fact that car majors regularly increase prices of models by Rs. 10,000 to Rs. 30,000 because steel, crude oil or aluminum prices have shot up.
  
  
• Shop floor workers' wages go up by 6 to 8% (inflation rate) even if the company is growing its profits at 20% per annum.
  
  
• Except Tata Motors, all the above companies have been making consistent profits. And the profits have been increasing every year too. It is peculiar that the industry keeps 50% of workforce on temporary or contract basis. Constraints regarding "hiring & firing" of employees at whim does not seem to be a valid argument - because if we look at 10 year data, number of employees is going only one way and that is UP.
  
  
• All the above listed companies pay approximately 25% of their profits as dividends to shareholders. The sad fact is that - other than the promoter group, very few shareholders care about dividends. A company with high standards of corporate governance puts customer first, employees second and shareholders third. But it looks like Indian automobile giants put shareholder interests ahead of employee (shop floor worker) interests.

However, I'm not implying that CEO/MDs/promoters are bloodsucking vampires. It is quite possible that they have other things on their minds and just let HR manage labour issues. Insurance major Aetna's former CEO says -

Corporate leaders need to learn what is life like for the workers. It took me 6 months to get the data, but once I got the data, I was embarrassed.

https://www.youtube.com/watch?v=EMFrxnZ8YJY

Perhaps this is something to ponder about for promoters & top management of Indian automobile companies?

[ampere]

Thread moved out from the Assembly Line. Thanks for sharing!

[ninjatalli]

Another point of concern wrt to India (since the analysis started out comparing with US and other global markets) is what other income generating / assets gathering aspects also are leveraged by the CXO level.

The most recent ICICI Chanda's case comes in point; I'm sure (auto and other industries) there are cases to be unraveled across the board. With our relatively lax regulations, and the process how states fall head over heels to get large (especially auto) organizations to invest in their states, I'd make a fair assumption a lot of the under-the-table setups are happening wrt the CXO level remunerations.

[Hayek]

Interesting question, and as befits my Handle, I went for the unpopular view. The entire idea that workers wages should be delinked from their productivity and with wages for similar skills in the market is dumb. That’s the primary reason India hasn’t emerged as a manufacturing hub - we want to take short cuts to pay above market wages for lucky insiders who get good jobs in the organised sector, even if it means that hundreds of millions of others languish with no jobs.

About 20 years ago, a close friend got a job with a large MNC in China. 2 years later, the Chinese government allowed them to fire nearly 5000 workers at a plant close to Shanghai, as they were creating 20000 jobs further away (at 50% of the wage). That attitude has led to China become the world’s assembler, and made the country as rich today as South Korea was back then. We have been talking of labour reform throughout my career but have done nothing - and seem to have missed the manufacturing bus. Hence we will keep fighting about sharing a small pie rather than expanding the pie by making ourselves richer. And in a Trumpian world moving to zero sum thinking, changing our attitude becomes harder.

More broadly for the auto sector, our dumb tariffs and crazy indirect tax rules have made India a massive profit island for those who succeed like Maruti, Hyundai and Toyota - but with products that can’t be sold anywhere else without major modifications. If we had kept tariffs low (not more than 15%), upgraded safety standards to global levels, and not had dumb excise rules like the 4 m one, we would have naturally emerged as the world’s hub for making small cars. Instead, for Maruti, making cars for exports means altering design to meet safety norms - and sacrificing margins compared to what they can make while selling in India - and hence we are a purely domestic manufacturing market. End result, limited production, players pulling out and limited opportunities to increase demand for labour.

Au contraire, India has emerged as a global hub for sourcing managers and “white collar” professionals. Hence their salaries have risen rapidly, with senior managers being in a position to get jobs anywhere in the world and hence getting globally benchmarked comp. Great for folks like lots of us on this forum- but this obviously increases perceived inequality.

BTW, the increase in wages for educated professionals in India reduces global inequality - when I graduated over 20 years ago, I earned less than 10% of what my friends who went to the US made. Today the difference in comp is probably down to 2.5x. That’s good - but something that all those whining about inequality ignore

Sorry for the long harangue.

[libranof1987]

Interesting compilation there, smartcat.

This debate has come up quite often in the recent past: and in India, most recently when Vishal Sikka was appointed CEO/MD of Infosys.

When you look at the numbers just by themselves, it is staggering; the amount of disparity makes you wonder why it is so and whether it is justified. But then again, I wonder if there is really a science behind the numbers. Just as willingness to pay is a very subjective concept, salaries are a function of demand and supply and perceived/expected notion of what you can bring in to the firm (eg. lawyers and consultants are judged based on the ticket price of their client engagements).

Also, when you look at salaries at the CxO level; that number is inclusive of a lot of factors (base pay, incentives, bonuses, stock options, stock price etc.): they don't necessarily always get that amount. Needless to say, what they make is still pretty obscene a lot of times!

The same debate has also come up in recent times with regards to salaries paid out to sportspersons (basketball, football and cricket in particular). Of there, it isn't so much of a comparison there but just whether a single person deserves so much.

Coming back on topic: unlikely that any of the CxOs would want to take a pay cut, and if the base salaries were to go up, wonder how that would affect demand and supply. A common problem in most IT services firms today is that they've become very middle heavy (too many mid-level managers twiddling their thumbs bringing nothing to the table worthy of their designation) so a pay hike will probably make it worse. And an increase in costs (wages) will make India lose its current lower-cost advantage.

[V.Narayan]

Originally Posted by Hayek

Interesting question, and as befits my Handle, I went for the unpopular view. The entire idea that workers wages should be delinked from their productivity and with wages for similar skills in the market is dumb. That’s the primary reason India hasn’t emerged as a manufacturing hub - we want to take short cuts to pay above market wages for lucky insiders who get good jobs in the organised sector, even if it means that hundreds of millions of others languish with no jobs.

We have been talking of labour reform throughout my career but have done nothing - and seem to have missed the manufacturing bus. Hence we will keep fighting about sharing a small pie rather than expanding the pie by making ourselves richer. And in a Trumpian world moving to zero sum thinking, changing our attitude becomes harder.

More broadly for the auto sector, our dumb tariffs and crazy indirect tax rules have made India a massive profit island for those who succeed like Maruti, Hyundai and Toyota - but with products that can’t be sold anywhere else without major modifications. End result, limited production, players pulling out and limited opportunities to increase demand for labour.

Au contraire, India has emerged as a global hub for sourcing managers and “white collar” professionals. Great for folks like lots of us on this forum- but this obviously increases perceived inequality.

BTW, the increase in wages for educated professionals in India reduces global inequality - when I graduated over 20 years ago, I earned less than 10% of what my friends who went to the US made. Today the difference in comp is probably down to 2.5x. That’s good - but something that all those whining about inequality ignore

+1 to that. Thank you, Hayek, for putting forth your points so beautifully. I couldn't do it thus even if I tried.

All,
Why stop at workers vs CEOs why not cricketers vs hockey players or politicians vs IAS officers or Bank general managers vs Brigadiers and so on or software coders vs the office boy. Why not what the auto worker drew without that auto industry job vs what he draws now. Why not auto worker vs worker in another industry.

The only reason journalists start comparing worker vs CEO is their own limited thinking. In early 1970s Madame Gandhi introduced a 1:10 salary ratio in Govt so safai karamchari to the senior most IAS/Army Chief had a 1:10 ratio. We ended up with over paid zero productivity safai karamcharis and stopped attracting the best brains to Govt service (contrary to the case in the 1950s and 60s).

The only thing achieved by wage control is to prevent future fresh employment. The only thing worse than market force balance is to have Govt officials and politicians and journalists deciding on input costs of any industry. We saw that for 40 years in the license raj.

[Samurai]

Tata Motors India blue collar workers have a median salary of 5.75L? That means 50% of Tata blue collar workers make 48K/month or more. That's better than what engineers make in many sectors.

[SmartCat]

Originally Posted by V.Narayan

software coders vs the office boy. peons vs officers

Key differences:

1) Office boys & peons are a small percentage of the work force. But shop floor workers form the majority.
2) Peons and office boys do not have a significant effect on productivity, quality of work and profits. Not the case with shop floor workers.

The only thing achieved by wage control is to prevent future fresh employment. The only thing worse than market force balance is to have Govt officials and politicians and journalists deciding on input costs of any industry. We saw that for 40 years in the license raj.

I think any form of Government intervention in the form of increasing wages or restricting CEO pay is a terrible idea. Increasing wages should be voluntary (as Aetna did). That's why the poll is titled "Should consistently profitable companies increase wages" and NOT "Should Govt increase minimum labour wages"

Originally Posted by Samurai

Tata Motors India blue collar workers have a median salary of 5.75L? That means 50% of Tata blue collar workers make 48K/month or more. That's better than what engineers make in many sectors.

Right, and not just Tata Motors. Permanent blue collar employees have decent salaries in all the sample automobile companies (read Hero Moto article).

It is the temporary employees or contract workers who are paid relatively low wages - Rs. 16,000 per month in case of Maruti. And as mentioned before, it is unclear what kind of cut the labour contractor takes on this Rs. 16,000 amount.

[hrman]

Originally Posted by Samurai

Tata Motors India blue collar workers have a median salary of 5.75L? That means 50% of Tata blue collar workers make 48K/month or more. That's better than what engineers make in many sectors.

The data is common for most Automotive MNCs. In many companies I know of, the average engineering degree holder's salary is less than half that of the slightly experienced shopfloor worker. But mostly for the fresh engineer v/s seasoned shopfloor worker. Once the experience kicks in, the software engineer overtakes the shopfloor worker in a few years time, while the shopfloor workers wages have not correspondingly risen.

Despite this, the shopfloor workers do nurse an ambition to have their children study engineering and become engineers.

[AMG Power]

Wage disparity between employee and CEO is not a reason for hiking salaries. The CEO's salary is a factor of his ability to command a salary and prove his worth to the stake holders who eventually decide whether the CEO is worth the money paid to him.

Hypothetically, if one get's two equally good employees, with one willing to work for 25% less pay, the choice is clear. The same applies to a CEO - if the stakeholders find what they perceive to be an equally good CEO @ 25% lower costs, it's a no brainer for them. If the CEO performs well the stakeholders benefit - the converse is also true.

Additionally relations do not improve by wage hikes alone, it is a combination of several factors of which wage hikes is just one. Motivation levels, working conditions, treatment of employees, job content, job rotation, opportunities for promotion etc are factors that are equally important.

Salary hikes to workers are dependent on market forces and how best one can manage to walk that tight rope in a company.

[timuseravan]

Excellent post smartcat! I am firmly in the demand/supply camp. Any attempts at regulation by Govt or any other agency has almost always lead to much bigger problems.

Originally Posted by smartcat

• All the above listed companies pay approximately 25% of their profits as dividends to shareholders. The sad fact is that - other than the promoter group, very few shareholders care about dividends.

This is mostly true only for retail/small shareholders. Big institutional investors and MFs do look at total dividends paid.
Also in India for almost past couple of decades we are in a unique situation where Share prices have leapfrogged dividend payouts. However as the market stabilizes, dividend component should become more important.

Originally Posted by smartcat

• A company with high standards of corporate governance puts customer first, employees second and shareholders third. But it looks like Indian automobile giants put shareholder interests ahead of employee (shop floor worker) interests.

This may have been true in 60s and 70s.
Today the priority list goes:

1. Promoters/High Management
2. big/institutional shareholders
3. customers
4. small/retail shareholders
5. employees

Originally Posted by smartcat

Corporate leaders need to learn what is life like for the workers. It took me 6 months to get the data, but once I got the data, I was embarrassed.

On the other hand, CEO or other higher management position is 24/7 365 days a year job! You cannot really be not at work at any time.

[SoumenD]

Originally Posted by Samurai

Tata Motors India blue collar workers have a median salary of 5.75L? That means 50% of Tata blue collar workers make 48K/month or more. That's better than what engineers make in many sectors.

That's more of a CTC. What tata does is provides accommodation(1 bhk to 3bhk quarters based on designation), free education for 1 kid(my schooling was free till 12th in D.A.V ), free electricity, water and medical. My dad used to work for TATA STEEL all his life till he retired 4 years ago in a small township named Noamundi in Jharkhand. Although it wasn't TATA motors but their policies are kinda similar. TATA motors have similar setup in Jamshepur named TELCO. Their employee perks is just mind blowing & on top of that they have an UNION(for worker category) which is pretty strong.

P.S: The greenery in TATA townships is to die for. Damn, I miss those days.

[Kaumad]

Article on The Economic Times in July on this topic.

https://economictimes.indiatimes.com...w/64847185.cms