When stockmarket declines affect compensation

SINCE January 2015, the Straits Times Index has dropped by approximately 15 per cent. The depressed share prices and low corporate earnings have affected Singapore companies in various ways. Some have cut jobs, some have frozen or reduced executive salaries, while others are awarding lower bonuses. The biggest impact, however, will likely be on the companies' long-term incentive (LTI) plans.

LTI plans are recommended by Guideline 8.2 of the Code of Corporate Governance. They should be designed to align the interests of management and shareholders, and reward forward-looking performance. In Singapore, the most prevalent plans revolve around restricted shares (which reward the achievement of operational targets and enable retention of executives) and performance shares (which reward the creation and preservation of shareholder value over the long-term).

Typically, performance shares incorporate total shareholder returns (TSR) as a performance hurdle. TSR combines share price appreciation and dividends to measure total returns to the shareholder. Management is rewarded for generating TSR in excess of a certain hurdle rate, or for generating a higher TSR relative to peer companies.