The recommendation to eliminate the 11%-of-profit salary cap for company directors that is currently enforced is sensible and long overdue. The JJ Irani Committee is right in pointing out that corporate compensation is best left to market forces. In the age of global deals and mega takeovers, directors' salaries cannot be held hostage to arbitrarily dictated caps by the government. In competitive times, the corporate sector needs flexibility in determining exactly how the finances are to be used in engaging resources to optimise operations and achieve the desired results, and this includes human resources. What value who brings to the business, and what it is worth in rupees, dollars or beach holidays, is a matter of internal knowledge. It may be a matter of disclosure and discussion between a company and its shareholders, but the government certainly has no locus standi here at all. The only external regulator should be the market, and the government's job is to ensure that there is sufficient competition. So, if a company mis-allots its funds, it will find itself edged out of business by firms that do a better job of it.
As for the charge that directors are 'overpaid', there is little evidence to show that any systemic imbalance has arisen out of high salaries in corporate India. In fact, there is reason to believe that companies are paying people only as much as needed to access their skills. And these vary vastly, as evident in dozens of other fields of human endeavour that get more media exposure. It is just that this variation is something that external observers are not necessarily equipped to appreciate in the corporate arena. Higher competition tends to activate the variation, resulting in divergences in pay. In such a scenario, any arbitrary cap can create an artificial imbalance that will eventually curtail corporate India's competitive advantage. This is not to argue that there is no such thing as an 'outrageous salary'; as some instances from the US have recently shown, scandals do occur, but it is the self-corrective mechanism of the market—shareholders protesting, for example—that adequately takes care of them. Corporate governance exists for a reason, and that reason is to make sure that the company serves the interests of its shareholders. Salary caps do nothing of the sort.
As for the charge that directors are 'overpaid', there is little evidence to show that any systemic imbalance has arisen out of high salaries in corporate India. In fact, there is reason to believe that companies are paying people only as much as needed to access their skills. And these vary vastly, as evident in dozens of other fields of human endeavour that get more media exposure. It is just that this variation is something that external observers are not necessarily equipped to appreciate in the corporate arena. Higher competition tends to activate the variation, resulting in divergences in pay. In such a scenario, any arbitrary cap can create an artificial imbalance that will eventually curtail corporate India's competitive advantage. This is not to argue that there is no such thing as an 'outrageous salary'; as some instances from the US have recently shown, scandals do occur, but it is the self-corrective mechanism of the market—shareholders protesting, for example—that adequately takes care of them. Corporate governance exists for a reason, and that reason is to make sure that the company serves the interests of its shareholders. Salary caps do nothing of the sort.
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