Taming the Top: Balancing Managerial Remuneration in India

Sambit Rath and Prisha Batra*

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SETTING THE STAGE: GLOBAL TRENDS AND INDIAN REALITIES

     In 2025, the issue of excessive managerial remuneration (or executive remuneration) commands global attention, driven by high-profile judicial interventions and escalating public scrutiny. A pivotal moment came in December 2024, when the Delaware Court of Chancery invalidated Elon Musk’s $56 Billion compensation package, citing a flawed approval process and an “unfathomable sum”. This ruling reverberated an old debate around excessive managerial remuneration which has been raging for almost half a century now. Looking back in time, the US led adoption of stock-based incentive compensation, which by the early 2000s incentivised executives to manipulate earnings, contributed to financial scandals. During this period, executive pay soared, with Chief Executive Officer (‘CEO’)-to-worker pay ratio reaching 372:1 by 2000. Moreover, the 2008 global financial crisis further highlighted the consequences of excessive compensation, with policies aimed at deterrence often circumvented by pay restructuring, while major financial institutions collapsed.

In India, where corporate structures are often dominated by promoters, this discourse finds acute relevance, as the disparity between managerial and median employee remuneration continues to widen. According to a study, the ratio of CEO compensation to median employee pay among India’s top companies escalated from approximately 200:1 in Financial Year (‘FY’) 20 to 300:1 in FY24. This trend is not an isolated statistical aberration but a manifestation of systemic issues within corporate governance structures. Theorists have tried to expound the reasons for this phenomenon through extensive research, presenting arguments for either side of the fence. Regulators around the world have attempted to control it, while trying to maintain a balance between shareholder protection and corporate independence. However, the problem persists till date. The reappointment of Gautam Singhania as the Managing Director of Raymond Ltd., despite controversies surrounding his high remuneration package or Wipro’s ex-CEO Delaporte taking home double the amount he was paid the previous year despite decline in profits, reflect a broader systemic issue: the ability of promoters and CEOs to influence remuneration decisions at the expense of stakeholder interests. This article addresses this issue in the Indian context by first examining the limitations and the gaps in the regulatory framework, then analysing fiduciary duties and oppression from a governance perspective, exploring theories that explain excessive executive pay, and concluding with practical suggestions to align executive remuneration with stakeholder interests.

EXAMINING THE REGULATORY FRAMEWORK: LIMITATIONS AND GAPS

The legal framework governing ‘managerial remuneration’ is primarily governed by the Companies Act, 2013 (‘the Act’) and the regulations issued by the Securities and Exchange Board of India (‘SEBI’). Section 2(78) of the Act defines remuneration expansively, encompassing salaries, bonuses, stock options, and ancillary benefits as stipulated under the Income Tax Act, 1961.

Section 197 imposes specific limits on public companies: the aggregate remuneration of managing directors, whole-time directors, and managers is capped at 11% of the company’s net profits for a given financial year. Individually, a managing director’s remuneration is restricted to 5% of net profits, while the collective remuneration of multiple directors must not exceed 10%. However, the Act permits deviations from these limits with shareholder approval via a special resolution. Additionally, Schedule V outlines alternative thresholds for companies with inadequate profits, which may be doubled through a special resolution.

For listed entities, SEBI’s Listing Obligations and Disclosure Requirements Regulations, 2015 (‘LODR’), introduce supplementary constraints. Regulation 17(6)(e) stipulates that remuneration for a promoter director exceeding ₹5 crore or 2.5% of net profits, whichever is higher, requires shareholder approval through a special resolution. In cases involving multiple promoter directors, their collective remuneration is limited to 5% of net profits sans such approval. These provisions are designed to counteract undue influence by corporate insiders, particularly in promoter-dominated firms. Nevertheless, their effectiveness is contingent upon robust shareholder engagement, which is frequently undermined by concentrated voting power among promoters or institutional investors aligned with management interests. Below is a breakdown of the approval mechanism and the loopholes in it.

Nomination and Remuneration Committee

     The Nomination and Remuneration Committee (‘NRC’), consisting of both executive and independent directors, is entrusted with devising remuneration proposals grounded in performance metrics, profitability, and industry benchmarks. This setup tries to ensure a blend of internal expertise and external impartiality. However, the committee’s recommendations are not binding and are subject to the board’s discretion, as outlined in Section 178 of the Act and Regulation 19 of LODR, which use “recommend” and “consider”, indicating an advisory role of the committee. This may erode its influence, especially in companies where board members are closely aligned with management.

Board of Directors

The board assesses and ratifies the NRC’s proposals, acting as an intermediary between the committee and shareholders. Owing to its fiduciary duty, the board is expected to align remuneration with the company’s broader interests. Yet, in promoter dominated companies or where directors hold significant equity, impartiality might get compromised, as directors may feel inclined to prioritise maintaining amicable relations with the management and promoter over rigorous oversight. Furthermore, the provisions allow promoters to vote on their own remuneration resolution and are also members of NRC, which as per assessments by PAFs, suggests that had this been impermissible, a significant percentage of remuneration resolutions would have been defeated.

Shareholder Sanction

Shareholders possess the ultimate authority in approving remuneration, particularly when statutory caps are exceeded, which necessitates passing a special resolution. This process is designed to empower shareholders to reject excessive pay packages. However, research suggests that the fragmented retail investors, and institutional investors vote differently due to conflicting interests, as the former (mostly) prioritises stock performance while the latter, not influenced by the same, disregards signs of poor governance, and often votes in favour of management-sponsored proposals. This undermines the safeguard, rendering it a procedural formality.

Post-2017 Legislative Amendments

The Companies (Amendment) Act, 2017, eliminated the requirement for Central Government approval of excess remuneration, streamlining the process but dismantling an extra layer of accountability. This led to the shifting of burden of oversight entirely onto shareholders. To assist them, PAFs have become more active by providing voting guidance to shareholders. While their counsel can influence outcomes, it lacks enforceability and is often disregarded in promoter-controlled companies.

Complementary Tools

In addition to the above, clawback provision in Section 199 mandates the recovery of excess remuneration paid to executives (except independent director), including stock options, due to re-statement of financial statements owing to fraud or non-compliance with the Act. This provision extends its reach to former executives as well, implying that the excess remuneration paid (difference between amount paid and what ought to be) during the relevant period, must be recovered by the company.  Furthermore, by virtue of Sections 206 & 454, the Registrar of Companies has wide powers to scrutinise companies for non-compliance with the conditions laid down by the Act, which includes imposition of heavy penalties. Together, these complimentary tools form a part of the overall regulatory framework.

FIDUCIARY DUTIES AND OPPRESSION: A GOVERNANCE ANALYSIS

Beyond the procedural safeguards of approval mechanisms, the only other mode for dissenting shareholders to challenge these astronomical pay packages is the doctrine of oppression and mismanagement (‘O&M’). This doctrine provides a mechanism for such shareholders to challenge managerial actions. At this juncture, it is pertinent to analyse the situation of fiduciary duties of corporate officers and directors and then proceeding to the doctrine, since these duties form the basis on which O&M is decided. The Delaware Supreme Court in Gantler v Stephens famously held that corporate officers owe the same fiduciary duties to the corporation and shareholders as directors, while negotiating their compensation agreements. This opened the door for courts to scrutinise executive compensations by inquiring whether officers upheld their fiduciary duties in the process. The situation in India, however, is distinct. The Supreme Court in Sangramsinh P Gaekwad & Ors. v Shantadevi P. Gaekwad & Ors has held that directors do not owe the same fiduciary duty towards shareholders as they do to the company, as doing so would barge them with multiple lawsuits from dissenting minority shareholders. With regards to scrutiny/ validity of their actions, the Court stated that only oppressive and mala fide actions of directors must be set aside.

     However, courts abroad and in India have consistently set a high bar for claims of O&M. In Jermyn Street Turkish Baths Ltd., the England and Wales Court of Appeal ruled that a director drawing remuneration beyond legal entitlement does not inherently constitute oppression. Similarly, in Smith v Croft, excessive salaries paid to directors were deemed insufficient to establish oppressive conduct. In Shankar Sundaram  Amalgamations Ltd., the NCLAT clarified that excessive remuneration alone does not qualify as mismanagement or oppression, and it must be established by evidencing “continuous acts on the part of the majority shareholders”, forming a pattern of prejudicial conduct. This high bar has been set to ensure that courts intervene only when there is a serious and on-going misconduct, and not entertain frivolous litigation. But this restrictive interpretation narrows the scope of this doctrine as a remedy and sets the threshold very high, discouraging shareholders from approaching courts.

EXECUTIVE COMPENSATION THEORIES: THE RATIONALE BEHIND EXCESSIVE PAY

Thus far, we have examined the rising dissent surrounding excessive managerial remuneration, the regulation of the same, and the efficacy of remedies available to shareholders. Prior to proposing solutions, it is prudent to explore the rationale behind such compensation and address potential counterarguments. This requires an analysis of prominent executive compensation theories. These theories provide reasoning to justify such pay packages by taking into account economic and social factors.

Marginal Revenue Product Theory

This theory rests on the economic concept that each factor of production should be paid according to its contribution to the value of the firm. The proponents of this theory argue that you will make what you deserve based on your skills, productivity, effort, and most importantly, how valuable you are to the company’s success. This is why the top executives around the world like Elon Musk, Tim Cook, and Jensen Huang are being paid handsomely. But there are several factors that contribute towards the success of the company, like market conditions, economic cycles, and firm-specific risks, thus making it difficult to establish a direct link between executive’s actions and revenue outcomes. Furthermore, unlike a factory worker whose output can be directly quantified, executives make complex, strategic decisions whose impact is not easily calculated. Most importantly, the theory fails to reconcile the vast gap between executive pay and that of other employees. If pay strictly reflected marginal productivity, a more balanced distribution would be expected. This challenges the theory’s foundational base.

Tournament Theory

According to this theory, corporate promotions are likened to tournaments, where the CEO gets the ultimate prize. It implies that CEOs are overpaid to motivate lower-level executives. But this assumption carries a greater risk of increasing the pay gap, and if the pay level is not socially perceived as appropriate, it may fail to incentivise or even provoke resentment, undermining its effectiveness. Additionally, such an arrangement might prioritise individual ambition over collective organisational goals.

Opportunity Cost Theory

The proponents of this theory argue that CEOs are paid more because their opportunity costs (the pay they could earn in their best alternative job) are higher. It assumes that there is complete information about firms’ hiring practices and available executives. However, in practice, this is not true. There is an information asymmetry which coupled with the unique, firm specific roles of executives, makes it difficult to establish a clear opportunity cost benchmark. It fails to justify the excessive pay package by entities when there is lack of data to compare the proposed pay with a better alternative package.

Efficiency Wage Theory

The argument proposed by this theory is that paying executives above-market wages increases productivity and reduces turnover by providing extra incentives, which enhances their effort and loyalty. But research suggests there’s an overall consensus that pay-performance relationships are not very strong and expected incentive may not boost productivity. Furthermore, high pay tied to short term metrics can encourage executives to prioritise immediate results over long-term stability, potentially leading to detrimental decisions.

Board Capture Theory

Although this theory does not justify excessive pay, it attempts to explain the reasons for the same. Also referred to as Managerial Power Theory, it posits that executives can influence or “capture” the board of directors and set their pay. The proponents of this theory emphasise that CEOs can exert influence through close relationships, control appointments, and dominate information flow. This sway can lead boards to approve generous pay packages. Being one of the first theories, it has its critics, and its imperfection has led to emergence of alternative theories. Nevertheless, there exists research to backup claims of board capture theory, making it relevant even in the age of improved corporate governance practices.

The discussion in this section highlights that excessive managerial remuneration stems from a complex interplay of factors, with no single theory fully justifying or explaining it. Therefore, effective solutions must integrate insights from diverse perspectives, working together to address and mitigate this issue.

SUGGESTIONS

The proposed suggestions in this section are an attempt to strengthen existing regulation with regards to managerial remuneration in India. These include practices or policies that have been introduced in other economies and have been found effective by prominent research organisations.

Firstly, tax incentives and penalties as a policy tool have been proposed in recent years to help lower the inflated ratios of CEO to median-worker pay. Indian regulators have already mandated companies to disclose director to median employee remuneration ratio (‘Ratio’) as per Section 197 (12) of the Act. This tool can be implemented by either incentivising companies to keep the Ratio below a certain level (for example, companies keeping the ratio below 100:1 would be eligible for tax incentives) or penalising companies for keeping the Ratio higher than a particular level. This however, would not be effective in isolation as proven by evidence, which suggests that historically companies have adapted by re-structuring CEO pay or possibly outsourcing lower-wage portions of their firms to maintain the ratio. Thus, these measures must be complemented with strong policies to strengthen corporate governance.

Secondly, the potential impact of NRC must not be overlooked when it comes to managerial remuneration. Even though its nature is recommendatory, it plays an important role in guiding the company through its quality recommendations. In order to strengthen these recommendations, provisions such as in Section 177 (8) of the Act requiring disclosure of reasons for non-acceptance of Audit Committee’s recommendation, must be made mandatory for NRC recommendations as well.

Thirdly, shareholders can play an important role in persuading the board to review CEO compensation agreements. Also known as ‘say-on-pay’ votes (‘SoP’), these allow shareholders to cast a non-binding vote periodically to voice their opinions on the current executive pay, a practice that has been implemented in the United States (‘U.S’) and the United Kingdom (‘U.K’). However, long term evidence has shown that its effect has been dissatisfactory for key reasons. Provided that many of India’s corporates have a concentrated shareholding (promoter-driven), it would be helpful to adapt SoP voting policy based on this uniqueness. Evidence shows that SoP is effective when it is more binding (in the U.K) than advisory (in the U.S). Furthermore, in economies where promoters dominate shareholding, SoP voting is diluted, and the results lean in favour of the promoter. To counter this, SoP voting in India can be tweaked to exclude promoter votes or require      a majority of non-promoter shareholders to approve pay packages, possibly being introduced in a phased manner moving from advisory to binding. This will ensure that SOP policy integrates smoothly with other functions of shareholders.

Fourthly, the promoter CEOs must be discouraged from      voting      on their own pay. As noted earlier, promoter CEOs holding majority shares can effectively dominate voting on resolutions to permit excessive remuneration. This is a clear case of conflict of interest and to remedy this, it must be treated the same as related party transactions. This would mean getting the promoter remuneration resolution approved by majority-of-the-minority shareholders. Analysis of voting patterns by prominent PAFs indicate that such a provision would prove effective.

Lastly, managerial pay should be structured on the basis of long term performance metrics. The shift towards ‘pay-at-risk’ structures, where a significant portion of CEO pay is contingent on achieving specific performance targets and tied to the company by equity (equity based pay), should be encouraged. To complement the same, it should be mandatory to disclose performance metrics of the pay structure. Additionally, in order to prevent companies from overpaying their CEOs, the absolute pay must be based on a justifiable benchmark and long-term incentive schemes need to be based on real measures of long-term value creation.

The above discussed solutions blend global best practices with context-specific adjustments to ensure India can mitigate executive pay excesses.

CONCLUSION

Excessive managerial remuneration remains a pressing issue in corporate governance, particularly in India, where promoter-controlled firms dominate the landscape. With the wage gap widening rapidly every year, eroding trust in corporate institutions, and threatening economic stability, it is high time to introduce reform. India’s regulatory framework has improved through the years, incorporating changes to address contemporary needs. However, the corporate landscape is evolving at a faster rate, and regulators have to play catch-up. Solving such a problem requires an understanding of its roots and analysing the effect it has on other economies; only then can lessons from their experience help create solutions that are specific to our needs. Mechanisms like SoP, tax incentives/ penalties, claw back provisions have shown promise globally, and adapting these to India requires innovation. Complementing these with mandatory transparent disclosures of performance metrics, excluding promoter votes, and setting justifiable benchmarks of absolute pay would address not only the symptoms of excessive pay but also its root causes – weak governance and misaligned priorities. Ultimately, curbing excessive pay is not merely a matter of equity, but a necessity to foster sustainable growth and preserve societal trust in corporate leadership.

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*Sambit Rath is a 4th Year B.A LL.B Student at Dr. Ram Manohar Lohiya National Law University, Lucknow. Prisha Batra is a 3rd Year LL.B Student at Symbiosis Law School, Pune.