EXECUTIVE AND DIRECTOR REMUNERATION

Mak Yuen Teen

1
Important Issues in Remuneration
Procedures
01
Approval
02
Disclosure
03
Level, Mix and Design
04
Risks
05
2
Introduction
• In this topic, we cover issues relating to the
remuneration of directors and key management
personnel (KMP) of listed companies

• KMP includes the CEO and other persons having

the authority and responsibility for planning,
directing and controlling the company's
activities.

• In the Singapore Code of Corporate Governance

(SCCG) 2018, there are 3 principles and 10
provisions relating to procedures for developing
remuneration policies, level and mix of
remuneration, and disclosure on remuneration

3
Introduction
• The actual design of remuneration - or how to
pay directors and KMP - is generally left to the
Remuneration Committee (RC) and the Board of
Directors (BOD), often aided by remuneration
consultants.

• Certain aspects of remuneration are generally

subject to the approval of shareholders. These
aspects vary across countries.

4
Procedures for Developing Remuneration Policies and
Determining Remuneration Packages
“The Board has a formal and transparent procedure
for developing policies on director and executive
remuneration, and for fixing the remuneration
packages of individual directors and KMP. No
director is involved in deciding his or her own
remuneration.”
Principle 6 of the SCCG 2018

5
 Procedures for Developing Remuneration Policies and
Determining Remuneration Packages
• Corporate governance codes generally recommend
that companies put in place formal and transparent
procedures for developing the remuneration
framework and setting the remuneration packages of
individual directors, the CEO and KMP.

• No director should be involved in deciding his or her

own remuneration.

• A Remuneration Committee (RC) or Compensation

Committee is usually either required or recommended.
The RC should be chaired by an ID and comprise either
all IDs or all NEDs, with a majority being independent.
6
Procedures for Developing Remuneration Policies and
Determining Remuneration Packages
• The SCCG 2018 recommends that an RC have at least 3
members who are all NEDs, with a majority including
the Chairman being independent.

• The RC should review and recommend to the board a

remuneration framework for the board and KMP and
the specific remuneration packages of each director
and KMP.

7
 Approval of Remuneration
• Remuneration paid to executives has generally been viewed as a
matter for the BOD, assisted by the RC, to determine.

• However, starting from the U.K. in 2006, a number of countries,

mostly in Europe and the U.S., introduced "say on pay" legislation
which gives shareholders the right to vote on certain executive
remuneration matters.

• In Singapore, as in many other countries, remuneration paid to EDs

and management is not subject to shareholders’ approval. However,
at each annual general meeting (AGM), shareholders approve the
total remuneration paid to the NEDs.

• The BOD decides on the distribution of the total NED remuneration

among individual NEDs. 8
Disclosure of Remuneration
• In many countries, disclosures relating to certain aspects of remuneration are
either required or recommended.

• Disclosures generally cover remuneration framework, levels and breakdown.

Countries such as Australia, U.K. and U.S. impose very stringent disclosure
requirements.

9
Disclosure of Remuneration
"The company discloses in its annual report the policy and criteria for
setting remuneration, as well as names, amounts and breakdown of
remuneration of:
(a) each individual director and the CEO; and
(b) at least the top five key management personnel (who are not
directors or the CEO) in bands no wider than S$250,000 and in
aggregate the total remuneration paid to these KMP."

Provision 8.1 of the SCCG 2018

Starting from annual reports prepared for the financial years ending on or after
31 December 2024, companies must disclose remuneration paid to individual
directors and CEO by the issuer and its subsidiaries under the SGX listing rules.
10
 Disclosure of Remuneration of Employees Who are
Substantial Shareholders or Family Members
A substantial shareholder 04 The SCCG 2018 recommends
01 disclosure of remuneration
who is not a director, CEO or
KMP may nevertheless be exceeding $100,000, in bands of
paid remuneration as an $100,000, in such situations.
employee. Being a
substantial shareholder, he
may be able to indirectly
There remains a risk that these
influence his remuneration. 05 individuals are paid excessively
In family companies, there may be family because their remuneration is
02 members of directors, the CEO or generally not subject to the approval
substantial shareholder who are receiving of shareholders.
remuneration as employees.
In these cases, there is a risk that these
employees are paid remuneration that is
03 not commensurate with their
responsibilities or with market benchmarks.
11
Examples Of Poor Remuneration Disclosures:
Noble Group

Source: Noble Group Limited, Supplementary Documents to the 2017 Full Year
Announcement to SGX
12
Examples Of Poor Remuneration Disclosures:
Noble Group

Source: Noble Group Limited, Supplementary Documents to the 2017 Full Year
Announcement to SGX
13
Examples Of Poor Remuneration Disclosures:
Noble Group

Source: Noble Group Limited, Supplementary Documents to the 2017 Full Year
Announcement to SGX
14
Examples Of Poor Remuneration Disclosures:
Noble Group

Source: Noble Group Limited, Supplementary Documents to the 2017 Full Year
15
Announcement to SGX
Examples Of Poor Remuneration Disclosures:
Noble Group

Source: Noble Group Limited, Response to SGX Queries, March 14, 2018 16
Examples Of Poor Remuneration Disclosures:
Chip Eng Seng

Source: Chip Eng Seng Corporation, Annual Report 2018

17
Examples Of Poor Remuneration Disclosures:
Chip Eng Seng

Source: Chip Eng Seng Corporation, Annual Report 2018

18
Examples Of Poor Remuneration Disclosures:
Chip Eng Seng

All in the
family!

Source: Chip Eng Seng Corporation, Annual Report 2018

19
Disclosure of Remuneration/Remuneration in Family
Companies Vs Relative Amount of Remuneration

In the Singapore Report on Remuneration Practices by Mak Yuen Teen

and Chew Yi Hong published in 2018, based on 609 companies with a
primary listing on SGX, it was found that companies with poorer
disclosures and family-managed companies tend to pay higher
remuneration to key management personnel, compared to companies
of similar sizes (as measured by market capitalization, revenues and
total assets)

20
Level and Structure (Mix) of Remuneration

"The level and structure of remuneration of the Board and

KMP are appropriate and proportionate to the sustained
performance and value creation of the company, taking into
account the strategic objectives of the company."

Principle 7 of the SCCG 2018

21
Level of Remuneration
• One of the most difficult challenges
faced by RCs and BODs is what is
the right level of remuneration,
especially when it comes to the
CEO

• The level of remuneration is a

function of many factors, including
bargaining power of the CEO

22
Amount of Remuneration

• Many companies use benchmarking

to other "peer companies" (for
example, based on similar size or
sector) to help set the level of CEO
remuneration. However, there are
many practical difficulties with
benchmarking.

23
Benchmarking
Ø Research shows that “peer companies” used in benchmarking often
change over time. A study of Equilar 500 companies published in August
2020 found that 91.8% used peer group benchmarking for compensation
plan design purposes, with 71.9% having 10 to 20 companies in their
compensation peer group, and the most common peer group size is 16.
Nearly two-thirds of those practising peer benchmarking have made
changes to their peer groups. There may be good reasons for such
changes, but there is also the risk of gaming behaviour.

Ø In many countries, there are additional challenges in terms of small

number of comparable companies especially in certain sectors, and poor
remuneration disclosures

24
Detailed Issues Relating to
Design of Remuneration
Framework

25
Detailed Issues Relating to Design of Remuneration
Framework

01 02 03 04

Mix of Types of Performance Performance

remuneration performance- measures targets
related
remuneration

26
Detailed Issues Relating to Design of Remuneration
Framework

Having an appropriate remuneration framework is critical in

ensuring that directors and management are incentivised to
improve individual and corporate performance, and work
towards the long-term success of the company. The
remuneration framework sends a strong message as to
what the company values and is a manifestation of the
company culture.

27
Mix of Remuneration
Short- These 3 elements are
Cash term vs
vs not mutually exclusive.
long-
stock term For example, variable
Fixed vs
variable
remuneration can be in
cash or stock, short-
term or long-term

28
Fixed versus Variable Remuneration: Examples

Fixed Variable

Annual (base) salary Annual cash bonus

Benefits Profit sharing
Fees Share options
Performance shares
Restricted shares
“Phantom” shares
Share appreciation rights

29
Structure (Mix) of Remuneration
In recent years, there has
Codes of corporate been concern that poorly
governance usually Performance-related designed performance-
recommend a significant remuneration should also related remuneration has
element of performance- include long-term contributed to excessive
related remuneration, incentives. risk-taking and misconduct.
especially for EDs and KMP

How much performance-related

remuneration is appropriate depends
on factors such as the role of the
executive.
30
Fixed Versus Variable
Remuneration
• Fixed remuneration does not increase or
decrease with performance once it it set

• Variable remuneration tends to vary with

individual and/or corporate performance

• Codes of corporate governance generally

advocate a significant element of pay for
performance – and therefore variable
remuneration – particularly for executive
directors and key management personnel
31
Fixed versus Variable Remuneration
• The role of the individual is also
relevant in determining fixed/variable
mix – e.g., control function heads
versus business line heads.

• In recent years, there has been

concern that excessive and poorly
designed performance-related
remuneration, especially over-
reliance on short-term variable
remuneration, has contributed to
excessive risk-taking and misconduct.

32
Cash Versus Stock-Based Remuneration
• The most common forms of cash remuneration are the base salary and
cash bonuses. Cash paid out through some form of profit-sharing
arrangement is also common in family-managed companies.

• Remuneration in the form of cash is generally either fixed, as in the case

of the base or annual salary, or a short-term incentive. For example, cash
bonuses and profit-sharing arrangements are usually tied to
performance measured on an annual basis.

• However, it is possible to use cash remuneration as a form of longer-

term incentive. This can be done by linking the payment of cash bonuses
to performance over a number of years, or by deferring cash bonuses
over a number of years.

33
Cash Versus Stock-Based Remuneration
• Some companies defer cash bonuses using a "bonus bank".

• Cash bonuses are first put in a "bonus bank" and each year, typically one-
third of the amount in the "bonus bank" is paid out. The remaining
amount in the "bonus bank" can be reduced if future year's performance
does not meet targets.

• This helps mitigate the risk that management will improve current
performance at the expense of future performance, making them take a
longer-term view.

34
 Example of Deferral of Cash Bonuses: Bonus Bank
"....the bonus declared to each Economic Value-Added-based Incentive Plan (EBIP)
participant for the current year is added to the participant's balance carried forward
from the previous year, upon which one-third of the resulting total amount is paid out
in cash, with the remaining two-thirds to be carried forward to the following year.

Amounts in each participant's EBIP account are at risk because a significant reduction
This is a of the EBIP bonus declared in preceding
in EVA in any year may result in retraction...
sample text.
years. The EBIP encourages KMP to work for sustained EVA generation and to take
actions that are aligned with the longer term interests of shareholders.

Based on the ERCC's assessment that the actual achievement by the Group in FY 2016
was below the pre-determined EVA targets, the resulting bonus declared and paid out
under the EBIP has been adjusted accordingly to reflect the performance level.
Source: https://investor.capitaland.com/corporate_governance_2.html
35
 Cash Versus Stock-Based Remuneration

• It is common for companies to use stock or shares as a form of

remuneration.

• Share remuneration has the benefit of turning managers into

owners/shareholders and, therefore, helping align the
managers' interest with that of shareholders. This helps
address the "type 1" agency problem.

• Some amount of share remuneration is generally appropriate

for EDs and KMP. Institutional investors often view them
favourably provided it is not excessive.

36
 Cash Versus Stock-Based Remuneration
• However, whether share remuneration is appropriate and the
extent to which it should be used depend on the role of the
executive . Share remuneration may also have limited
usefulness for managers who are already major shareholders
since their interests should have already been aligned.

• Share remuneration is generally a form of long-term incentive

but again this depends on how it is designed. The vesting
period and exercise period would affect whether they are a
short-term or long-term incentive.

37
 Cash Versus Stock-Based Remuneration
• Remuneration may also be denominated in shares but paid out
in cash, although they are not common. For example, some
companies used share appreciation rights (SARs) or phantom
shares. The remuneration is still linked to the value of the
underlying shares and therefore they are considered a form of
share-based remuneration.

• Companies may use such remuneration to achieve the

objectives of share remuneration but without the effect of
diluting other shareholders.

38
 Short-Term Versus Long-Term Remuneration
• The objective of corporate governance is to
enhance long-term value of the company. However,
6 this does not mean that short-term performance is
5 not important.
4
• Further, incentives tend to be more motivating if
3
the rewards follow soon after the achievement of
2
objectives. Paying only in long-term incentives also
1 increases risk to the executives, who are likely to
0
expect higher expected value from these incentives
to compensate them for the greater risk.

• Good corporate governance requires balancing

short-term and long-term incentives.

39
Issues Relating to Profit-Based Incentive Plans

40
Annual (Short-term) Incentive Plans: Profit-sharing
Plans

Incentive scheme for CEO of CAO (Source: CAO Prospectus) 41

Annual (Short-term) Incentive Plans: Profit-sharing
Plans

Minimum
Bonus profit to
earn bonus

Profit
PBTbefore tax
Incentive scheme for CEO of CAO12m 20m
(Source: CAO Prospectus) 35m
42
Consider the profit-sharing plan for the CEO of China
Aviation Oil as disclosed in the company’s prospectus
and the graphical illustration in the previous 2 slides. Profit share =
$8.41m
Total =
Assume that CAO made a profit of $100 million. What $9.01m
would be the CEO’s profit share and his total
remuneration? What would be his total remuneration if
the company made a loss? What sort of behaviour
might such a profit-sharing plan induce? How can the
company mitigate against such behaviour?

43
Short-term Incentive Plan Gone Wrong?

44
A Reasonable Profit Share?
“At Raffles Education Corporation, the Chairman and CEO, Mr Chew Hua Seng, is paid a
bonus based on profit sharing. In dollar terms, his bonus for FY2021 is the second
highest in the past 10 years…As a percentage relative to profit before tax, it is the
highest over the last 10 years. The board’s justification is as follows: “In spite of the
challenging conditions as a result of the Covid-19 pandemic globally, the Company has
been able to deliver a commendable group profit before tax of S$29.9 million.”
However, …the external auditors had flagged a material uncertainty relating to going
concern through an emphasis of matter paragraph in its opinion…More bad news
followed shortly after when the company announced its results for the first quarter of
FY2022, which show an operating loss before tax of S$4.7 million compared to an
operating profit before tax of S$3.5 million for the comparative quarter in the previous
year. Loss after tax widened from S$1.5 million to S$10.2 million.”
Was the bonus paid to the Chairman and CEO, who is also the controlling shareholder,
fair? Could such a situation be avoided? How?
Source: Mak Yuen Teen, Remuneration Policies: Getting What You Pay For, Governance for Stakeholders, 1 January 2022 45
Fair Value and One-Off Gains/Losses
“The profit used to determine Mr Chew’s incentive bonus includes fair value gains or
losses on investment properties and one-off gains or losses on disposals of assets, and
this has been consistently followed over the years. For FY2021, REC’s reported profit
before tax of S$29.9 million included a fair value gain from investment properties of
S$13.8 million and gain on disposal of non-current assets held for sale of S$28.4 million.
Without these unrealised or one-off gains, REC would have reported an operating loss
before tax of S$12.3 million for FY2021.
Over the past 10 years, REC has reported a fair value loss on investment properties in
only one year, S$6.3 million in FY2012. Since then, it has reported nine consecutive years
of fair value gain on investment properties. Cumulatively, the net fair value gain is
S$208.6 million over the 10 years.
According to REC’s annual report, fair value of investment properties is considered
“Level 3 recurring fair value measurements” with “unobservable inputs for the asset
and liability”, which means it is highly subjective.”
Should fair value and one-off gains/losses be included in profit in determining
bonuses?
Source: Mak Yuen Teen, Remuneration Policies: Getting What You Pay For, Governance for Stakeholders, 1 January 2022
46
 Government Grants
“…at Old Chang Kee, government grants, including Jobs Support Scheme (JSS) grants to
offset local employees’ wages and help protect their jobs during the pandemic helped
boost the amounts paid to directors to S$5.5 million in FY2021, nearly double the
amount in FY2020….increases in government grants, including from JSS, contributed S$6
million to a S$8.1 million increase in the company’s profit before tax for FY2021.
Meanwhile, total salaries and bonuses (excluding amounts paid to directors) fell by
nearly 15% and total CPF contributions by 23%, suggesting that ordinary employees had
faced job and/or salary cuts.

The RC of Old Chang Kee said that it “has reviewed the bonuses for the Executive
Directors. Performance bonuses are based on the service agreements signed with the
Executive Directors, which included a percentage of profit sharing based on the adjusted
profit before tax as elaborated above.”
Should government grants be included in profit in determining bonuses?

Source: Mak Yuen Teen, Remuneration Policies: Getting What You Pay For, Governance for Stakeholders, 1 January 2022
47
Long-Term Incentives
• Long-term incentives (LTIs) play an important role in motivating
directors and KMP to take a longer-term perspective.

• The following are some actions companies can take to encourage a long-
term perspective:

Using multi-year performance Using stock-based

targets to award cash bonuses remuneration linked to multi-
year performance targets or
that vests over several years

Using a “bonus bank” to defer Requiring further deferral of

part of the annual cash stock awarded through stock-
bonuses and paying out over based remuneration after the
several years stock has vested

48
Long-Term Incentives
• LTIs can also help in retention as the recipient will generally lose
unvested LTIs if they resign.

• A recent study in SGX-listed companies found that, on average, a CEO

receives about 70% of his total remuneration in base salary, 20% in cash
bonuses, and about 3% in shares.

• It also found that as companies become larger in terms of market

capitalisation, the salary component decreases in percentage terms,
while the cash bonus and share-based components increase.

49
Performance measures

Accounting measures Other measures

E.g., profits, EPS, ROE, E.g., market share, new
economic value added product development,
risk, customer
satisfaction, people
development, ESG

Market measures
E.g., total shareholder
returns

50
Performance Measures

• There is no single perfect performance measure although some

measures are better than others.

• The key is to use a small number of measures that best capture the
overall performance of the company and the contributions of the
director or KMP.

• Many companies use a "balanced scorecard" approach that includes

financial and non-financial measures.

51
Performance Targets
• After selecting performance measures, companies
need to set performance targets - the different
levels of performance that will entitle the executive
to earn the performance-based remuneration.

• Performance targets may be absolute, relative to

past performance, or relative to peer companies.

• For example, a target of EPS of 10 cents is an

absolute target. A target of 10% growth in EPS is a
relative target based on past performance. A target
of EPS growth of 10% above a group of peer
companies would include a comparison with peer
companies.
52
Types of Performance-Related Remuneration
• Performance-related remuneration can be classified into
those that are cash-based and those that are share-
based.

• Cash-based performance-related remuneration includes

cash bonuses and profit shares.

• Examples of share-based performance-related

remuneration are share options and performance shares.

• Under a performance share plan, a target number of

shares is conditionally awarded to an executive. The
actual number of shares eventually issued to the
executive depends on the extent to which performance
targets are met. 53
Types of Performance-Related Remuneration
• Each type of performance-related remuneration plan
have their pros and cons. Companies need to evaluate
which plan is appropriate given their circumstances.

• Companies also need to ensure that the plans adopted do

not promote excessive short-termism and encourage
excessive risk-taking and other forms of misconduct.

54
Types of Performance-Related Remuneration
• Some companies have restricted share plans. Under a
restricted share plan, a certain number of shares are
transferred to employee at the date of grant, subject to
certain restrictions. The restriction can be time or
performance.

• A time-based restricted plan which does not require

achievement of performance targets is used to retain
critical executives. As long as the executive remains in the
company for the period specified, he or she will be
entitled to the shares.

55
Types of Performance-Related Remuneration
• A restricted share plan where the restriction is based on
achieving performance targets is in essence a
performance share plan.

• However, in practice, the terminology used by companies

is often ambiguous.

56
 Malus/Clawback Provisions
Ø Companies can have malus provisions to reduce or cancel deferred
bonuses, share options or share awards before they have been paid out or
transferred, in situations such as misconduct, firm-wide failures or poor
performance.

Ø In contrast, clawback provisions allow the company to recover

remuneration after it has been paid out, which is far more challenging to
implement in practice. Clawback provisions generally apply in more limited
circumstances than malus clauses, such as where there are material
misstatements of financial results or gross misconduct, but not poor
financial performance.

57
Malus/Clawback Provisions
Ø In the Wells Fargo case in the U.S., its former Chairman and CEO John
Stumpf gave up US$41 million in unvested equity awards shortly before
he resigned, while the former head of the bank’s community banking
division, Carrie Tolstedt, had US$19 million of unvested equity awards
forfeited, following the revelations of the cross-selling scandal. After an
investigation, the board also determined that “cause existed” for
Tolstedt’s termination, requiring the forfeiture of another US$47.3 million
outstanding stock option awards. Malus provisions which are properly
crafted can enable such forfeitures.

Ø The board also decided to “claw back” an additional $28 million of pay
from Stumpf, which had already been paid out to him.
58
Malus/Clawback Provisions
Ø More recently, McDonald’s clawed back US$105 million from the
severance paid to its ex-CEO Steve Easterbrook, two years after they had
fired him for a consensual relationship with a subordinate which was
against the company policy. In August 2020, McDonald’s sued
Easterbrook to recoup that payout, claiming he had lied and committed
fraud. A subsequent investigation allegedly revealed that Easterbrook had
destroyed information regarding his inappropriate behavior, including
three alleged additional sexual relationships with employees before his
firing. Easterbrook fought the lawsuit before eventually agreeing to the
clawback and apologising for failing “at times to uphold McDonald’s
values.”

59
Malus/Clawback Provisions
“The Company does not have any contractual provision which allows the
Company to reclaim incentive components of remuneration from Executive
Directors and/or key management personnel in exceptional circumstances of
misstatement of financial results, or of misconduct resulting in financial loss
to the Company as such provisions will stifle the Company’s ability to
effectively attract and retain the right individuals”.

Asian Micro Holdings Annual Report

60
Non-Executive Director Remuneration

61
Non-Executive Director Remuneration
Ø Some codes specifically state that NEDs should be remunerated
differently from EDs and other executives, and that NEDs should not be
paid in share options or other performance-related incentives.

Ø Institutional investors generally do not object to independent directors

receiving some shares as part of their remuneration or being required to
use part of their fees to buy shares in the company – to align their
interests to shareholders. However, in such cases, they believe there
should not be performance conditions or vesting periods. Why?

62
 Non-Executive Director Remuneration
Ø It is a fairly common practice today for companies to have a policy
requiring or recommending that NEDs hold shares equivalent to, for
example, one year of their fees. There is often a requirement to hold the
shares until a director leaves the board.

Ø NEDs, including IDs, are sometimes paid additional ad hoc fees for extra
time spent, or for approving decisions which may be perceived to benefit
the controlling shareholder (such as restructuring rental agreements
between REIT and master lessee of a property, where the master lessee is
owned by the controlling shareholder), or for winning projects, or
successful acquisitions or divestments.

63
Non-Executive Director Remuneration
Ø For example, Genting Singapore awarded 500,000 performance shares as
“special incentive awards” to each ID, which are contingent on winning the
Yokohama IR project.

Ø How should these be handled?

64
Risks of Performance-Related Remuneration
There are certain risks associated with poorly--implemented
performance-related remuneration plans. These include:

Excessive remuneration

Short-termism

Excessive risk-taking

Misconduct

65
Integrating ESG Factors Into Executive Remuneration

66
Linking Remuneration to ESG

Financial Times, 22 February 2022

Financial Times, 15 February 2021

Financial Times, 20 February 2022

Financial Times, 22 February 2022

67
Incorporating ESG into Remuneration Policies: 10 Key
Questions

1. Should a company link ESG factors to executive remuneration (and

to which executives)?
2. What specific ESG factors should be considered?
3. What specific ESG metrics should be defined relative to each
factor?
4. Should quantitative or qualitative metrics be used?
5. Should ESG metrics be stand-alone, part of an ESG scorecard, or
part of an overall scorecard?

68
Incorporating ESG into Remuneration Policies: 10 Key
Questions for the RC/Board
6. Should ESG performance directly determine remuneration, modify
payouts otherwise earned, or be a precondition for payouts?
7. How much should ESG metrics be weighted?
8. Should ESG metrics be incorporated into short-term incentives
(STIs), long-term incentives (LTIs) or both?
9. Should ESG performance be measured against pre-set internal
targets or external benchmarks?
10. How can the remuneration committee balance objectivity and
judgment when evaluating ESG performance in determining
executive remuneration?

69