Companies need to demonstrate a clearer and stronger link between executive remuneration and company performance, says consultant Hay Group.

The average pay for chief executive officers in Singapore fell slightly last year, at approximately S$2.35 million ($1.85 million) compared to 2010’s S$2.36 million, while the average company profit grew by one per cent.

The median total remuneration (which includes salary, bonus, allowance and long-term incentives) for Singapore CEOs in 2011 was S$1.3 million, with the median total remuneration for CEOs in large-sized companies at S$3.88 million, followed by S$1.63 million in medium-sized companies, and S$0.88 million in small-sized companies, according to the
Hay Group Singapore CEO Remuneration Report 2012.

The survey from the global consultant analysed compensation data from 145 Singapore publicly-listed companies, and identified the key trends in executive pay from 2010 to 2011. 

Although Singapore CEOs in large-sized companies received a higher median total remuneration, their remuneration accounted for a much smaller percentage (0.6 per cent) of the companies’ profit, compared to 1.7 per cent in medium-sized companies and 5.4 per cent in small-sized companies. The percentage remains similar to the previous year, said the report.

In addition, the report found that the highest-paid Singapore CEO in a company received a total remuneration package of approximately S$11.7 million in 2011, compared to 2010’s S$12.1 million.

On average, the compensation for Singapore CEOs is composed of 43 per cent of base salary, 52 per cent of variable pay, including both bonus and long-term incentives, and another 5 per cent of allowance or benefits.

Long-term incentive plans

The prevalence of long-term incentive plans that includes performance-based share plan, restricted share plan, or share option plan in Singapore companies is moderately high, said the study, with 78 per cent of Singapore companies having at least one LTI plan.

However, only one-third of Singapore companies with LTI plans rewarded their CEOs with LTI last year, constituting 27 to 30 per cent of the median total remuneration.

Kevin Goh, director of executive rewards, Singapore, at Hay Group, said, “Compared to more mature economies, the lower utilisation of LTI in rewarding CEOs in Singapore companies could arise from a concern of potential dilution and challenges in setting performance measures for share plans, especially the long-term performance measures. Other concerns may also include the perceived value of underwater stock options and complexity in valuation of complex LTI instruments.”

He added, “Most of these concerns, however, can be properly addressed through well-designed share plans. Appropriate usage of long-term incentive plans can help improve the alignment with shareholder value creation.”

Higher CEO bonus

According to the report, Singapore CEOs earned a median of S$570,000 bonus, equivalent to 14 months’ salary in 2011.

In 2010, the median CEO bonus was S$484,000, amounting to 13 months’ salary. The highest bonus paid to a CEO in terms of monthly base salary was approximately 244 months (approximately S$7 million).

"Earnings growth and shareholder returns are two common performance indicators in accessing CEO pay, especially the variable component," added Goh. The report shows that 60 per cent of CEO bonuses changes correspondingly with their company growth or drop in earnings per share, while 20 per cent of the companies still paid higher bonuses to their CEOs despite negative earnings growth in the same period. The remaining 20 per cent of the companies with improved earnings paid lower bonuses to their CEOs.

The pay-for-performance relationship is also weak when the total shareholder return, that is, share price appreciation plus dividends paid in the financial year, is used as the company performance measure. Forty-one per cent of Singapore companies paid their CEOs higher bonuses despite a negative TSR in 2011; 48 per cent showed an aligned movement of the CEO bonuses with the company’s TSR; and 11 per cent paid lower bonuses to their CEOs when the company’s TSR is positive.

Goh said, “We understand that there are alternative performance metrics such as return on invested capital, return on equity and cash flow. This simple check, however, provides some evidence that there is room for Singapore companies to improve their pay-for-performance relationship.” 

He added, “Shareholders across the world have been increasingly voicing their concerns about inappropriate executive remuneration packages. Companies need to demonstrate a clearer and stronger link between executive remuneration and company performance.”