R Jagannathan
Those who believe that compassionate capitalism must make lower salary differentials the norm have the duty to demonstrate that it can work in today’s business environment.
Narayana Murthy is not too old to start or invest in companies that will attempt to follow his values. If he has something to prove, he should go out and prove it. The world will take note if he delivers.
N R Narayana Murthy, iconic founder of Infosys, is beginning to sound like an old grandpa railing against the decline in values among his grandchildren.
Murthy kicked up a fuss some time ago when Infosys’s last chief financial officer (CFO), Rajiv Bansal, got a platinum handshake as severance pay when he left the company in 2015. Now, after abstaining from voting on a resolution to give Infosys’s Chief Operating Officer (COO) U B Pravin Rao a hefty pay hike (60 per cent plus), he has let loose another fusillade of public accusations about poor corporate governance (read the full text of what he said here). Murthy had demurred last year when shareholders voted for a big hike in chief executive officer (CEO) Vishal Sikka’s compensation.
Murthy definitely has a point, as grandparents and elders generally do too. His crib has three prongs to it – all related to his belief in equity and fairness.
One, he believes that the differentials between top-level pay and those at the bottom must be reduced. “I believe in striving towards reducing differences in compensation and equity in a corporation.”
Two, senior management must set the right example by being moderate in the pay hikes it awards itself. “I have always felt that every senior management person of an Indian corporation has to show self-restraint in his or her compensation and perquisites.”
Three, companies must focus on “compassionate capitalism” so that the people don’t turn against it. Moderate pay hikes at the top are needed “if we have to make compassionate capitalism acceptable to a majority of Indians who are poor. Without compassionate capitalism, this country cannot create jobs and solve the problem of poverty.”
There is no point criticising Murthy’s social conscience any more than there is a need to rubbish your granny’s conservative values which she believes are eternally valid.
However, one has to note that there may be equal justification for companies to do what they are doing differently today. For the reality is that we don’t live in grandpa’s or granny’s world any more than Infosys lives in the same environment that existed when Murthy started his company.
Murthy’s Infosys began in the dying days of the licence-permit raj, when governments artificially kept boardroom pay low, and profits were a dirty word. Murthy’s Infosys began in an India where talent was in plentiful supply and cheap, and good quality jobs were rare. Everyone, from top to bottom, was happy to work with far lower pay than today.
Today’s Infosys operates in the global ocean, not in the Indian pond. The pay, aspirations and competition (for business and talent) are global. At the very top, aspirations are not just for a good “Indian” salary, but for compensation that compares with the best in the world. When your market, profits and future lie in North America, will talent compare salaries in India or the US? When the competition for top talent is global, can the compensation for such talent be based on Indian conditions?
In Infosys’s case, the rise of protectionism in the US means that the company has to recruit more talent in the US. A global company cannot ultimately maintain differentials in pay at the top that depend only on the colour of your skin. If a US national (Vishal Sikka too is one) is going to be paid well because he is a US national, it follows that others at the top must be too. This may not be conducive to the practice of compassionate capitalism, but it is one of the realities in which the world of talent operates.
Another vital difference: most of Murthy’s compatriots at the time he founded Infosys were rewarded with stocks that yielded them huge riches when the company became the toast of the tech world. When you get a stock at Rs 10, even the humble liftman with Esops could conceivably become a crorepati in 20 years. But what is the possibility of an Infosys share given at Rs 1,000 becoming Rs 20,000 in the same timeframe today. Salaries are high because the possibility of making a killing on Esops are lower today than they were in the late 1980s or early 1990s.
Business conditions and competition too are different. In Murthy’s time, the US did not bother about Indian companies making profits from labour arbitrage. They were happy to offload jobs they didn’t want to do. Today, as jobs get scarcer in the West, this indulgence is missing. Even at home, the kind of business concessions that a government was willing to give an export-oriented company like Infosys in the 1990s (cheap land, exemption from profits) are no longer available. Every rupee Infosys earns today has to be made the hard way. It follows that success is harder today than before. It follows that compensation will spike when more is demanded from senior executives.
Then consider the salary differentials between top and bottom. The demand for skills has changed dramatically, both for leaders and the led. Old, plain-vanilla coding skills have been commoditised, while higher-skilled employees – those with expertise in artificial intelligence, machine learning, cloud computing, etc – are being highly valued. This is why salaries at the bottom end cannot rise as fast as those at the top in terms of valued skills. And managing the talent of highly-paid professionals calls for similar incentives to business leaders. Murthy surely does not need to be told this. The truth is companies cannot afford to be charitable to those at the bottom when the value addition they may offer is marginal, given the context of a gradual shift to automation.
One does not need to justify huge salary differentials that have no connection to real demand and supply conditions in various categories of talent, but companies operating in a goldfish bowl, do not have the luxury of only thinking long-term. They need people who deliver faster.
Murthy’s belief in greater equity within companies is laudable, but will this alone be good enough to instil the ordinary man’s faith in capitalism? Infosys, even if it maintains low differentials in salaries between top and bottom, will still be an island of prosperity compared to the world outside, where, at any point of time, 99 per cent of Indians will be outside this circle of prosperity. A chauffeur in Infosys may be a crorepati (after converting stock options received in the 1990s), but the kaali-peeli taxi driver will struggle to make ends meet. Envy is the normal state of reality in India’s sea of poverty (“India shining” lost out to the aam aadmi’s envy in 2004). It is doubtful if one Infosys practising internal pay equity is going to make a difference to how ordinary Indians view the benefits of capitalism.
In fact, it can be argued that the existence of high salary differentials can also act as motivators for people at levels immediately below the top. They may believe they can earn the same if they perform. So the logic can apply down the line, and between companies. Envy can either be a goad to bitterness for those left out or a spur to those who believe the system operates neutrally and can deliver the same outcomes for them too. This is really the crucial point: if the Infoscion at the bottom believes that the rules for rewarding performance are different at the top compared to what is available at the bottom, then Infosys has a problem. If the entry level guy believes that he too can become a Pravin Rao in 20 years, then there is no need to fear large pay hikes.
This is not to rubbish the case for lower multiples between top and bottom rungs, or that leaders must pay themselves moderately. But those who believe that compassionate capitalism must make lower salary differentials the norm have the duty to demonstrate that it can work in today’s business environment, when job security has gone out of the window, and a skill valued today may be junked tomorrow.
Narayana Murthy is not too old to start or invest in companies that will attempt to follow his values. He need not be a promoter, but he could easily invest only in companies that believe in his virtues by hardcoding these values into its operating metrics and articles of association.
He has something to prove. He should go out and prove it. The world will take note if he delivers.
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