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Monday, August 15, 2011

Paying commission on adjusted operating net profits-L&T sets an example

L&T is one of India's best managed and governed companies. The remuneration was on the lower side compared to competition, but now they decided, as part of their 2015 strategic plan to revise top management remuneration. Now, the companies act allows commission to be paid on basis of net profit-not adjusted for exceptional gains. If at all companies have adjusted this, it has been to exclude impairments etc. But now, L&T has set an example. In its FY11 AGM, it has requested shareholders to approve managerial commission on the net profits after tax of the Company and excluding extraordinary/exceptional profits or losses arising out of sale of business/assets/sale of shares in subsidiary/associates/SPVs/JVs/, and also from sale of strategic investments/adjustments in value of strategic investments. 

A cynic could argue that till the point of sale, impairment of strategic investments are excluded from the profit computation. But then, one must admire the beauty of this scheme. It does not reward 'inorganic' profits, like say how a Jack Welch could have earned from just splitting the entity/financial engineering. And given L&Ts plan of divesting its subsidiaries/stake sales, this little spotted loopholes could have earned millions for the managerial staff.

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