Why RC Bhargava is wrong

Last week, RC Bhargava, Chairman–Maruti, stated that the CEOs in India should not be getting obscene salaries. Similar sentiments had been raised about ten years ago by Salman Khurshid, when he was the Minister of Corporate Affairs. At that time there was a global sentiment against high salaries, primarily due to the impact of Occupy Wall Street (OWS) Movement. Today, we are living in a different world and raising such issues is simply seen as a rhetorical exercise by someone who has enjoyed the fruits of the high office for a sufficiently long period of time, and even more than twenty five years after retirement. 

The OWS Movement was aimed at reining in the unscrupulous bankers who had benefited from their salar fat bonuses despite the banks doing badly and even failing. In Switzerland, there was a proposal to make the 1:12 law, so that the ratio between the lowest and the highest salaries in a company should not be more than 1:12, however, the law did not get enacted because of immense lobbying and backlash from the elitists in the society, not only in Switzerland, but also in different countries in Europe and elsewhere as there had been, and still are, vested interests looking for every opportunity to skim the milk.

Salman Khurshid had been highly vocal at that time and had wanted to have a ceiling imposed on CEO salaries by law, but was silenced by the then Prime Minister, Dr. Manmohan Singh, who, rightly, understood that any cap on CEO salaries should be recommended and implemented by the shareholders of the company, and not by legislation. This was one of the rare occasions when Dr. Singh had put his foot down and exhibited the true characteristic of his former self, which had transformed the Indian economy in early 1990s. It has been well appreciated since that time that for wealth creation and maximisation, market forces have to be almost left free to operate, though certain amount of regulation is necessary.

The moment one agrees to a ceiling, or floor, for any salaries, and that too by diktat, one is inviting trouble and preparing the ground well for exodus of talent to greener pastures. While talking about the floor, we are surely not considering the vulnerable labourers and other extremely low paid persons, who are exposed to exploitation, and, hence, need protection by law. The simple principle of demand and supply tells us that merit and talent cannot be retained without paying the market rates. Simply relying on loyalty, or the concept of job security, is not relevant any more with multiple opportunities available in the market for the talented and the doer.

Bhargava is wrong because of these reasons. More so, when we compare the salaries of Indian CEOs to that of their Western counterparts, there is hardly any comparison as the salaries in dollar terms are very high and can usually attract the same talented persons for similar positions abroad if a cap is imposed in India. It is undoubtedly the case that while taking into consideration the purchase power parity, the Indian salary may appear to be respectable. Also, the challenge one faces while working in the Indian market is unique, which cannot be experienced anywhere else in the world, and this is one of the primary reasons why several expatriates are willing to work in India, simply to get the wonderful opportunity of learning the ropes.

He has also said that the cars are becoming expensive and unaffordable because of the safety features. Nothing can be further from the truth. A veteran in the automobile industry cannot be talking about safety in such callous terms. Do we want to push car production the way Boeing 787 Max 8 had worked on safety features? It is a pity that with advancing technology, Bhargava would like Maruti to keep manufacturing the entry-level cars without the safety features now considered to be almost standard in all cars. Safety cannot be compromised and if the regulatory environment in the country is moving in a positive direction, there is a need to seriously support it, rather than speak against it.

The author is a professor at IIM-A, akagarwal@iima.ac.in