CEO Compensations. Case in Point: Infosys CEO compensation

The compensation packages offered to two key officers of Infosys, Vishal Sikka and U.B. Pravin Rao generated a lot of press this summer and even the co-founder NR Narayana murthy weighed in. The topic also came up a few times during the Q&A with shareholders at the recent AGM (my blog)

This is a topic I reviewed in my recent blog ("How ourfascination with CEO packages impacts our compensation"). After the AGM, I continued to reflect on the topic and decided to review the facts presented in the Annual Report. The section on "Employment agreements with Executive Directors" gives specific details of compensation offered to Vishal Sikka and Pravin Rao.

Vishal Sikka’s compensation is about $11 million

• Base Pay $ 1 million
• Variable Pay $ 3 million
• Stock compensation
• RSUs $2 million 
• Performance based equity $5 million

Mr. Sikka also has a Golden parachute that kicks off “in case of termination for other than cause, death, disability or resignation for good reason.” This includes continued payment of severance pay at rate of base pay for 24 months, COBRA / health benefits and accelerated vesting of outstanding equity grants

Pravin Rao’s compensation is about Indian rupees 13 crore (with a fixed Salary Rs 800,00,000 and performance based stock compensation Rs 400,00,000)

These numbers sound rather large but need to be taken in context. These gentlemen run a business that employs nearly 200,000 people around the globe and generates over $10 billion in revenue.

Let us compare these against packages offered to other tech CEOs:

• The software services giant, Accenture reportedly pays its CEO Pierre-Nanterme a total compensation package of about $18.5 that includes base pay of about $4 million and the rest in stock and incentives. Of course Pierre-Nanterme runs a much larger business generating about US$32.9 billion revenue. 
• Satya Nadella, Microsoft's CEO made headlines recently for his mammoth $84 million pay package. 
• According to the confidential sources, Google’s Sundar Pichai’s salary is about $50 million per annum;  and Mr. Pichai’s Net worth is about $600 million  

The arguments for and against large compensations

After the board of directors approved Infosys CEO’s package, Mr. Narayana Murthy was gunning for "corporate governance" and he took to media to voice his concerns about the package There is a bit of socialistic slant in Mr. Murthy’s assertion (reuters)

"Giving nearly 60% to 70% increase in compensation for a  top level person (even including performance-based variable pay) when the compensation for most of the employees in the company was increased by just 6% to 8% is, in my opinion, not proper,"

This is grossly unfair to the majority of the Infosys employees including project managers, delivery managers, analysts, programmers, sales people in the field, entry level engineers, clerks and office boys who are toiling hard to make the company better. 

The same arguments – pros and cons – are revived every time there is an announcement of a new CEO taking charge of a public company or a board approval of another CXOs compensation package. Corporate storytellers and journalists with an analytical bent of mind quickly knock out sound-bites like "This CEO’s package is 1000 or 10,000 times that of a Joe/Jane-line worker."

This time it is no different with business-journalist dissecting every angle of COO UB Pravin Rao’s multi-million-rupee package including – dollar-rupee disparity, lower cost of living in India (vs. global packages) etc. Corporate benefits consultants, analysts and academics are also weighing in with an academic and theoretical curiosity.

The current Infosys-COO-package controversy is perhaps a storm-in-teacup that is bound to blow over; but not our fascination with executive compensations. The next time we see an announcement of a large CxO package, similar views and counter-viewpoints will be revived. In the interim, managers will continue to use the arguments learnt from the CxO-package debates while negotiating annual raises of their organization-men (and women - ref my earlier article)

Looking beyond the political debate on immigration and offshoring

Infosys, Wipro, TCS in a headline on offshoring visas is sure to attract attention in a highly charged immigration overhaul debate. Therefore, it is not surprising to see headlines like the recent one in Economic Times titled “TCS, Infosys and Wipro abusing H-1B visa system: Senator” The article like many recent ones starts by saying “Amidst Congressional debate on the comprehensive immigration reform, a top US Senator has accused big Indian IT companies - TCS, Infosys and Wipro - of abusing the H-1B visa system.
"There are some specific abuses of H-1B," Senator Richard Durbin, said during a Congressional hearing on immigration reform by the powerful Senate Judiciary Committee on Monday, during which the lawmakers discussed threadbare the H-1B visa issues.”

The immigration debate and the proposed bill is focused on ensuring that companies that bring in people on H1 visas also hire a good percentage of local Americans (citizen, residents). Rightfully so, one might argue. The argument is that visas should be issued to hi-tech companies that generate value to American economy – Microsoft, google and the like - and also happen to be based in America, with a majority of employees being American.  (ref: NYT blog “New American Bill Threatens Indian Outsourcing Companies”)

Offshoring firms, many of which are headquartered in India (Infosys, Wipro, TCS) or incorporated in Bermuda (Accenture) try to neutralize the argument by trying local hiring and promising future growth with “onsite, proximity development centers.” Offshoring firms have been trying hard to hire and retain the few Americans (native or naturalized) whom they happen to employ. They also try and go the extra length to retain employees who gain permanent residency (green cards). Of course, the business model is skewed towards cost arbitrage that comes from serving clients with an offshore cost base, not being onsite-heavy.  (Personal note, in my past work-life, I joined and enjoyed the offshoring wave for nearly eight years with an offshoring major, despite being a US permanent resident. In a sense, I was an exception to the norm.)

Hiring local is an argument offshoring firms cannot win, leading to a lot of fuzzy math. For instance, NYT blog had to post a correction "An earlier version of this post said that Indian companies have invested $820 million in the United States to set up offices closer to their American clients. The correct figure is $5.9 billion." Rather than trying to argue on the exact investment - 820 million or $5.9 billion - there may be a better argument to be made in the TCO and value of offshoring

Outsourcing has long been a win-win proposition for corporate America. Sourcing non-core functions, including IT development and maintenance activities helps companies free up capital and resources to invest in other core activities that help in revenue generation. Offshoring extends the benefits of sourcing by leveraging a larger pool of resources across the globe, aided by seamless communication and technology. The fact is that much of Corporate America relies on cost benefits of offshoring. And while Microsoft, google and other hi-tech companies benefit from "foreign born" talent imported on H1 visas, rest of the corporate world also benefits by retaining the services of offshoring firms who need to import talent from offshore locations to service clients onsite.  The Microsofts and Googles may certainly be leading the technology innovation curve, but most other companies, large and small also leverage Information Technology to run their business. The "development and maintenance" of such IT systems requires armies of skilled technologists.

Refocusing the visa debate on the basic need from Corporate America is not as tenuous as it sounds.  However most logic is sure to get muffled in the rhetoric of political arguments.

Musings on body shopping, IT Service Firms, visas and the 7 Year itch

Technology sourcing companies have long struggled with the "7 year itch" but now with a few forces coming together, the problem seems to be getting magnified: Sluggish global economy coupled with continued demand for offshoring, protectionist visa policies, and IT service companies continuing to go after a slice of the same big pie. The unsung beneficiaries of this: small, mid-size body-shops (And no, in this blog, I am not adding to the debate on Whether Infosys Is a 'Body Shop')

Firstly, defining the 7 Year Itch. Many IT professionals who have grown in a service firm, especially those with an extended experience working on hot technologies in more than a few projects feel the need to explore the grass-on-the-other side. These Tech-lead/Junior-Architect level folks are also backbones of successful IT sourcing projects, and are much in demand.

Case in point. Here is a practical problem that managers of sourcing firms face. My client just awarded a million-dollar six-month contract for the next phase of eCommerce program to my firm. Most of the existing technical folks in my project are already locked into working on the previous phases. I don't have a pool of experienced IBM Websphere, IBM Portal and IBM Commerce programmers currently available in my organizational bench pool to join the team at a short notice. Flying in folks from out of US is not a practical option for two reasons: we don't have a pool of "visa ready" folks waiting on bench, and getting visas for other folks at short notice would be impossible.

What do I do? I turn to sub-contractors in the local market. The sub-con has a database of Websphere professionals working for other tier-1outsourcing and offshoring firms - possibly my competetors. These also happen to be folks either going through a 7-Year-Itch at their firm, are looking for a subcon to sponsor their immigrant visa or simply an opportunity to make a few dollars more as an IT contractor.

There are a few interesting market forces coming together here, something that the body-shops are looking to capitalize on.

• Sluggish global economy with continued outsourcing. Sluggish global economy means most companies either have a hiring freeze or a slowdown in hiring. The slowdown in hiring does not always mean a corresponding freeze in the technology initiatives, which translates to an opportunity for sourcing vendors.
• Let the big dogs fight over the slice of the same pie. A client may decide to award an eCommerce project to a Vendor A and a SAP upgrade program to Vendor B. Vendor A scrambles to put together a team of Managers, Architects, Tech Leads and Developers proficient in eCommerce technologies. Vendor B likewise does it for the SAP program. Just like organizations realize they can easily interchange and deploy resources across client programs, the ‘resources’ realize they can switch employers and continue to work on same technologies.
• Fewer Work Visas: Not wishing to go against political headwinds, service companies are applying for fewer work visas. Even the few applications are going through additional scrutiny by immigration officials, which means one thing: fewer experienced IT professionals available in any geography.

Opportunity: Body Shops promise mobility while carving out a niche. Technologists with the 7-Year-Itch are motivated and unencumbered by a baggage of loyalty and need to work for a single employer. However, their mobility is restricted by their immigrant/visa status and sluggish hiring by end-clients. Also, most large sourcing firms are reluctant to hire candidates in the US if they also have to sponsor visas for them. The body shops are stepping in to provide a bridge: hiring talented individuals who can be sub-contracted to larger sourcing firms with the only overhead of having to sponsor their paperwork.

ps: As with any opportunity, there are risks, especially for those being "body shopped." Risks include being out of visa status if the body-shopper is unable to get the right paperwork to sponsor visa extension …. but that is another topic in itself.