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!
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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

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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

Overly Aggressive Retrenching Is A Western Disease

Every time recession hits, its the MNCs who will be the first to retrench workers. Yes, you can argue that on an export destruction platform, but that is just part of the real story. Generally, local companies "are not as quick" to fire or retrench staff than say MNCs.

If you look at what has been happening around the world, almost all listed companies have enforced some sort of retrenchment or cost cutting exercise. From the GMs to the Sonys to even pharmaceuticals and construction firms. No industry is spared.

Don't you find it interesting that Malaysian companies, in general, list and unlisted, are not quite so trigger happy. Companies in developed markets tend to follow the mantra that the CEO is responsible for the fortunes of the company. The big movement over the past 15 years to tie CEOs compensation (and those of senior management) to the share price returns has produced a magnifying glass effect on management's behaviour and financial figures.

Everybody knows that American and some European companies are the quickest to retrench and downsize at the slightest hint of uncertainty or diminished orders coming in or inventory piling up.

The biggest culprit is the emergence of the quite silly Quarterly Earnings Results and the subsequent Quarterly Earnings Guidance. Needless to say, this kind of short term managing will result in a very difficult operating environment. Long term objectives and strategy will be compromised to attain short term goals and targets. QEG will not just affect the top layer of management, but will work itself down to the nuts and bolts of every organization, especially sales and marketing. Constantly doing, re-doing, re-working, re-stating QEGs will create a damaging focus on meaningless short-term performance and undermine a company's ability to manage for the long term. This re-working, re-stating, re-doing will have to be re-communicated down the line re-peatedly. Re-diculous!

Wall Street's relentless focus on whether companies hit or miss quarterly earnings targets encourages balance-sheet manipulation and discourages long-range planning. A consensus is growing among CEOs, regulators and analysts to go against QEGs. Many CEOs despise giving such guidance but are afraid to stop because they think they would be punished by Wall Street analysts and shareholders.

The unfortunate consequence of these excessive focus on short term numbers is that retrenchments and downsizing are textbook plays when things are starting to look bad. When things are bad, the management is EXPECTED to quickly do SOMETHING, and firing and downsizing are the quickest to pacify the markets.

In many ways, we should be glad that Malaysian companies are not there yet. We do not yet have that magnified focus on quarterly numbers every few months. We do not see CEOs being fired every now and then for not meeting numbers (maybe we should fire more CEOs actually). Is that good or bad? But of course the local CEOs payscale and reward structure are nowhere close to those of the Western world.

I think companies should be managed not quarter by quarter but rather based on a 3 or 5 year plan with visible and measurable milestones being communicated to all. At the moment probably less than half of all companies have a proper strategy going forward - they have little idea of how their industry will pan out 3 years or 5 years down the road, and how they are positioning themselves. They do not know where their critical strengths are (if they had any) and where they have critical competitive advantages in order to leverage on them. They have no idea on scalability, organic growth strategy and growth via acquisitions. But I digress...

p/s photos: Linda Chung Ka Yan

Regulators Need To Fix Dividend & Share Buyback Schemes

Possibly my most important posting this year.... This is not the crux of the problem we are facing but is part and parcel of navigating the "compensation culture" of Wall Street and high-falutin' CEOs. Excessive risk taking has been the center of what brought the credit markets to its knees. The compensation culture is one where the base salary is only a fraction of these people's compensation packages, even though for many of them the base salary is already more than $1m. In Wall street, the culture is even more evident in that analysts and bankers get between $100,000-300,000 as their base salaries but there is a tacit understanding that their overall compensation will be in multiples of their base salary - and not in number of months like the rest of us. Hence many of them argue that the compensation cap by Obama will not work. Its like saying "don't throw us in prison as there are too many of us"...

An article by David Reilly, Bloomberg news columnist, wrote recently that there need to be a revamp of the way companies pay dividends and do share buybacks. I totally agree. Dividends that are steady, predictable and "high-ish" will always attract the longer term funds as solid shareholders, thus propping up share prices. As the CEO, your destiny is tied to the share price, thanks to the finance literature over the last 20 years which says that the CEO and senior management's goals, objectives and compensation must be tied to the share price performance - which indirectly implies that shareholders interest are served. BUT ARE SHAREHOLDERS INTERESTS BEING SERVED PROPERLY?

The compensation maniac rise over the last 10 years and the current crisis basically reinforced to us that shareholders interests are not best served under current system of tying in share prices to compensation.

The current system will make almost all CEOs to aggressively pay out strong dividends or have a strong dividend policy, and worse still, engage in frequent and at times excessive share buybacks. Share buybacks in the US are usually then canceled (unlike in Malaysia, which defeats the purpose) and that will improve the EPS by a corresponding amount, which will then move share prices higher if forward PER ratings and valuations stay the same. That is because the bulk of the CEOs and Wall Street compensation rides on share options.

The danger with Obama's pay cap is that much of the additional compensation will be paid via shares, although they will only vest after TARP money has been fully repaid. Thus, I can already predict what the CEOs will be doing once they get profits rolling again:
a) pay down TARP
b) improve dividends
c) buyback shares
The only difference is that they will pay down TARP as a new priority. It does not change the compensation culture. Especially in times like this any free cash flow should be used to shore up balance sheet and increase your capital standing and sufficiency, not paid back via dividends or doing useless share buybacks.

I can soften the blow for dividends, its good and essential to encourage long term shareholders to hold onto good stocks for a long time. I do agree that if a company can, they should pay good dividends, above the company's capital requirements for normal growth strategy. It would be prudent to have a proper dividend policy (e.g. percentage of profits that goes into dividend pool; or targeting a dividend yield year in year out). But do not do haphazard dividend payments one year from the next, it is unprofessional and unpredictable, and will cause valuations to be marked down.

Here is where we need more bite from the board of directors, especially the independent ones. New guidelines by the SEC should be furnished to the directors to ensure that dividends and share buybacks are backed by a solid grasp of business fundamentals and industry trends.

Share buybacks are only OK if shares are subsequently canceled, otherwise the CEOs have no fucking idea what share buybacks are supposed to do. Trashing share buybacks was my very first article for this blog, so its ranks very high on my list of piss-me-off-silly issues. However, owing to the compensation culture in Wall Street and among CEOs in the US, the share price is like their religion. Thus they will engage in excessive and frequent share buybacks, EVEN when they are not necessary - this will lead to a depletion of capital, and hello... what are really troubling the banks nowadays.... They have pushing a lot of free cash flow into share buybacks, depleting capital, pushing up EPS... and yet leveraged up even more on their remaining lesser capital.

Now, oops, they need more capital... We need a regulatory body to oversee the amount of shares each company is buying back and reassess them as normal capital requirements for the companies in those industry. For example, between 2003 and 2007, Citigroup paid out $44bn in dividends and spent $22bn buying back stocks. If they had slashed their dividends by half and not do any share buybacks, they would have an additional "capital" of $44bn. But noooo... the compensation culture is such that every time these buggers see some money flowing into the coffers, they will think of ways to use them immediately, always running on the edge, skirting between raindrops... maximising every dollar. Capital is there for a reason, ... to fund growth , AND TO HELP THE COMPANY RIDE OUT BUSINESS CYCLES & MAYBE CATACLYSMIC RECESSIONS.

Is there anybody out there???

p/s photos: JJ

UBS Joins Goldman, Pressure On The Rest

IHT: UBS on Monday joined Goldman Sachs in saying its top executives would get no bonus this year, as public scrutiny of bankers' compensation intensifies amid the taxpayer rescue of the financial sector.

UBS said its chairman, Peter Kurer, chief executive, Marcel Rohner, and other members of the executive board would receive only their fixed salaries this year and that all other employees would have their 2008 bonuses reduced. The bank, based in Zurich, received a Swiss government bailout of about $60 billion in October after losing nearly $50 billion since the the credit crisis began last year.

UBS said that beginning next year, top executives would be paid according to a long-term compensation model that "rewards realized value creation and takes business risk into account." In profitable periods, the executives will be paid performance-based variable compensation, but in hard times, no bonus will be paid. In addition, it said, "a 'malus' can be deducted from bonus accounts" when performance merits.

UBS made the announcement a day after top executives at Goldman Sachs sent a request to the company's directors asking that they receive no bonus pay for their work in 2008, a company spokesman said. Their request was granted, he said.

The moves by UBS and Goldman Sachs turns up the heat on their competitors, including Morgan Stanley, to take similar action as they decide on year-end bonus figures in the coming weeks. Last month, Josef Ackermann, the chief executive of Deutsche Bank, announced that he would forgo his bonus this year as "a very personal sign of solidarity."

"We may see more of such bonus decisions at the top of the tree," said Andrew Oliver, managing director at Profile Search & Selection, an executive search firm in Hong Kong, on Monday.

The decision by Goldman Sachs could also ease political pressure and reduce adverse reaction to what is expected to be a bleak fourth-quarter earnings report in December, including perhaps the bank's first loss of the credit crisis. Goldman's bailout package includes some strictures on executive pay, but the industry does not view them as especially strong.

It comes after banks worldwide have been awarded or promised hundreds of billions of dollars in taxpayer bailouts. Numerous European officials, including President Nicolas Sarkozy of France and Angela Merkel, the German chancellor, have called for limits on bank executives' pay.

In the United States, public officials including the New York attorney general, Andrew Cuomo, and Representative Henry Waxman, a Democrat of California, have been warning banks not to use any taxpayer money to award bonuses to executives. Industry lobbyists and interest groups have also warned executives at the banks that any big pay numbers this year could generate a significant public backlash.

There is a widespread belief that the way Wall Street awarded bonuses in recent years helped feed the risky behavior that eventually created big losses on exotic debt securities and helped create the current crisis.

UBS acknowledged as much Monday, noting that a report it submitted in April to the Swiss Federal Banking Commission concluded that "disproportionately large risks" had been assumed within its investment bank and that the bonuses there, linked to earnings, "had not been sufficiently tied to the amount of assumed risk. In addition, the bonus payments were calculated based on short-term results, without sufficient appraisal of the quality or sustainability of those earnings."

Morgan Stanley and other banks are still formulating bonus figures. Morgan Stanley's chief executive, John Mack, took no bonus last year. Morgan Stanley, which took a loss in the fourth quarter last year but has been profitable all of this year, declined to comment Sunday. Morgan Stanley posted better results in the third quarter than Goldman Sachs.

In September, Goldman Sachs and Morgan Stanley transformed themselves into bank holding companies that take deposits, take less risk and are subject to more government oversight. That new structure may limit their ability to generate big profits, because they cannot use as much borrowed money to make big investment bets.

In the past several years, Goldman Sachs has posted some of the biggest profits and paid out some of the biggest bonuses in Wall Street history. The company's chief executive, Lloyd Blankfein, received a salary and bonus package last year worth $68.5 million.

Goldman Sachs paid its two co-presidents, Gary Cohn and Jon Winkelried, about $67.5 million each last year, more than most chief executives. All three will receive no bonuses this year.

Others forgoing bonuses at Goldman Sachs will include the chief financial officer, David Viniar, and the vice chairmen, J. Michael Evans, Michael Sherwood and John Weinberg.

p/s photos: Nok Ussanee Wattanathana