Should top execs in firms receiving government support get a pay rise?

CONSTRUCTION company Lian Beng Group came under the spotlight recently, after it said government Covid-19 support grants had been included in its calculations of overall profitability and, therefore, top executive remuneration. Lian Beng later explained that its executives were not benefiting directly from the grants as these had been insufficient to offset higher Covid-related costs. But the flak directed at the company is a reminder that boards and management need to be more sensitive and careful about not just how government support during the pandemic is utilised, but also in communicating this.

Paying directors more

A shareholder had asked Lian Beng why its key executives received a higher remuneration than the previous financial year, even though the company's net profit excluding government grants was lower.

"The remuneration payable to the key executives of the company includes a bonus component which is calculated based on the overall general profitability of the group," Lian Beng said in response to the shareholder query.

"Both the additional operating costs incurred due to the ongoing Covid-19 pandemic and government grants received to help defray such costs were included in the computation. The slight increase in remuneration is in line with the slight increase in profitability of the group." Lian Beng also clarified to The Business Times later that the actual expenses incurred by the group due to Covid-19 were higher than the grant amount received, and that the increase in remuneration was computed based on overall group performance.

To be clear, Lian Beng did not increase the pay of all its key executives.

The company's latest annual report said total remuneration for the top 8 key executives who were not also directors totalled S$2.7 million in FY21. This was slightly less than the S$2.8 million paid in FY20.

The remuneration for its 3 executive directors, however, rose.

Lian Beng disclosed remuneration for its directors in bands of S$250,000, and all 3 saw their remuneration rise by one band.

The remuneration of chairman and managing director Ong Pang Aik rose to between S$2.75 million and S$3 million. Its head of accounting and finance, human resources and corporate affairs Ong Lay Koon, and head of contracts department Ong Lay Huan were paid between S$1.75 million and S$2 million.

Lian Beng is majority-controlled by the Ong family.

Beware the optics

It is Lian Beng's prerogative to decide how it wants to pay its top executives; after all, only the company knows how much they have contributed to the group, or what they did to steer it through a challenging time.

Lian Beng is in an industry adversely affected by lockdowns and other Covid-19 measures. It is also one among many other companies whose profits have been supported by grants. It could be said too that in supporting the bottom line of many companies and keeping their operations going as much as possible, the grants are doing their job in helping to preserve jobs and preventing the business sector from suffering too severe a dislocation.

But there is also a perception issue. For Lian Beng shareholders, the higher remuneration for the Ong family directors was what sat uncomfortably. In contrast, Sheng Siong, which benefited both from rising business and government support in the pandemic, was lauded for paying more bonuses to its workers.

The reality is that pay remains a key factor for companies even in a pandemic: to attract and retain the talent and manpower they need, and to get out of the current situation. This applies not just to workers, but also to management expertise. It will be unfortunate if shareholder backlash ultimately leads to departures and loss of expertise, or even deters companies from accepting government grants when it is needed.

Companies, however, can be more sensitive when it comes to the remuneration of top executives and directors.

The usual profit sharing or bonus calculations based on profitability metrics, for one, will often end up factoring in the impact of government grants. These may need to be adjusted to be applicable in exceptional times, like now, rather than carry on normally.

Communicating any rise in top executive remuneration at this time should also come with more awareness of the optics. Shareholders will require properly put and thought-out explanations. And while most fair-minded investors may accept (or welcome) paying the rank and file more in difficult times, they will likely need more convincing when it comes to top executive pay if the company is receiving government grants.

With many sectors still vulnerable to the impact of Covid-19, and government support expected to remain to underpin the economy, this will likely be an issue that will remain under scrutiny.

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