Research Handbooks in Corporate Law and Governance series
Edited by Randall S. Thomas and Jennifer G. Hill
Chapter 21: Executive Compensation in India
Rajesh Chakrabarti, Krishnamurthy Subramanian, Pradeep K. Yadav and Yesha Yadav* 1 1 INTRODUCTION The issue of executive compensation in corporate India has gained increasingly in significance since the advent of economic liberalization in 1993–94, the subsequent rise of India as a leading center for international investment, and the rapidly increasing domestic equity participation by retail investors in Indian capital markets. Salaries for senior management have grown sharply since 1994, and are sizable in the Indian context, particularly when compared with non-managerial employee salaries. The sharp rise in salary levels, and the wide regulatory latitude afforded to boards to set executive pay after the 1993–94 reforms, have prompted concerns long analyzed in developed markets in relation to the play of incentives governing executive employment contracts, and in particular, the better alignment of pay with performance to reduce “agency costs,” and the use and abuse of managerial power to extract rents and thereby disgorge shareholder value. As India seeks to progress the creation of corporate governance systems in avowed alignment with international best practice, it presents an interesting case-study in the context of executive compensation, from an economic as well as a regulatory policy perspective. From an economic perspective, the agency costs that are of greatest concern in an Indian context are “horizontal” agency costs between controlling (potentially minority) shareholders and other (passively investing) shareholders. These are fundamentally different from the “vertical” agency costs between managers and dispersed shareholders that are widely regarded as a potential explanation for high CEO...
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