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

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

Goldman Sachs, The Hated Kid On Wall Street

Blankfein, presidents and co-chief operating officers Jon Winkelried and Gary Cohn, chief financial officer David Viniar, and three vice chairmen -- J. Michael Evans, Michael Sherwood and John Weinberg -- asked the board's compensation committee that they not receive a bonus, spokesman Lucas van Praag said. The compensation committee met and agreed, Praag said.

The executives will only be eligible for a base salary of US$600,000 (HK$4.68 million) each, the Wall Street Journal reported. Last year, Blankfein made US$68.5 million, Winkelried and Cohn got US$67.5 million, and Viniar got US$57.5 million.

Goldman Sachs, not being badly hit by the current financial turmoil, is now leading the way for the rest to follow. This will make everyone on Wall Street to hate them, especially the senior management at poorer performing firms such as Merrill Lynch and Citigroup - how are they going to be able to ask for a decent bonus now. Having said that the top guys at Goldman knows when to play their cards right. When you have over US$60 million last year, its quite pointless to fight for US$20 million. Might as well forgo all, win enormous credibility in the market place for leadership, making the tough decisions, gaining respect from other players. The only enemey they have is Vikram Pandit, who will be cursing them in hushed tones... how will he get his bonus approved now?

p/s photos: Ayumi Lee

Investment Banking Bonuses To Be Slashed

Bloomberg: U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don't want executives' bonuses reduced. They want them eliminated. President-elect Obama cited the program at his first news conference on Nov. 7, saying it will be reviewed to make sure it's ``not unduly rewarding the management of financial firms receiving government assistance.''

While year-end rewards are likely to decline with a drop in revenue this year, industry veterans say that eliminating them risks driving away the firms' most productive workers.``There are instances where bonuses are justified, deserved, and in the best interests of the investment bank involved,'' said Dan Lufkin, a co-founder of Donaldson Lufkin & Jenrette Inc., the investment bank acquired by Credit Suisse Group AG in 2000. ``Your very best people are people you want to hold, and your very best people will have opportunities even in this environment to transfer allegiance.''

The companies, which set aside revenue throughout the year to pay bonuses, haven't commented on plans for year-end awards, typically decided this month or next. A study released last week said the firms are likely to cut bonuses for top executives by as much as 70 percent. Cuomo is expected to go through the bonus proposals from these investment banks, and is likely to cut the bonuses a lot further to appease the public's fury. I think Cuomo could further halve the actual bonuses.

``Even really sober people are saying this is the worst financial crisis since the Depression, and they're saying bonuses are just going to be reduced?'' said a 53-year-old retired merchant marine in Seattle. ``Oh my God, you read that and your jaw drops.''

Wall Street firms' pay has traditionally been tied closely to performance of the companies, which is why employees receive most of their compensation at the end of the year after final results are known. Depending on seniority and performance, bonuses for traders, bankers and executives can be a multiple of their salaries, which range from about $80,000 to $600,000.

The nine banks that was pressed to detail their bonus plans asked for more time to respond. They've been granted an additional two weeks. The original deadline was yesterday.

Goldman, the largest and most profitable U.S. securities firm in the world last year, paid Chief Executive Officer Lloyd Blankfein a record $67.9 million bonus for 2007 on top of his $600,000 salary. That was justified, he told shareholders at the company's annual meeting in April, because of Goldman's superior financial results. ``We're very much a performance-related firm,'' he said. ``If those results don't come in, I assure you at Goldman Sachs you won't see that compensation.''

Goldman's profit is down 47 percent so far this year and five analysts expect the company to report its first loss as a public company in the fourth quarter that ends this month. The stock price has dropped 67 percent this year and Goldman received $10 billion from the U.S. government in the bailout last month.

``The executives in companies that get bailout money should have their base salaries reduced by 10 percent for 2009 and they should pay back a substantial portion of their 2007 bonuses to the government for the financial devastation they oversaw, fostered and, in some cases, directly caused,'' said a 57-year-old lawyer in Baltimore. ``Their sense of entitlement is appalling.''

In addition to Goldman, Morgan Stanley and Citigroup, the companies that received the first round of money from the U.S. government's Troubled Asset Relief Program were Merrill Lynch, JPMorgan Chase & Co., Bank of America Corp, Wells Fargo & Co., State Street Corp and Bank of New York Mellon Corp.

Some needed the money more than others. Citigroup and Merrill haven't been profitable since early last year. Earnings at each of the other firms, except Boston-based State Street, have been dropping.

``Bonuses and severance packages will obsess the American public'' and become ``a humiliation and embarrassment,'' said Arthur Levitt, a senior adviser to the Carlyle Group, former chairman of the Securities and Exchange Commission, and a board member of Bloomberg LP, the parent company of Bloomberg News. ``Compensation committees, believe me, are paying close attention to this.''

Several of the companies -- including Citigroup and Wells Fargo -- have said they won't use federal funds to pay bonuses. That's disputed by some. ``The argument of saying we're not using the bailout money is just crap because money's fungible, money's money,'' said Crystal, who writes the newsletter graefcrystal.com. ``It exposes them to ridicule.''

The bailout is only part of the reason that people object to Wall Street bonuses this year. The financial industry worldwide has taken more than $690 billion in writedowns and credit losses this year and cut more than 150,000 jobs. A decline in lending has caused the wider economy to contract: the U.S. gross domestic product shrank at a 0.3 percent annual pace in the third quarter, consumer spending fell at its fastest pace since 1980 and unemployment jumped to 6.5 percent, the highest since 1994.

Attention is most focused on the top executives at the banks that are receiving federal money. They'll have to take the steepest pay cuts because their pay is disclosed in proxy filings, according to Alan Johnson, managing director of Johnson Associates, the compensation consulting firm that estimates bonuses will decline between 10 percent and 70 percent. ``I'd advise the CEO to say he can't take anything if it's one of these firms getting bailed out by the government,'' said Crystal. ``I think he's just going to have to go down to just his salary.''

That's probably not the case for employees whose pay isn't disclosed, even those who get bonuses that exceed $1 million. Top performers should receive bonuses this year or companies risk losing their best workers. Of about 600 people who responded to an online survey on the eFinancialCareers.com Web site, 46 percent said they would be unwilling to take any pay cut this year.

p/s photos: Fiona Xie