When pay ceiling catches up with IT firms' stock-rich CEOs

This is a Mint Premium article gifted to you.Subscribe to enjoy similar stories.

Information technology (IT) services firms have long used shares to reward chief executives. Now, as the CEOs cash in stock awards accumulated over the years, companies are seeking shareholder nod to raise the statutory remuneration cap, drawing scrutiny from investors and proxy advisory firms over compensation disclosures.

Under the Companies Act, a company can pay up to 5% of its net profit in remuneration to its chief executive, and a shareholder nod is needed if companies want to pay more.

On Monday, Mphasis Ltd sought shareholder approval to increase the remuneration threshold payable to CEO Nitin Rakesh from 5% of the company’s net profit to 7%, citing the value of shares that may be encashed. Blackstone-backed Mphasis will hold its annual general meeting on Thursday.

Mphasis became the second mid-cap IT services firm to seek shareholder approval after Persistent Systems Ltd raised the remuneration for incumbent boss Sandeep Kalra from 5% to 21%, also because of share-based pay.

For now, Rakesh’s ₹104.8 crore remuneration is 5.63% of Mphasis’s net profit, while Kalra’s ₹388.6 crore remuneration is about 20.84% of net profits. At Sonata Software Ltd, former CEO Samir Dhir’s ₹11.4 crore was 2.5% of profit, while Sudhir Singh’s ₹36.1 crore salary in FY25 was 4.5% of Coforge’s profit in that year. Coforge is yet to release its FY26 annual report.

The remuneration in these instances includes realization from shares that the CEOs sold in a fiscal year besides salary, allowances, bonuses, and other components of their annual compensation. Some of these shares may have vested over several years, but encashed in the said year.

Mphasis said it needs shareholder approval because Rakesh has more accumulated shares that could be encashed.

“If the stock options and RSUs (restricted stock units) granted in separate financial years are exercised collectively in a single financial year, the perquisite value of such exercise, aggregated with other components of his remuneration, may result in aggregate remuneration payable to Mr Nitin Rakesh exceeding 5% of the net profits of the Company,” Mphasis said in a disclosure on 20 July.

Mphasis had appointed Rakesh in 2017. Over the last nine years, he has been rewarded with employee stock ownership plans.

In the case of Persistent, Kalra’s ₹388.6 crore remuneration last year comprised ₹22 crore cash and ₹366 crore in share-based compensation through exercise of stock options. Kalra received many of these shares over the years after he was appointed CEO in 2020.

Two key factors have prompted these companies to seek shareholder approval.

Firstly, accounting rules govern how companies recognize these stock units, often at grant value, over the vesting period or when the CEO becomes eligible to buy the stock unit. Subsequently, the same shares, when sold by the CEO, are counted as part of the remuneration.

“The Esop ecosystem has different dimensions. For listed companies, Sebi's (the Securities and Exchange Board of India) Esop regulations need to be followed, which amongst other things requires a special resolution of shareholders; in relation to overall compensation for companies (listed or otherwise) it needs to be within the limits specified in Schedule V of the Companies Act,” said Ketan Dalal, managing director of Katalyst Advisors.

“The company also needs to follow IndAS 102, which requires a charge of Esop cost through the profit and loss account over the vesting period," Dalal added. "From a taxation standpoint, insofar as the company is concerned, the issue of whether the Esop P&L (profit and loss) charge is deductible or not has been a matter of controversy, but the trend of judicial opinions is in favour of granting that deduction.”

Significantly, Mphasis and Persistent’s net profit growth has underperformed the gains in their share prices.

Rakesh took over as CEO of Mphasis on 29...