CapitaLand bonus: a question on revaluation
Uma Shankari
Tue, Mar 31, 2009
The Business Times

CAPITALAND revealed last week that it had awarded chief executive Liew Mun Leong a bonus of $20.52 million for 2007 and a comparatively more modest bonus of $2.98 million for 2008.

Mr Liew's award for 2007 was a reward for the group's record profit of $2.76 billion that year. Profits more than doubled from 2006's $1.01 billion, for which Mr Liew was paid $6.36 million.

CapitaLand also said the bonus accrued to Mr Liew in 2007 was due primarily to an economic value added (EVA) bonus payment. Essentially, EVA measures the net operating profit after tax of the group minus the cost of all capital employed. In 2007, CapitaLand's EVA was $2.3 billion. The amount fell to a smaller $660 million in 2008, leading to a significantly smaller bonus for Mr Liew.

Predictably, the figure of $20.52 million has come under fire. The amount is unprecedented here, even among the three listed local banks, whose management typically draw high bonuses. CapitaLand's disclosure led at least one commentator to draw a parallel to the public anger in the United States and some parts of Europe over excessive CEO compensation.

Perhaps anticipating the reaction, Mr Liew sat down with local media on the day of the bonus announcement to explain how his bonus was worked out. One point he took great pains to explain was that bonuses for all of CapitaLand's top management are awarded on an accrual basis.

What this means is that the bonus awarded in a particular year to any one person will be credited into a bonus account, and just one-third of the balance in that accumulated account will be paid out each year. If the group performs poorly in a certain year, the bonus for that year will be negative and will accordingly be subtracted from the person's accrued bonus account - what CapitaLand calls a 'clawback'. Mr Liew's account was hit by a clawback in 2003, and this could happen again in the lean years that are coming, he said.

Mr Liew also pointed out his $20.52 million bonus for 2007 works out to 0.74 per cent of the company's net profit, which hit a record $2.76 billion that year. By contrast, the average bonuses drawn for the 2007 financial year by the chief executives of the 10 largest companies listed on the Singapore Exchange (SGX) came to a larger 3.9 per cent, Mr Liew said.

However, the absolute amount awarded to Mr Liew - headline grabbing as it was - is not really the issue here. The real issue is whether one-off revaluation gains should figure when CapitaLand derived the bonus.

While it is true that CapitaLand raked in a record profit in 2007, one must not forget that the group benefited from the strong recovery in property prices that year - particularly in Singapore - as well as recognised revaluation gains of about $1.1 billion from its investment portfolio. This is one major reason why its net profit, which included such gains, rose a whopping 172.5 per cent in 2007, while gross profit climbed by a much smaller 45.3 per cent.

And one can argue that revaluation gains result from changes in market conditions over time that are not directly influenced by management action.

So for CapitaLand to compare the ratio of its CEO bonus to net earnings to the rest of the 10 largest companies listed on SGX may not be totally fair: most of the other 10 big firms on SGX are not in real estate - which means that their bottom lines were not inflated by revaluation gains during the 2007 property boom which boosted the earnings of most developers. There is, of course, a counter-argument that while fair values can go up, they can also go down.

CapitaLand deserves credit for explaining in detail how it pays its CEO. The group has demonstrated time and again that it is ahead of the curve when it comes to accountability to its shareholders. It has also gone on record to say that its bonus plan is reviewed regularly to ensure that the measures remain relevant and that targets are in line with market expectations. Taking revaluation changes out of the equation when it comes to deriving bonuses is something it can look into.

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