Executive pay: the sky is the limit!

A student at one of the IIMs (not IIMA) is said to have bagged a summer internship for Rs 11 lakh. It is not known whether the internship is in India or abroad (most likely, the latter). What we do know is that Rs 11 lakh would be a top-of-the-line package for domestic placements at the IIMs.

The story made front page news. For the foreign firm, handing out,say,$25,000 for a summer internship means nothing. But the mileage it gets is enormous. So, offering such internships makes sense to foreign firms.

What the soaring offers at IIMs tell us is that executive pay in India is going through the roof. A CEO of a financial services firm told me that he lost an analyst recently to a mutual fund. The analyst, who had less than five years' experience, had a Rs 1 crore offer from a foreign investment bank but turned it down for a lesser pay as fund manager.

The trend-setters in the game are the private equity players. One high-profile investment banker was said to have been lured away last year by a private equity for a packet of $1 million. But that is now passe. A colleague of his has joined another private equity firm on a salary of $2 mn.

We are talking of a salary of Rs 9 crore! Now, Rs 9 crore would profit after tax of a manufacturing firm with sales of Rs 100 crore. For a first generation entrepreneur, it would take some 20 years to get there. An investment banker gets there in the same time but without having take commensurate risks.

This is amazing! What does it mean? It means that the returns to intellectual capital are today as great as those to physical capital. That is exactly what we would expect to see in a knowledge-based economy and in knowledge-intensive sectors. We have already seen the rewards to entrepreneurs in the knowledge-based sectors in the post-reform era- think of Infosys, Biocon and Indiabulls.

You would always expect successful entrepreneurs to reap huge rewards. What is new is that such rewards are now accruing to employees, who are relatively risk-averse- and not just in the knowledge-intensive sectors. A knowledge worker at the senior levels in any firm- anybody who is top management- is making a tidy packet. Today, one paper reports that Cairns India had to pay Rs 100 crore in stock options to persuade an Indian investment banker in London to come to India to head its operations!

News of such payouts draws much outrage. There are, of course, numerous instances of pliable boards making excessively generous payments. But the literature on executive compensation does suggest that there is a competitive market for executive talent. Some of the numbers in the US seem crazy. But, as the search for talent becomes truly global, it should help moderate increases in executive pay. So, I wouldn't get too worked up over the numbers that are bandied about in the media.

See my column on this subject in ET.