Context:
In the case of this large manufacturing Company, a proposal to substantially increase the pay of a promoter VC & MD did not get the requisite shareholder approval in the first instance.

• The Nomination and Remuneration Committee (NRC) of a listed Company recommended, via postal ballot, the re-appointment of the Vice Chairperson & Managing Director (VC & MD), who is part of the third generation of the promoter family, for a term of 5 years, with effect from May 28, 2019.
• In the Board meeting held on August 1, 2018, he was re-appointed, subject to the approval of the shareholders.
• His salary was fixed at INR 42 lakhs per month, with suitable increases as may be determined by the Board/ its Committee from time to time, not exceeding 15% annual increment each year, commission up to 5% of total profits and perquisites restricted to 300% of the total salary.
• The period of e-voting for this proposal was from August 9, 2018 to September 7, 2018. This was a special resolution. As per SEBI LODR Regulations, if the remuneration payable to an Executive Director, who is a promoter or part of the promoter group, exceeds INR 5 crores or 2.5% of net profits, whichever is higher, a special resolution is required.
• The special resolution was defeated, with more than half of the public institutions voting against it, even as the promoters and non-institutions supported it.
• 72.71% of the votes polled were in favour of the resolution, falling short of the minimum 75% required. Institutional investors owned 44% of the shares, and roughly 56% of those voted against the resolution.
• The reason that some institutions did not back the re-appointment was the higher pay proposed to be paid to the VC & MD. In FY 2016-17, his annual salary was INR 30.89 crores, and this increased by 43% to INR 44.64 crores in FY 2017-18, even though the Company’s profits fell by 34% during the period.
• In the Board meeting held on October 1, 2018, the Directors reiterated their unanimous approval of the VC & MD’s leadership since he had taken the Company to greater heights since he had joined the Company. This was communicated to the Stock Exchanges vide a filing on October 3, 2018. The filing further stated that the Board would seek shareholder guidance and independent counsel on a compensation level commensurate with the position. Once that process was completed, the Board would re-nominate the VC & MD to be re-appointed with effect from May 28, 2019.
• As per a Stock Exchange filing dated November 13, 2018, in October, 2018, the NRC engaged with a range of institutional shareholders to take their views into consideration, and commissioned an independent report from one of the big 4 audit firms to benchmark the VC & MD’s compensation structure.
• This twin process of consultation and external benchmarking resulted in a significantly revised proposal from the NRC for the compensation package to renew his contract from May, 2019. The revised proposal resulted in a reduction of approximately 30% in overall compensation for him, as well as for the Chairperson of the Company, who too was a promoter, and the VC & MD’s father.
• Both the Chairperson and the VC & MD agreed to a reduction in their compensation in FY 2019, post the study by the big 4 firm.
• 0n November 13, 2018, the NRC once again recommended the re-appointment of the VC & MD for a term of 5 years from May 28, 2019 till March 31, 2024, on revised terms and conditions, including the remuneration, subject to the approval of the members of the Company via postal ballot.
• The revised salary of the VC & MD was fixed at INR 32.90 lakhs per month, with suitable increases as may be determined by the Board/ its Committee from time to time, commensurate with average percentile increase in the remuneration of employees at one level below the Board of Directors, commission up to 3.5% of total profit and perquisites restricted to 150% of total salary.
• On the basis of the study, 3 of the major changes to the compensation, that were proposed by the NRC, were
  1. A cap on total promoter compensation set at 7.5% of Profit Before Tax (PBT). This was to be reduced over a period of time. (For FY 2017-18, the total compensation paid to both the promoters was a little under 10% of the consolidated net profit of the Company).
  2. Performance-based remuneration to be targeted at approximately 70% of the total compensation.
  3. Annual increments for the fixed portion of promoter compensation will be in line with that of the senior professionals of the Company.
• On December 21, 2018, the Company informed Stock Exchanges that the special resolution had been passed. 96.72 % of votes were cast in favor of the resolution.
  Points to Ponder
• Should there have been wider consultations and better benchmarking, before finalising the proposal?
• Could the NRC have done a better job?