Trade tensions, political instability, rising inequality and mounting debt levels have cast a dampening effect on growth forecast. The International Monetary Fund expects 70% of the global economy to contract this year and has cut its global growth forecast to 3.3%, the lowest since the financial crisis and the third downward revision in six months. The local front sees a growth forecast of 2.4% for 2019, a decline from 3.2% in 2018. Investor sentiment paints a similar picture with the Straits Times Index reporting a 6.5% decline in total returns in 2018 and a gloomy forecast for 2019.
In these challenging times, the focus and scrutiny on both how and how much to pay top executives has become a key bone of contention for both investors and the public. Remuneration Committee Chairs are under increasing pressure to ensure that current executive remuneration structures adequately reflect the present realities of business, whilst still motivating executives to outperform on expectations.
While the pay for performance narrative has been around for a while, its alignment in practice and more importantly its ability to improve performance continues to be debated. Looking at CEO pay over the last few years at the SGX Top 30 companies by market capitalization presents some interesting findings.
CEO compensation is primarily made up of salary, benefits and performance related variable pay (annual bonuses and long-term share-based awards). In the past 3 years, CEO total compensation has gone up by 19%, driven largely by increases in variable pay which makes up just over two-thirds of their total compensation. This is in stark contrast to their shareholders who on average only made around 6.5% in returns, which implies there may be some misalignment to what the executives are being paid for.
While shareholder gains or losses can be impacted by a vast array of reasons, it would appear some of this misalignment is structural.
Lastly, given the muted performance forecasts and cost saving pressures, it is important for Remuneration Committees to look at executive pay in relation to their wider employees to avoid creating perceptions of unfairness. Given the absence of such disclosures in Singapore, simply considering compensation for an experienced professional, we find that the Top 30 CEO’s get paid around 60 times more. The average increase in pay over the past 3 years for the average employee is around 10% whereas for the CEO’s is around 19%. With CEO to employee pay-ratio disclosures in the West now being mandated, this relationship is very much in focus for investors.
Challenging times make for favorable grounds to shake things up. The time to act is now. What has worked for Singapore PLC’s in the past may not necessarily work in this changing environment and expectations. Remuneration Committees would do themselves and their stakeholders a huge favour by not just looking sideways at what others are doing but focusing more on where they themselves are headed when reviewing and designing their executive pay programmes.
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