Friday, May 05, 2006

Quibbles Over Top Executive Pay

Financial Talent In Asia Hits New Ground

We have heard of the often outrageous pay packages for many of the American CEOs. The figures are so stratospheric that it does not make any sense to the common folk. You do a job, and you do it well, then get paid well - not paid out of this world. the CEOs pay should be no more than 30x-50x the pay for fresh graduates joining the company. Anything totalling more than that is hard to justify. Of course the more socialist your leanings are, the lesser the multiple. We can all argue till the cows come home on what is fair, but in a capitalistic world, what is paid will be closer to the 50x mark rather than the 20x mark.

When you have boards allowing CEOs to market their pay packages to the top quartile of fellow CEOs, its a never ending game. Now lets look at some interesting developments in Asia. The HK$10 million (US$1.28 million) annual pay of de facto central banker Joseph Yam Chi-kwong and the Exchange Fund's heavy management cost came under sharp fire from lawmakers dissatisfied with the poor investment performance last year. Hong Kong Monetary Authority chief executive Yam, Hong Kong's highest-paid official, took home a paycheck of HK$9.97 million last year, up 12% from 2004, boosted mainly by a 32.9% rise in his performance-linked pay component, which came in at HK$2.5 million. His fixed pay rose 3.55% to HK$6.7 million. Yam had already requested a pay freeze in 2006.

Members of the opposition fiercely criticized Yam's remuneration for being the highest among the world's top central bankers. It was well above US Federal Reserve board chairman Ben Bernanke's US$183,500 (HK$1.43 million) 2006 salary. It is not entirely fair to compare Yam's pay with Bernanke as the Fed operates in a committee, and US levels are not necessarily the best benchmarks anyway, especially for government type positions. In Singapore the top politicians all get paid a lot more than US politicians, including the President post.

But Marvin Cheung Kin-tung, chairman of the Exchange Fund Advisory Committee governance subcommittee, which oversees the governance issues of the HKMA, defended Yam at the Legislative Council panel meeting on Thursday, maintaining that HKMA staff were underpaid compared with the market for financial talent in the SAR. Backing this point, Christopher Munn, the HKMA's executive director for corporate services, said it is facing increasing staff turnover. Last year it was 8%, much higher than the previous year's figure which he didn't disclose. Munn said in order to address the high turnover, the HKMA had to raise staff salaries by an average of 4.2% and hire 10 more staff this year. Some lawmakers suggested Yam's pay be linked to the performance of the HKMA-managed Exchange Fund. Given its poor 3.1% return last year - the lowest since 2001 - Yam should have his pay cut, they argued.

However, Cheung said besides managing the Exchange Fund's investment, Yam has four other roles - maintaining the stability of the Hong Kong dollar, the financial and banking systems, and improving the market infrastructure. He regarded Yam as having done well in all five roles. Lawmakers also lashed out at the high management cost for the Exchange Fund, noting it skyrocketed by 4.36 times from HK$186 million in 1997 to HK$811 million in 2005. Stripping out the new accounting rules that came into effect in 2005 and other non-investment management related items, Yam argued the increase was just 3.49 times. He justified the increase in costs by noting that the fund's size jumped to HK$1,066 billion at the end of 2005 from HK$636 billion in 1997.

Yam said the average return rate was 5.7% over the past seven years, higher than the 5% required by lawmakers and the average 4.5% benchmark investment portfolio return rate set by the authority and then approved by the investment subcommittee under the Exchange Fund Advisory Committee tasked with appraising the performance of the Monetary Authority. Much of the quibbling has to do with the Exchange Fund's dismal returns of just 3.1% last year. Yam attributed last year's paltry 3.1% return to the restrictions placed on the fund's investment strategy, which forces the authority to invest in highly liquid assets with low risk so cash remains available to fend off attacks on the Hong Kong dollar.

Overall, I think Yam is underpaid based on what he can get in the private sector. HK$10 million a year is OK for a position with such importance, responsibility and visibility. For that kind of position, you also have to pay for status, loyalty and a level which deters the person from considering other job offers. If you can find the right person, you must at least match it with what he/she can get in the private sector. Yam is doing a pretty good job. Now all he has to do is to engineer a 10% devaluation/re-peg of the HK dollar over the next 24 months. (Sorry, but that is my best prescribe strategy going forward for HK). The so called paltry returns is necessary as you cannot and should not ask for returns that are more than 200-300 basis points than the prevailing interest rates (i.e. if the prevailing interest rates in 4%, the Funds should not target more than 5.5%-6% in returns). To go above that would automatically require the Fund to seek higher risks - not in the best interest of the Fund. The same mentality should prevail for any retirement / superannuation funds... be it CPF, EPF, 401k and when designing your own personal retirement fund portfolio.

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