Tempering CEO pay will help build a stronger local bourse

THE chief executive officer (CEO) of a listed group has a tough job. He/she needs to motivate a large number of staff, win the confidence of investors, manage relationships with customers and suppliers, build the company’s brand, find growth opportunities, manage risks, deal with regulatory issues, travel extensively and so forth.

Today’s CEO also has to handle threats and opportunities posed by digitalisation, climate change, artificial intelligence and geopolitics, among other global forces.

But some CEOs are richly compensated. The CEOs of the local banking trio of DBS , OCBC and UOB , for example, received remuneration of between S$11.2 million and S$15.9 million for the financial year ended last Dec 31(FY 2023).

Shareholders may not begrudge paying huge sums to the CEOs and senior management of the banks, which have posted robust financial results and grown their dividends. What may rile investors, though, is that some smaller listed groups also pay their top management seven-digit sums for a substantially weaker financial performance.

Property group Hong Fok Corporation paid its three executive directors a combined total remuneration of at least S$13.25 million for FY 2023, representing over 15 per cent of profit attributable to shareholders. Larger peer UOL Group , which posted a much higher profit attributable to equity holders, paid its sole executive director and group CEO S$2.9 million for FY 2023. 

Lower pay is investor-friendly

In August, the Monetary Authority of Singapore announced the setting up of a review group to recommend measures to develop Singapore’s equities market.

Perhaps, having more moderate executive remuneration will boost the allure of local stocks to retail and institutional investors.

One, in a tough business climate under which profit margins across industries are thin, reducing the pay of top executives might lead to meaningful improvements in the bottom line.

Indeed, paying head honchos lavishly can represent leakage to investors. After all, money saved on executive remuneration could have been redeployed into paying higher dividends or funding the expansion of the business.

Two, as people grow more conscious over fairness and equality, investors may increasingly reward companies that pay their executives reasonably, and punish those that pay top executives excessively.

Maybe, some investors would prefer that a CEO’s remuneration be capped at a reasonable multiple of the median wage in the company, or the median income in the country.

In perspective, a CEO of one of Singapore listed banking trio might receive annual remuneration that is around 100 times of the annualised median monthly household income from work, including employer CPF contribution among resident employed households. The said median household income was S$10,869 per month in 2023.

Three, paying top management reasonably could strengthen business sustainability. Some CEOs may refrain from taking undue risks for potential big near-term payoffs if their incentive to do so is weaker.

Also, remunerating corporate leaders richly might make such leaders lose touch with their rank-and-file.

The high compensation of the top management can hamper their effectiveness in handling labour relations if jobs are displaced or if workers need to make painful adjustments to assume new roles because of job market disruptions.

Four, many businesses thrive because of a capitalist system, which has open rules-based trade and flexible labour markets.

Crucially, the perceived greed of corporate leaders might turn people against businesses and the capitalist system. This can, in turn, encourage politicians to be anti-business and hostile to the rich. 

Indeed, businesses that espouse corporate social responsibility need to ensure that the public views businesses positively and sees executive compensation as fair.

Singapore’s exceptionalism

Certainly, corporate boards and remuneration consultants invest much effort to draw up competitive executive pay packages and structures to incentivise behaviours such as driving long-term sustainable business growth. In short, boards of listed groups may feel justified in paying their CEOs handsomely. 

Still, Singapore has thrived by being exceptional. Could another facet of our exceptionalism stem from Singapore having corporate leaders who are ethical, competent and driven, yet relatively poorly compensated?

Think about it. The local bourse enjoys favourable tailwinds.

For example, the positive growth outlook in South-east Asia will lift many listed groups here.

Also, equity investors might value Singapore’s political stability, consistency in policymaking, social cohesion and business-friendly environment. Maybe, building strong support from the local community for business-friendly policies will drive investors to attach a premium to Singapore corporations. 

Singapore’s equities market will receive a boost if investors see top corporate leaders as delivering outstanding value for what they are being paid. In addition, trimming executive compensation can help build an inclusive society and enhance social cohesion, which matter to long-term, focused investors.

In property terms, a CEO earning S$10 million a year might be able to afford a S$50 million rebuilt detached house in a Good-Class Bungalow Area, costing five times of his annual income. If his annual pay fell by 70 per cent to, say, S$3 million, he might well have to cut back to a S$15 million, rebuilt semi-detached house in a sought-after location.

For many CEOs, building a legacy – which might entail transforming the business, growing a new market, nurturing a stronger culture, strengthening the brand or building a stronger team – may vastly outweigh monetary rewards.

Often, CEOs steward businesses, which have been built up over time, and are largely managing third-party money. May they be reasonably – but not lavishly – rewarded for performance. Let the big money largely accrue to entrepreneurs who have risked much to build new businesses.