How much is too much?

Source : Straits Times - 2 Apr 2009

IT TAKES a bit for a corporate boss to get out of the finance section and into the news pages but CapitaLand boss Liew Mun Leong managed it last week with his $20.5 million bonus.

The huge payout for 2007 has quickly become talk of the town and is likely the largest bonus ever awarded to a chief executive here in a single year.

Take the three years - 2006 to 2008 - and the property chief’s total bonuses were just shy of $30 million.

Add in his actual pay and Mr Liew’s $21.67 million package for 2007 easily trumps that of other big-earning bosses such as Metro Holdings’ Jopie Ong, who collected $12.75 million in 2004, and even Venture Corp’s Wong Ngit Liong, who was $17 million richer in 2005.

Numbers like these will inevitably ignite the stock standard debate about CEO pay that tends to take hold this time of year when firms release annual reports before shareholder meetings.

For the public and many shareholders, it usually comes down to the simple question - how can one guy earn that much?

Analysts point out a crucial point about CapitaLand’s $2.8 billion net profit in 2007 - it included $608.1 million from portfolio and divestment gains.

These gains - received from actually selling investments and bricks and mortar - reflect more of a timing decision taken during a booming market.

Strike them out and the underlying profit is lower.

So that refines the question a bit further: How much of the profit can be put down to the skills of a CEO and how much is merely the effect of the market - the rising-tide-lifts-all-boats theory?

After all, the property market was white-hot that year. Few could miss the mark.

Another issue is whether he is getting far more than his peers.

For example, Mr Chew Choon Seng runs another world-class company in Singapore Airlines but earned only $3.5 million for 2007/2008.

Among Singapore’s property giants, Mr Liew’s total pay of $21.67 million in 2007 far exceeded that of City Developments executive chairman Kwek Leng Beng, who earned $7.75 million to $8 million, or Keppel Land chief executive Kevin Wong’s $3.25 million to $3.5 million.

Mr Liew pointed out that his bonus was only 0.7 per cent of the firm’s profit. If his salary were included, it would also be about 0.7 per cent. On that score, Mr Kwek received more - at 1.1 per cent of the $725 million profit - and Mr Wong, less, at 0.4 per cent of the $779.65 million profit.

A related issue is whether Mr Liew, as a professional manager, should be taking home far more than an owner-manager like Mr Kwek.

Many think that a major shareholder who also manages the company risks his entire capital going down the plughole but a professional CEO loses only his job, albeit a well-paid one.

An owner would also look to the long-term future of the company but a professional manager might be more focused on shorter-term returns or be more willing to take risks simply because it isn’t his capital at stake.

CapitaLand has shed about 60 per cent of its market capitalisation since its peak in April 2007, prompting many shareholders to lick their wounds.

A recent Citigroup report expects CapitaLand to have the lowest return on equity this year among the bigger property players, including Allgreen and Wing Tai.

What the debate signals is that here and in other countries, CEO pay is a tricky, controversial and sensitive issue.

No one likes his or her remuneration disclosed and dissected in public even as shareholders also want a say, now more than ever, with portfolios sinking fast.

The aim for firms is simple enough - to reward for upsides but penalise if the firm’s results fall short - yet few have found the magic formula.

Not for want of trying, however. There are learned papers galore on the subject, presenting boards and shareholders with a dizzying array of competing theories.

They could try EVA (economic value added) or benchmark pay to shareholder return, or link it to stock market indexes or throw in stretch goals. (Don’t ask.)

Quite a balancing act for any company, and even harder when the American International Group bonuses are rocking the White House and every shareholder and opinion page writer is venturing an opinion.

In such a climate, it is inevitable that business can get it wrong sometimes.

When what seems to be an excessive figure is announced, be it in Singapore, Britain or the United States, shareholders clamour for changes.

One easy response would be to demand that boards put a cap on pay, just as the US government wants a US$500,000 (S$760,900) pay limit for bosses in banks that have received taxpayer bailouts.

Britain introduced a ’say on pay’ vote for shareholders a few years ago on what the CEOs are paid but it was non-binding and failed to curb hefty payouts.

The US requires detailed disclosure on CEO pay - to the nearest dollar in fact - but more information has not kept remuneration in check either.

By all accounts, Mr Liew’s pay was correctly disclosed and correctly calculated - and also reviewed by auditors.

And it is true that part of Mr Liew’s 2007 bonus can be held back and that his bonus for last year was sharply down at $2.98 million.

Yet while the pay figures may be accurate, they could be criticised for lacking a sense of proportion.

How detailed an analysis did the compensation committee or the rest of the board undertake to see how high or how low the pay could go?

After all, this counts as an area of risk management - if overlooked, a company could end up paying a CEO a vast sum of money.

If the directors felt they could live with the figure of $20 million or an even higher one, then the least they can do is to justify to their shareholders how it made sense.

In fact, shareholders should also ask why this 2007 number was not even highlighted to them last year, together with the detailed basis on which the bonus is calculated.

The upcoming annual general meeting on April 23 will give investors the chance to ask some hard questions - and the company an opportunity to cast some much needed light on the issue.