Tuesday, August 18, 2009

Should We Be Bitching About Listed Company Directors' Pay?

I am certainly surprised, for many years now, how "silent" the public is over the remuneration of listed company directors. Maybe we are not sure if they deserved it. Maybe we just shrug our shoulders because its not "our money anyway". Maybe we couldn't care less as its none of our business. Maybe we say to each other at coffee shops that they control the company wat... they can pay whatever they want laaa!

Genting Bhd topped the list in the "highest-paid directors" survey, with a big payout of RM81.98 million to its board last year. According to Malaysian Business, the annual survey revealed that the top 50 firms in terms of total payout generously forked out RM553 million in 2008. The payout for the top 10 companies alone was nearly RM300 million, the business magazine said.

"This show that despite the slowing economy, listed companies paid their directors a higher remuneration in 2008 compared to 2007," it said.

Boardroom remuneration has become a hot topic in the current economic environment, with directors seen as reaping huge rewards as investors face dwindling share values, Malaysian Business said. The survey report, which appeared in the Aug 16 issue, listed 630 firms that paid their top-earning directors RM300,000 and above for the financial year 2008, amounting to a total of RM1.7 billion to their boards collectively.

Genting had the highest remuneration band of RM77.65 million to RM77.7 million for a single director, according to the survey, but the firm did not name who it was. The top executive listed for Genting is its chairman and chief executive officer Tan Sri Lim Kok Thay.

IOI Corporation Bhd came in second as the company doubled the payout to its board members last year to RM45.16 million, of which the bulk went to a key director who received a sum in the RM41.1 million to RM41.15 million band. "We assume that this recipient would be IOI Corp director and founder Tan Sri Lee Shin Cheng," said Malaysian Business.

SP Setia, a firm that has consistently kept to high governance standards, came in fourth as it upped the remuneration of group managing director Tan Sri Liew Kee Sin by 32 per cent to RM10.26 million on the back of increased profitability, according to Malaysian Business.

Tan Sri Teh Hong Piow, chairman and founder of Public Bank, was back on the list as the highest-paid director at the bank, with a remuneration package totalling RM6.96 million. The bank's managing director and chief executive officer, Tan Sri Tay Ah Lek, who was the highest paid in 2007, received RM5.15 million in 2008, the magazine said.

Malaysian Business noted that SP Setia and Public Bank were among the handful of companies which disclosed the exact remuneration received by each director.

"Sadly, only about five per cent or 44 companies were transparent in stating the exact remuneration of their top executive. Interestingly, several companies with huge losses still rewarded their directors with huge payouts," it said.

Ancom Bhd propelled to the top 10 list when its top executive received a huge increase in remuneration in 2008 compared to the previous year, the magazine said. It said that other notable shifts came from firms like DRB-Hicom Bhd and Huline Bhd, whose biggest increases in remuneration to their single top executive got them a place in the top 50 list.

Bumiputra-Commerce Holdings Bhd cut its total director payout by close to half last year to RM10.54 million from RM17.37 million. In tandem, remuneration to its key director, Datuk Seri Nazir Razak, was down to RM5.13 million from RM9.35 million the bank paid him in 2007. This pushed the company to the 12th spot in the survey from the sixth spot previously, the magazine added. — Bernama

Do we see anything wrong with the compensation scheme? Independent directors, please note, the ball is in your court ... the controlling shareholders will always tweak compensation in their favour. Its up to the independent directors to ask for transparency to be better, to ask the board come out with a clean and clear remuneration package and incentives that is fair to all, especially minority shareholders.

a) If you pay yourself RM50m or RM100, how do you draw the line between proper incentives and motivation to run the company well, and just plain excess. If You move past the RM50m mark, what is there to stop you from getting RM200m or RM300m a year? Hence there must be clear guidelines and goalposts to mark your achievements. Back to Genting, if the board can issue clear guidelines that say if the company can notch 3 straight years of net profit growth of 12% annually, that there will be a RM30m bonus to the CEO; and if the share price can achieve a compunded annual return of 15% a year, the CEO will get another RM20m; and if the company can make sure that the return on capital deployed is at least 9% for 3 straight years, the CEO will gte another RM25m etc... That way, no one will care if your end package is RM50m or RM150m even, you deserved it. There need to be clawbacks clauses as well, that's why the performance is over 3 years.

b) There is a silly mentality that if a person controls a company i.e. over 32.9%, then that person can do whatever he/she likes. WRONG!!! Even if you own more than 50% of a listed company, you must still govern according to best global practices. Those who still act and behave as if its their own family company tells you a lot about their mindset and where the pitfalls of the company are: lack of professionalism; not a true pursuer of global best practices; will tend to just get by on transparency issue rather than seeing the improvements in integrity and professionalism by doing so. The danger is that a CEO in this kind of situation may keep paying himself an excessive amount of compensation, whether or not it is justifiable or defensible. If you own it 100%, then its fine. Even if you own 99%, you still have to consider the interest of that 1% in that whether you have been paying yourself excessively.

c) Already you can see which are the more professionally managed firms, by being more professional, you can be more assured that all transactions will be more at arm's length, that they will not screw minority shareholders deliberately. The directors' pay at SP Setia, YTL and CIMB are excellent examples. You do great, you get rewarded, and even then within decent sums. CIMB did not do as well, and they got a lot less - they have a clear defensible formula that allows them to get good bonuses when the important performance metrics have been achieved.

d) If the US can come up with a deliberation of a US$500,000 salary cap ... are we so peacock-like to say our CEOs deserve more than RM1.8m in base salary even when they are managing companies that is ten or twenty times smaller? Base salary must be fair and attractive, but seriously you are deluding yourself when your basic pay is more than RM5m - that is so nonsensical and indefensible. I am all for paying a CEO a lot more than that, provided he/she performs, which is why there must be oerformance clauses clearly spelt out for all to see, and there must be clawback clauses. It must also be based on metrics that "add long term value" to the underlying value of the company. Superficial metrics such as: growth in revenue, number of outlets, number of markets, etc... Key performance metrics that create long term value: sustainable improvements to net margins; sustainable benchmarking to outperform interest rates by at least 300 basis point on capital deployed; ensuring employee turnover rate is less than 10% a year; etc...

e) The current craze and anger over finance executives' compensation and bonuses are justified. For my life, I could never understand how and why options granted to employees are not expensed out or deducted as a real cost!!! If its of no real cost/value, then the employees should not even find getting these options as attractive at all - if they want the options, it must because there is a value.

f) The other piss me silly thing is how financial industry (and other senior management of top corporations) employees can be drawing US$300,000-US$500,000 and still justify bonuses and stock options running into 2x, 4x, heck some even 10x their base pay. The most ridiculous defense given by them is "we need to align the interest of the executives with the shareholders". CBMF... give you US$300,000-US$500,000 a year also NOT ENOUGH to align your interests with the shareholders' interest??!! I guess the US$300,000-US$500,000 salary is only for me to fuck around in the company - interesting lesson, that should be in Management 101 for all MBAs. So, you are saying that you got US$500,000 to work at a company but your interest will NOT be directed towards making the best returns and nurturing the best growth plans for the company... which pays you US$500,000 a year UNLESS you get a truckload of bonuses and options???!! Please go jump off the nearest building.

g) In aligning directors’ remuneration with the firm’s performance, the company directors must carefully consider the performance indicators to be used. Generally there are three categories of performance measures:
Market based performance measures
In this category, the remuneration will be based on the movement of the share price of the company over the given period of time. The example of the indicator is total shareholders return. This indicator will measure the return earned by shareholders, expressed in a percentage in terms of dividend received with a share price.
Earning based performance measures
The indicator in this category is based on profit related measures of performance such as earnings per share (EPS), return on equity (ROE), gross profit margin (GP Margin) and net profit margin (NP margin).
Internal performance measures
These are the most difficult performance measurements as the indicators used are subject to the special characteristics and internal environment such as the risks of the company. Examples of performance measures in this category include increase in the cash inflow due to improvement in overdue debtor accounts and higher profit as a result of group restructuring.

p/s photos: Go Ara



Yes we should. Fees are paid for directing, not ownership. Shareholders are paid via dividends.

And it's not just the non-director shareholders that lose out.

Other stakeholders (Eg. Employees, suppliers) do with less when a small group of shareholders (directors) take a disproportionate share of earnings.

ian said...

I am an employee of CIMB and have worked with Datuk Nazir for about a decade. When I first joined the bank I was terribly sceptical about his ability and leadership. The most obvious is his link to the PM. It was a mindset that I had. But over time it dawned on me that this chap was indeed different from my original impression of him. He comes in early, very early to work and he leaves late. He has an enormous ability to rationalise and is very popular with the staff. He walks the talk. He is worth every penny that CIMB pays him.