Information technology services firms are seeking shareholder approval to raise CEO remuneration thresholds beyond the statutory 5% of net profit limit due to accumulated stock awards. According to reports from Mint, Mphasis Ltd has sought approval to increase CEO Nitin Rakesh's remuneration threshold from 5% to 7% of net profit, while Persistent Systems Ltd raised CEO Sandeep Kalra's compensation from 5% to 21% of net profit. The Companies Act allows companies to pay up to 5% of net profit in remuneration to chief executives, requiring shareholder approval for higher amounts. As per Business Standard, these proposals were driven by stock-based compensation rather than increases in annual salary, with companies specifically noting that no changes were made to CEO salaries or target bonuses.
As reported by Mint, the remuneration packages include both cash and share-based components. Kalra's ₹388.6 crore remuneration comprises ₹22 crore cash and ₹366 crore in share-based compensation through stock option exercises, while Rakesh's ₹104.8 crore represents 5.63% of Mphasis's net profit. At Sonata Software, former CEO Samir Dhir's ₹11.4 crore was 2.5% of profit, and current CEO Sudhir Singh's ₹36.1 crore salary in FY25 was 4.5% of net profit. The compensation includes realization from shares sold during the fiscal year, along with salary, allowances, bonuses, and other components.
According to Business Standard, Section 197 of the Companies Act, 2013 governs managerial remuneration in public companies, stating that total remuneration payable to directors cannot exceed 11% of the company's net profits. Within this overall limit, individual managing directors' remuneration cannot exceed 5% of net profits unless shareholders approve higher amounts through special resolutions. If multiple managing directors exist, their combined remuneration cannot exceed 10% of net profits without shareholder approval. As per Mint, accounting rules govern how companies recognize stock units, often at grant value over the vesting period, with IndAS 102 mandating charging ESOP costs through the profit and loss account over the vesting period.
As reported by Mint, Mphasis shares have jumped almost 300% since Rakesh's appointment in 2017, while net profit increased 135% during the same period. Similarly, Persistent Systems shares have risen almost nine times since Kalra's 2020 appointment, with net profit jumping 448%. In contrast, Coforge and Sonata Software have outperformed their share price returns under their respective CEOs, with Coforge's net profit jumping 455% and Sonata's profit increasing 23% during their CEO tenures.
According to Mint reports, investor opposition has emerged despite company explanations. Persistent Systems faced opposition from 25% of institutional investors last July, though the resolution was approved with 87% overall shareholder support due to promoter backing. Legal & General Investment Management opposed the resolution, citing concerns about aggressive compensation compared to industry peers. Mphasis has faced recommendations from proxy advisory firms Institutional Investor Advisory Services and Stakeholder Empowerment Services to reject the resolution, with IiAS specifically opposing the lack of overall compensation caps despite supporting Rakesh's reappointment.
