Alignment between CEOs' pay and profitability found lacking: report

PAY-for-performance alignment between Singapore chief executives and profitability remain an issue as long-term incentives usage here remains low. At the same time, CEOs continue to receive bonuses despite incurring losses or higher bonuses despite lower profit, a study found.

In a damning study on Singapore CEO pay-for-performance practice, Korn Ferry Hay said that utilisation of long-term incentives remains low at 11 per cent at Singapore-listed companies.

"Pay-for-performance alignment between a CEO's pay and the company's profitability continues to be an issue," it said in a report published on Wednesday.

The study looked at top executives pay from 541 listed companies in the Singapore Exchange that filed their annual reports between May 1, 2016 and April 30, 2017 across nine major industry sectors: commerce, construction, finance, hotels/restaurants, manufacturing, multi-industry, properties, transportation/storage/communication and others.

It showed that the median total pay for CEOs at Singapore-listed companies has remained constant at S$625,000 per annum in financial year (FY) 2016.

By comparison, a study of CEO compensation at the 300 largest US-listed companies that filed their proxy statements during the year ending April 30, 2017 found that total direct compensation (the sum of salary, bonus, and grant date fair value of long-term incentives) increased by 4.2 per cent over the prior year to a total of US$12.5 million.

However, this increase was almost entirely due to a 4.4 per cent rise in the grant date fair value of long-term incentives (LTI), which maintained the heaviest emphasis within CEO pay at the US companies. Base salaries at such firms only increased 0.8 per cent, while annual incentives were flat.

Only 11 per cent of the 541 Singapore companies rewarded their top executives with LTI plans in FY 2016, with large-sized companies taking the lead in the utilisation of LTI pay (68.8 per cent), followed by medium-sized companies at 19 per cent, small-sized companies at 5.2 per cent and Catalist companies at 6.2 per cent.

In contrast to the limited use of LTIs in Singapore, at the US companies, LTIs were by far the largest component of CEOs' pay, representing 66 per cent of their total direct compensation.

The study also found that 31 per cent of Singapore companies in FY 2016 did not pay bonuses to their CEOs, while 21 per cent of companies in FY 2016 paid bonuses to their CEOs despite incurring a loss during the FY.

"In addition, 32 per cent of the companies that paid bonuses had significantly higher CEO bonuses for FY 2016 (compared to FY 2015) for lower company profitability for FY 2016 (compared to the prior year), indicating a significant misalignment between company profitability and CEO pay," it said.

At US publicly listed firms, "the input of (and the engagement by companies with) large shareholders, proxy advisory firms, and various stakeholders has resulted in a focus on 'pay-for-performance', as evidenced by the leading role of LTIs in CEO compensation and the dominance of performance awards in the LTI mix".

"(Singapore) remuneration committees need to address the enhanced scrutiny from corporate governance activists, with added emphasis on pay-for-performance and ultimately sustainable performance in the long term," said Kevin Goh, senior client partner, Korn Ferry Hay Group.

"Compared to more mature economies, Singapore companies have a lower utilisation of LTI in rewarding CEOs," he added. "Having an LTI plan is a way of delivering the message that top executives need to balance both the short and long-term sustainability of the company. A well-designed remuneration structure with executive pay having some resemblance to what shareholders will get out of their investment should be able to motivate executives to take action."