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PR Newswire
18-10-2011, 10:27 PM
Hock Lock Siew
Published October 18, 2011
Time to ask tough questions on executive pay
By R SIVANITHY
THE 'Occupy Wall Street' protest against the greed and excesses of the US financial sector may not have made its presence felt locally, but those who feel a sense of outrage at the gross inequality that exists in the corporate world should voice their opinions at company annual general meetings, starting with asking some hard questions about that most contentious subject of all - executive pay.
A good beginning would be the example set by famed US investor Warren Buffett, who this year took just US$100,000 in salary for the 30th consecutive year, and who does not receive bonuses or stock options.
Instead, Mr Buffett - a long-time, well-known critic of obscenely high executive pay - believes in tying chief executive officer (CEO) salary to long-term company performance rather than annual profits because of the short-term nature of the latter.
He's also a great believer in accountability: 'You need a person at the top who has all the downside that somebody has that loses their job working at an auto factory,' he said in an interview this year. If a company fails, Mr Buffett said management should give back five times the highest compensation they received in the previous five years.
This makes plenty of sense, particularly today given the volatile times in which we now live. For instance, the US dollar over the past two months has rebounded 10 per cent, the Straits Times Index recently plunged 20 per cent in a few weeks and daily price swings of up to 10 per cent on Wall Street are now common.
Economies can grow healthily in one quarter but contract sharply the next - consider for example that at the start of the year the outlook for Singapore's growth was robust with no talk at all of a recession, yet last week it was announced that the economy just narrowly avoided a technical recession in the third quarter.
If volatility in all facets of corporate and financial life has spiked upwards, shouldn't CEO compensation be based on long-term goals to smoothen out short-term fluctuations?
Coming back to the point that CEOs should be just as accountable as factory workers, consider this: if a company's share price rose in the past year but staff had to be retrenched in order to keep the company afloat or in the black, should a high salary - let alone bonuses - be paid?
After all, employees are also important - some might argue the most important - stakeholders in companies. There should therefore be due recognition given to their welfare, not just ordinary shareholders. So if retrenchments were performed, this should be factored in when reviewing CEO pay; unfortunately, it isn't.
The problem is that despite claims that it is the 'market' which decides salaries, there really is no free market for top management salaries and that all associated parties have a vested interest in jacking the figures up - with very few forces to push them down.
The corporate headhunter who specialises in executive placements wants to secure the highest possible salary because this means a fat commission while remuneration committees are usually comprised of cronies who don't want their own pay cut and so don't really provide the necessary checks and balances.
The outcome is a shareholder class - and investing public - who have been conditioned to believe that you have to pay tremendously high salaries for performance, the old 'peanuts and monkeys' argument. Maybe so, but shareholders can and should play their part by grilling boards for details of exactly how executive pay was determined, what benchmarks were used and insist on a long-term - say five-year - element in determining salaries.
Better yet, regulators should make it mandatory for these details to be included in annual reports, together with the ratio of top pay to that of the lowest worker in that company. This will give an idea of the income disparity which exists in companies, thus enabling industry-wide numbers to be compiled.
In this connection, regulators can look at the example of Germany, where the board of directors exists with a supervisory board of employees and unions, and with CEO pay subject to approval by both boards.
In his 'Overpaid bosses: just call their bluff' in the Australian Financial Review's Oct 11 edition, writer Jack Gray says having this supervisory board means the ratio of German CEO pay to that of the lowest workers is now an average of 40:1, a much more reasonable figure than the 400:1 in the US.
It's not known what the ratio is in Singapore - but if more shareholders start asking harder questions at more AGMs, maybe we will.
Published October 18, 2011
Time to ask tough questions on executive pay
By R SIVANITHY
THE 'Occupy Wall Street' protest against the greed and excesses of the US financial sector may not have made its presence felt locally, but those who feel a sense of outrage at the gross inequality that exists in the corporate world should voice their opinions at company annual general meetings, starting with asking some hard questions about that most contentious subject of all - executive pay.
A good beginning would be the example set by famed US investor Warren Buffett, who this year took just US$100,000 in salary for the 30th consecutive year, and who does not receive bonuses or stock options.
Instead, Mr Buffett - a long-time, well-known critic of obscenely high executive pay - believes in tying chief executive officer (CEO) salary to long-term company performance rather than annual profits because of the short-term nature of the latter.
He's also a great believer in accountability: 'You need a person at the top who has all the downside that somebody has that loses their job working at an auto factory,' he said in an interview this year. If a company fails, Mr Buffett said management should give back five times the highest compensation they received in the previous five years.
This makes plenty of sense, particularly today given the volatile times in which we now live. For instance, the US dollar over the past two months has rebounded 10 per cent, the Straits Times Index recently plunged 20 per cent in a few weeks and daily price swings of up to 10 per cent on Wall Street are now common.
Economies can grow healthily in one quarter but contract sharply the next - consider for example that at the start of the year the outlook for Singapore's growth was robust with no talk at all of a recession, yet last week it was announced that the economy just narrowly avoided a technical recession in the third quarter.
If volatility in all facets of corporate and financial life has spiked upwards, shouldn't CEO compensation be based on long-term goals to smoothen out short-term fluctuations?
Coming back to the point that CEOs should be just as accountable as factory workers, consider this: if a company's share price rose in the past year but staff had to be retrenched in order to keep the company afloat or in the black, should a high salary - let alone bonuses - be paid?
After all, employees are also important - some might argue the most important - stakeholders in companies. There should therefore be due recognition given to their welfare, not just ordinary shareholders. So if retrenchments were performed, this should be factored in when reviewing CEO pay; unfortunately, it isn't.
The problem is that despite claims that it is the 'market' which decides salaries, there really is no free market for top management salaries and that all associated parties have a vested interest in jacking the figures up - with very few forces to push them down.
The corporate headhunter who specialises in executive placements wants to secure the highest possible salary because this means a fat commission while remuneration committees are usually comprised of cronies who don't want their own pay cut and so don't really provide the necessary checks and balances.
The outcome is a shareholder class - and investing public - who have been conditioned to believe that you have to pay tremendously high salaries for performance, the old 'peanuts and monkeys' argument. Maybe so, but shareholders can and should play their part by grilling boards for details of exactly how executive pay was determined, what benchmarks were used and insist on a long-term - say five-year - element in determining salaries.
Better yet, regulators should make it mandatory for these details to be included in annual reports, together with the ratio of top pay to that of the lowest worker in that company. This will give an idea of the income disparity which exists in companies, thus enabling industry-wide numbers to be compiled.
In this connection, regulators can look at the example of Germany, where the board of directors exists with a supervisory board of employees and unions, and with CEO pay subject to approval by both boards.
In his 'Overpaid bosses: just call their bluff' in the Australian Financial Review's Oct 11 edition, writer Jack Gray says having this supervisory board means the ratio of German CEO pay to that of the lowest workers is now an average of 40:1, a much more reasonable figure than the 400:1 in the US.
It's not known what the ratio is in Singapore - but if more shareholders start asking harder questions at more AGMs, maybe we will.
