Forbes India 15th Anniversary Special

Infosys defends COO's pay hike after founder Murthy goes public again with criticism

The pay hike, which Murthy abstained from voting on, and criticised in emails to the media, is well benchmarked and essential to retaining top talent, the company says

Published: Apr 3, 2017 01:42:52 PM IST
Updated: Apr 6, 2017 12:59:45 AM IST

Infosys defends COO's pay hike after founder Murthy goes public again with criticismVishal Sikka is the CEO of Infosys
Image: Reuters (For illustrative purposes only)

Infosys Ltd, India’s second-largest IT services company has issued a statement defending the pay hike it gave COO Pravin Rao, after founder NR Narayana Murthy took to the media again, last week, in his fight with the board of the company.

“Infosys has the responsibility to attract and retain top quality talent to be effective in the transformation journey that the company has embarked upon. In this context, the company undertook a comprehensive survey of best practices and benchmarked senior management compensation with key Indian and global companies,” Infosys said in a statement on Monday.

The Bengaluru company added: “The compensation structure revised thereafter reduces the proportion of cash component in the total compensation and has introduced higher stock incentives (to be vested over a 4-year period); it was rolled out for the entire senior leadership including Mr. Pravin Rao, Chief Operating Officer.”

These details were disclosed in stock exchange filings as early as October 2016, Infosys said in its statement. Of the shareholders who voted on the pay hike proposal, 67 percent were in favour, according to Infosys’s April 1 filing with the stock exchanges on the results. The company considered the views of those opposed as “important feedback,” Infosys said in its statement.

There was general anticipation that after that last exchange of arguments in the tussle between the promoters of Infosys – one of India’s largest information technology firms – and its current management and board, the situation would thaw and, at least, the differences wouldn’t spill over to the media. 

That any such expectations are unfounded has been proven by the latest developments in the Infosys saga, where the founding promoters of the company (who aren’t in active management any longer), most notably NR Narayana Murthy, have locked horns with the current management led by Vishal Sikka over several governance issues.

At a press conference in Mumbai on February 13, Infosys chairman R Seshasayee and Sikka struck conciliatory notes, which made it appear that outstanding differences between the old guard and the present management would be solved through bilateral discussions. Seshasayee stated that an agreement had been reached with the promoters that any issues that merited discussion won’t be highlighted in the media. He and Sikka also emphasised that there were no differences with the promoters, who the management had a lot of respect for, and all concerned in this dramatis personae had Infosys’s best interest in their hearts and minds.

Indeed, for a month-and-a-half since that conference in Mumbai not much was spoken in connection with the imbroglio by the two sides in the media. But all that changed over this weekend, when the results of a postal ballot conducted by Infosys to vote on certain key resolutions were made public. One of the resolutions involved shareholders approving a 35 percent hike in chief operating officer UB Pravin Rao’s compensation to Rs 12.5 crore. Only 24 percent of the promoters cast their votes on the resolution. The other two resolutions that were put to vote – seeking the appointment of DN Prahlad as an independent director and, and proposing a change in the Articles of Association allowing Infosys to execute a share buyback – saw the promoters vote for the resolutions in full strength. 

The disapproval exhibited by Murthy and other shareholders in the promoter group vis-à-vis the proposal to hike Rao’s compensation is similar to the resentment with which an earlier proposal to increase Sikka’s compensation to $11 million (most of which was linked to performance and longevity of tenure) was met.

Murthy has always been a proponent of moderation in the compensation doled out to top executives of a company. He believes in the ideology of “compassionate capitalism” and that the highest compensation given to an executive shouldn’t be more than 50-60 times the median salary of an organisation.

In a late evening letter to the media, Murthy elaborately articulated his position on the resolution concerning Rao’s salary. Here is what Murthy said in his letter:

Dear Folks,
If you use the contents of this mail, please quote me verbatim and in full. Please do not paraphrase.

I have lots of affection for Pravin. Let me state you the facts.

I recruited Pravin in 1985 and had nurtured him throughout my stay at Infosys since then.

He had been sidelined. He was not even a member of the Executive Council at Infosys in 2013 when I came back. Kris, Shibu snd I encouraged him, elevated him to the board, and made him the COO when we recruited Vishal as the CEO. So, this abstention has nothing to do with Pravin.

Those of us who have always stood for fairness in compensation and practised it, right from the day Infosys was founded, will have to demonstrate it when needed. This is a time when it is needed. Nothing more and nothing less.

I believe in striving towards reducing differences in compensation and equity in a corporation. You may not know that my Infosys salary at the time of the founding of Infosys was just 10% of my salary in my previous job. I ensured that my younger, co-founder colleagues got 20% higher salary over their salaries in their previous job even though I was 7 levels above them in my previous job and was 11 years older than them. I gave them huge equity compensation the like of which has never been replicated in this world. So, this abstention comes from somebody who has walked the talk.

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. He or she has to fight for maintaining a reasonable ratio between the lowest salary and the highest salary in a corporation in a poor country like India. The board has to create a climate of opinion for such a fairness by their actions.

This is necessary 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. Experts tell me that capitalism may come to an end in the not-so-distant future if the current corporate leaders do not heed this advice in India.

Further, giving nearly 60 percent to 70 percent increase in compensation for a top level person (even including performance-based variable pay) when the compensation for most of the employees in the company was increased by just 6 percent to 8 percent is, in my opinion, not proper. This is grossly unfair to the majority of the Infosys employees including project managers, delivery managers, analysts, programmers, sales people in the field, entry level engineers, clerks and office boys who are toiling hard to make the company better. The impact of such a decision will likely erode the trust and faith of the employees in the management and the board. With what conscience can a decent person like Pravin ( a man schooled in Infosys values for over 30 years) tell his juniors that they should work hard and make sacrifice to reduce cost and protect margin? I have got so many mails from these people asking whether this resolution is fair. No previous resolution in the history of the company has received such a low approval.

Finally, given the current poor governance standards at Infosys, let us also remember that these targets for variable pay may not be adhered to if the board wants to favor a top management person.

Narayana Murthy

“Pravin’s commitment and contribution to the company has been immense, and his partnership over the past ~3 years has been critical to the successes and growth of our company. It is essential for us to see that this revision in his compensation, as with several of our senior leadership team, is focused on making Infosys more competitive, is benchmarked against peers, is critical for us to retain key talent and aligns the long term interests of our leadership team with that of our shareholders,” CEO Vishal Sikka said in the company’s statement.

Infosys provided the following breakdown of Rao’s compensation structure: The cash component of his compensation has decreased from Rs. 5.2 crores (including annual cash bonus) to Rs. 4.6 crores, a decrease of 10.6 percent. The performance based component of the compensation (directly linked to company and individual performance) has been increased from 4 percent to 63 percent of total compensation.

Given the four-year vesting period of stock, the net increase in Mr. Pravin Rao’s compensation for the current fiscal year, ending March 2018 will be 1.4 percent. This could go up to 33.4 percent in the fourth year, assuming similar grants are made in subsequent years based on the company’s and his individual performance.

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