Getting the formula for CEO pay right

IN his recent speech on building a culture of trust in the financial industry, Ravi Menon, managing director of the Monetary Authority of Singapore, observed that "compensation structures tend to over-emphasise profits as performance measures". We cannot agree more.

Although directors' remuneration remains a closely guarded secret known only to those who sit in boardrooms and compensation experts, it is widely known that most companies pay their directors based on the stock price and the company's level of profitability. A survey of directors' compensation by the Singapore Institute of Directors (SID) in 2010 and 2013 showed that the pay of executive directors is often fixed based on the company's financial performance.

However, the 2013 SID survey findings suggested that companies may be moving away from a profit-based metric as the sole determinant of CEO pay. In that survey, 81 per cent of the respondents cited the roles and responsibilities of the executive director as a factor in determining compensation, as compared to the second most popular factor: "results achieved" (68 per cent). Is this a sign of growing dissatisfaction with a profit-based metric for CEO pay?