Firms fall short in long-term incentives for top execs

Firms fall short in long-term incentives for top execs
Coming close to the $8.1m package of DBS's Mr Gupta (left) was Yongnam's Mr Seow with $7.4 million. The long-term incentives for Mr Choo (right) were about 3.69 times of his monthly salary.

COMPANIES may preach about planning and strategising for the long term. But when it comes to paying their top executives, the talk falls short.

Only one in five companies listed in Singapore provided some form of long- term incentives in the total remuneration package for top executives in 2011, a study by consultancy Freshwater Advisers has found.

Long-term incentives are generally equity-based payments: stock options, performance share plans, restricted share plans. The latter two are based respectively on meeting performance targets and the passage of time.

The practice of having long-term incentives is typically more prevalent among the larger companies that have more than $1 billion in revenue, with about two in five doing so.

The companies in this revenue band paid as high as 5.4 times the monthly salary in bonus, and 3.3 times in long-term incentives.

Among those studied, Keppel Corp CEO Choo Chiau Beng took home the greatest proportion of long-term incentives at an estimated 3.69 times of his monthly salary. His bonus, or short-term incentives, was 5.25 times of the monthly pay.

On the other hand, fewer than one in 10 companies with revenues less than $500 million incorporated long-term incentives as part of the total remuneration package.

Even when the smaller companies do so, it is often not an annual affair, said Freshwater.

But whether or not companies use long-term incentives as part of their remuneration package, the proportion of short-term incentives in the total remuneration package is largely similar - an indication that long-term incentives are considered a supplement rather than an integral part of the remuneration philosophy. Firms which employ long-term incentives would instead have a lower percentage of total remuneration in base salaries and fees.

The preference by company boards to use primarily short-term remuneration incentives sends the wrong message to company heads, said Freshwater managing director Jon Robinson.

"If you are paying your senior executive director a significant share of annual profits and with no long-term incentive, what that is saying is you don't care as much about the long-term strategic development of the company. You only care about what profits are made in any one year."

The practice of many companies in using an annual profit figure as the basis for bonus payments is "neither strategic nor has regard to risk", he added.

"Rewarding people for a year of results is not particularly long term. We think measures should be more strategic and measuring it out over one year is fraught with risks which boards should be concerned about."

Temasek companies such as Keppel Corp and Singapore Airlines stand out as examples of companies with long-term remuneration philosophy, said Mr Robinson.

These companies include in their remuneration package a performance target called economic value added, or profit less cost of capital, measured over three years.

In its study, Freshwater Advisers analysed the annual reports of 214 companies with at least $100 million in market capitalisation as at Dec 31, 2011. It excluded from the study investment trust companies such as real estate investment trusts (Reits) due to their different remuneration structures, and another 54 companies which did not disclose sufficient information.

The consultancy also found that the ratio of bonuses, or short-term incentives, to base salary increases with the size of the firm, though growth eventually flattens for firms with revenues above $500 million.

The construction sector had the highest levels of bonus payments in 2011, with an average of 4.7 times the monthly salary. The ratio ranged from 0.2 for mining firms to 2.41 for finance firms.

The high bonuses in the construction sector enlarged the size of the total wage bill so much that it ranked as the sector with the second highest level of total remuneration after finance.

Yongnam Holdings CEO Seow Soon Yong, for example, received about $6.9 million in bonuses compared to about $370,000 in monthly pay.

Coupled with other benefits of $50,000, he had total remuneration of about $7.4 million - close to DBS Group's $8.1 million package for its CEO, Piyush Gupta.

The large bonus sum for the construction sector was probably due to a good year of profits in 2011, said Mr Robinson.

In terms of monthly pay - regularly used as a reference for other aspects of remuneration such as bonuses - there is also a correlation with the size of the companies. The average $1 million that the larger companies with over $5 billion in revenue paid was more than three times the $327,000 paid by firms with less than $100 million in revenue.

Across the sectors, average monthly salary figures ranged from $368,000 to $917,000, with the services and construction sectors on the lower end, and mining and electricity/gas/water companies on the higher end.

There is no magic formula on the best ratio of long-term incentives to short-term ones in the remuneration package, said Mr Robinson, but it depends on a company's strategy and current state of development.

"It is important to use both short-term and long-term measures and rewards to motivate executives to balance their efforts between managing annual results and creating long-term shareholder value."

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