Singapore companies make progress towards sound compensation

Yet there are still opportunities to further strengthen compensation practices behind increasing shareholder interest in executive compensation.

Singapore companies have made progress in sound compensation practices but there is still room for improvement, according to Ernst & Young 2010 Executive and Board Remuneration Report, Journey to sound compensation, released on Monday.

This report is based on information disclosed in the most recent annual reports of SGX top 100 companies as at 30 May 2010, with financial years ended between 31 March 2009 and 31 December 2009 (FY09). The analysis excludes companies where Singapore is not the primary listing, and where data has not been reported or reported only on an aggregate basis. This results in 55 companies being included in the analysis.

In terms of how Singapore companies fared against the sound compensation principles that the G-20 has agreed to adopt to minimize risky rewards in banks and other financial companies, the report found that a large majority of Singapore companies do not have multi-year guaranteed bonuses – a clear strength in local compensation practices. Singapore companies have also done moderately well in ensuring that their corporate governance framework enables parties overseeing compensation policies to act independently, although the effectiveness of measures taken varies by companies.

On the other hand, compared to global standards, Singapore has a much lower percentage of compensation delivered through variable pay, and only 20% of companies in Singapore require a portion of variable compensation to be deferred and subject to appropriate claw-back. In addition, only 20% of Singapore companies analyzed had fully disclosed their executive compensation practices.

Julia Smith, Singapore Practice Leader for Performance and Reward, Ernst & Young Solutions LLP said: “Amid increasing shareholder interest in executive compensation, this is an opportunity for Singapore companies to further review and strengthen their compensation practices. Aligning executive compensation with performance and appropriate risk-taking to ensure long-term business success is fundamental to sound compensation policies. To this end, a significant portion of variable compensation can be deferred and tied to future performance of the company to discourage inappropriate risk-taking behaviors. To gain the trust of shareholders, companies should strive to make their compensation policies and structures accountable and transparent, and improve the effectiveness of their disclosures in this area.”

Modest recovery in total compensation levels

In FY09, the most prevalent salary band has increased across CEO, CFO and Business Unit Head (collectively known as top executives) positions. The number of CEOs with total compensation packages in excess of S$5 million has more than doubled from FY08 to FY09, with one-quarter of the CEOs having earned over S$5 million. However, a year-on-year analysis for incumbents remaining in their roles for both FYs revealed that 29% had moved up in pay band and 10% had dropped in pay band.

No dramatic changes in fixed compensation practices
The average fixed compensation increase for top executives was 2.4% in FY09 as compared to 10% in FY08. 44% of the top executives received salary cuts or no increase as compared to only 23% in the previous FY. CEOs led by example, with one-quarter of them taking a cut in base pay in FY09. Overall, the number of top executives receiving salary increases of over 15% also declined from 39% in FY08 to only 6% in FY09.

“Singapore companies have generally adopted a conservative approach towards base salary increases, in light of the uncertain economic outlook at the beginning of 2009, which coincided with the period when compensation decisions were likely to have been made. This shows that Singapore companies are prepared to make short-term sacrifices at the top level to contain costs and sustain business profits,” commented Julia Smith.

56% of CEOs received fixed compensation of between S$500,000 to S$1 million. The majority of CFOs and Business Unit Heads received fairly consistent fixed compensation in FY09, with 73% of CFOs and 55% of Business Unit Heads receiving between S$250,000 to S$500,000. The number of Business Unit Heads earning fixed compensation below S$250,000 declined by half in FY09 (from 21% to 11%), signaling market alignment for those who were underpaid in previous years.

Overall slight recovery in bonus but not back to pre-crisis levels
Generally, bonuses (expressed as month’s pay) paid out to top executives were slightly higher in FY09 as compared to FY08. Overall, 5% of the key executives in Singapore received no bonus in FY09 as compared to 7% in FY08. Again, CEOs led by example with the highest percentage (11% in FY09) of them receiving no bonus payment. The bonuses received by CEOs in FY09 had varied widely, ranging from zero to over S$4 million.  

For CFOs, 50% of them received bonuses between S$100,000 to S$500,000. Bonuses paid out to CFOs, which had increased in FY08 and reflected the enlarged role of the CFO during the financial crisis then, had however declined this year. Julia Smith added: “Bonuses for top executives have improved slightly owing to improving economic conditions and demonstrated growth in FY09 net profits by most of the companies analyzed. However, there is still some way to go before bonuses are reinstated to pre-crisis levels.”

“Looking ahead, aggregate increases to fixed remuneration will likely be modest. Short-term incentives are likely to continue to be constrained as companies are mindful that FY09 presents a lower base for measuring performance given that the economy was just beginning to recover. Performance measures will need to be refined to reflect revised business strategies and respond to calls for sound compensation practices that links executive rewards even more closely with proven business results beyond the immediate. For example, we expect to see greater use of deferral in short-term incentives to promote behaviors that drive sustained growth for the business. And with attracting and retaining executive talent returning to the forefront, the challenge is for companies to proactively tailor their compensation strategy in line with regulatory requirements, shareholder demands, executive expectations and their unique business needs,” Julia Smith concluded.