Leading Nestlé India Limited (NSE:NESTLEIND) as the CEO, Suresh Narayanan took the company to a valuation of ₹1.10t. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. Today we will assess Narayanan’s pay and compare this to the company’s performance over the same period, as well as measure it against other Indian CEOs leading companies of similar size and profitability.

See our latest analysis for Nestlé India

Did Narayanan create value?

Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. Over the last year NESTLEIND released an earnings of ₹14.74b , which is an increase of 52.1% from its last year’s earnings of ₹9.69b. This is an encouraging signal that NESTLEIND aims to sustain a strong track record of generating profits regardless of the challenges. Since earnings are heading towards the right direction, CEO pay should echo Narayanan’s valued-adding activities. During the same period, Narayanan’s total compensation rose by 10.5% to ₹99.7m. Although I couldn’t find information on the composition of Narayanan’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in NESTLEIND’s share price can affect the real level of what the CEO actually receives.

What’s a reasonable CEO compensation?

Though no standard benchmark exists, since remuneration should be tailored to the specific company and market, we can estimate a high-level yardstick to see if NESTLEIND is an outlier. This outcome can help direct shareholders to ask the right question about Narayanan’s incentive alignment. On average, a BSE or NSEI large-cap has a value of ₹879b, produces earnings of ₹36b and remunerates its CEO at roughly ₹69.8m per annum. Allowing for NESTLEIND’s size and performance, in terms of market cap and earnings, it appears that Narayanan is compensated more than other BSE and NSEI CEOs of profitable large-caps. Though this is merely a basic estimate, shareholders should be cognizant of this expense.

What this means for you:

Whether Narayanan is over or underpaid should not be a deciding factor whether or not you invest in NESTLEIND. However, the way the company is governed and policies, such as remuneration, are structured, are important considerations for an investor. The best place to start is to understand how well NESTLEIND is placed financially. If you have not done so already, I highly recommend you to complete your research by taking a look at the following: