Infosys has entered a new era of remuneration for senior leadership after promoters hung up their boots to make way for a professional CEO.
In doing so, the company has stepped out of the shadows of its founder N R Narayana Murthy's philosophy of compassionate capitalism which hailed the spirit of social equity.
Vishal Sikka, the first non-founder CEO brought in to put Infosys back on track, has lifted the fortunes of Infosys, which struggled to grow till two years back.
In FY16, Infosys revenue rose 9.1% to $9.5 billion, but it grew 13.3% in constant currency (taking into account currency fluctuations) beating Nasscom's industry average of 12.3%.
This compares well with the immediately preceding three fiscals when revenue growth stood at 5.6%, 11.5% and 5.3%, a period during which Murthy made a comeback to restore some of the glory focusing on sales effectiveness and deal wins.
Sikka has also built a narrative around Infosys heralding a transition for traditional IT services in a 'software-defined everything' world. He said the turnaround story was real, and rewards followed.
Sikka will take home a new compensation of $11 million beginning current fiscal. This includes a base salary of $1 million, $3 million in variable pay, $2 million in restricted stock units (RSUs) and another $5 million in stock options, which would be awarded to him based on Infosys's performance.
The revision in his total compensation coincides with the company extending Sikka's tenure by another two years up to 2021. Sikka's package has gone up from $7.08 million previously, which included up to $5.08 million in annual salary, besides a stock option of $2 million.
But this created a stir after some of the promoters abstained from voting on the resolution granting him a two-year extension, arguing that the new remuneration went against the company's long held beliefs. Murthy had authored an article in The Economic Times in 2012 where he suggested a ratio of 20 to 25 between the salary of the lowest level professional and the highest compensation paid in the corporation.
"These are good thoughts but not always practical. Murthy may have been too idealistic," said Vivek Wadhwa, a Fellow at the Arthur & Toni Rembe Rock Center for Corporate Governance in Stanford University. "You have to pay people their market value and align incentives with long-term performance. When large payouts are made based on short-term performance, company opens itself to problems."
The changes in Sikka's remuneration are beginning to transform the company's senior leadership compensation as well. Infosys has elevated three executive VPs as presidents - Sandeep Dadlani, head of Americas, Ravi Kumar, chief delivery officer and Mohit Joshi, head of financial services.
Sources said the salaries of the new presidents are touching a new high of nearly $2 million that includes stocks and long-term incentives. Infosys said they won't share details of executives' compensation.
"Increasingly, there's a sharper differentiation in compensation based on individual or business performance. Companies have recalibrated their compensation structures geared towards global standards. Also with CEO pay on the rise, the traditional ratio of CEO to CXO compensation of 2.2x is increasing," said Anandorup Ghose, partner, talent & rewards, Aon Hewitt Consulting.
In FY15, according to data sourced from the last available annual report, the ratio of Sikka's compensation to the median remuneration of the employees (MRE) was 116. Sikka drew $4.56 million as salary excluding stock options and RSUs, while the median salary at Infosys was Rs 5.16 lakh and Rs 4.89 lakh respectively during that fiscal and the preceding one.
In the case of TCS CEO N Chandrasekaran, who drew Rs 21.28 crore as salary excluding stocks, the differential in the MRE ratio was 416. For former Wipro CEO TK Kurien, the MRE ratio to CEO compensation was 169 after he took home Rs 6.57 crore as salary (excluding stock).
Anil Singhvi, a shareholder activist and co-founder of proxy advisory firm Institutional Investor Advisory Services (IIAS) said, "I have always argued that the true cost of Infosys wage bill was suppressed because promoter CEOs with substantial holdings took lower salaries. This had a cascading effect on the salary structure, making Infosys a relatively poor paymaster in a manpower driven industry. The lower wage bill was benign on the balance sheet and boosted P/E multiples. This was good for Infosys stock and senior management stock options. It all worked very well in a different era."
Sikka's $11-million compensation doesn't tie into Murthy's principle of compassionate capitalism, but it does link his performance to create shareholder value.
"Pay for performance is a direct result of demand that companies show they are creating shareholder value in both short term and long term, and pay incentives are structured to ensure that executives are motivated to do that," said Dan Marcec, director, content & marketing communications in US-based Equilar.
The next-generation technology firms are focused on increasing their market cap, and giving stock to all employees as compensation is intended to provide motivation to improve the company value. No better place to start that type of culture than at the top," he said.
In the US, for instance, the number of S&P 500 companies using performance awards for CEO pay has increased from 63% to 83% in the last five years, showed Equilar data.
More recently, Infosys announced RSUs to its employees who are project managers and above, covering a select percentage of high potential employees - about 20-25% of people in the managerial level.
"Infosys is giving RSUs, Wipro is contemplating performance-based grants and companies like HCL and Cognizant are already active in share based programs. It's increasingly becoming a new weapon for companies as they compete more with global IT service giants as well as new age companies," Ghose added.