SINGAPORE (May 7): It is that time of the year again when companies with December year-ends release their annual reports and hold their AGMs. While most investors will already have a good sense of how well these companies performed during the year from their quarterly and half-yearly financial reports, the annual reports also contain varying degrees of information on how much these companies paid their top executives.

Size and profitability count for a lot. The highest-paid executives are often the bosses of Singapore’s banks and largest property developers. And, every now and then, the CEO of a mid-sized company that had an exceptionally good year makes headlines for his pay package. Case in point: Wong Ngit Liong, chairman and CEO of Venture Corp, was paid a total of $12 million for FY2017. That was more than the $10.3 million that DBS Group Holdings’ CEO Piyush Gupta took home.

Most investors would not begrudge Wong the money, though. For its FY2017 ended Dec 31, Venture reported a 39.9% y-o-y rise in revenue to $4 billion, and a 106.3% y-o-y rise in earnings to $372.8 million. The company declared total dividends of 60 cents a share for FY2017, up from 50 cents in FY2016. Over the course of 2017, Venture saw a 107.2% rally in its share price, versus a 17.7% rise in the Straits Times Index. (The stock has since suffered a big sell-off recently on concerns about the sustainability of its earnings growth momentum.)

However, among the very best and worst performing stocks in the market, the story of top executive remuneration is rather more varied and complicated. Performance matters, of course. Then again, companies often have extraordinarily good years or bad years for reasons that have nothing to do with the decisions of their top executives. And, as much as it may irk investors, companies sometimes have little choice but to pay their executives top dollar even when things are not going well.

Caught up in circumstances

One company that performed extraordinarily well in 2017 was China-based steelmaker ­Delong Holdings. Shares in Delong shot up a dizzying 813.8% last year, from very depressed levels. The first inkling that the stock was undervalued came after the government of China’s Hebei Province decided early last year to enact a steel capacity rationalisation programme. Responding to the new policy, Delong said in April 2017 that it would sell some of its steel production capacity to another company for $81.1 million. That was more than Delong’s entire market capitalisation at the time.

Steel prices in China subsequently took off, fuelling a huge jump in profitability at the company. For FY2017, despite selling off some of its steel capacity, Delong reported an 871.7% y-o-y rise in earnings to RMB2 billion ($419 million), on a 29.9% y-o-y increase in revenue to RMB12.8 billion. The management of Delong arguably had little to do with these stellar earnings. In fact, even as its stock soared, the company came under fire from a group of minority shareholders who objected to the company’s plans to invest in a steel plant outside China, as well as its investment in an apparel business. Perhaps reflecting this, Delong’s executive chairman, Ding Liguo, was paid somewhere between $900,000 and $999,999 last year, the same range as in 2016.

At the other end of the spectrum is ISR Capital, which saw its stock collapse 96% y-o-y last year. The company reported an 82.8% y-o-y decline in losses to $1.4 million for the year, on a 64.8% increase in revenue to $576,075 over the same period. Chen Tong, executive chairman of the company, was paid between $250,000 and $500,000. The previous year, ISR’s highest-paid official was its executive director, Quah Su Yin, who also earned between $250,000 and $500,000.

Should Chen have been paid less after such a poor year? Keep in mind that Chen only became involved with ISR in September 2016. He was among four investors who put $12 million in ISR via a placement of new shares at 8.5 cents each. Shares in ISR were soaring at the time, following a series of announcements that it would invest in a rare earth mining concession in Madagascar. The stock hit a peak of 31 cents the following month, putting the whole company’s value at $661 million.

However, the stock collapsed when Malaysian businessman John Soh Chee Wen was arrested in November 2016. Soh was charged with the manipulation of shares in Blumont Group, LionGold Corp and Asiasons Capital (now called Attilan Group), the trio of stocks that soared and then collapsed spectacularly in 2013. Prosecutors later said in open court that Soh was also involved in the manipulation of shares in ISR.

Soh is said to have been romantically involved with Quah’s sister, Su Ling, the former CEO of IPCO International who was also arrested in November 2016 and slapped with charges related to the manipulation of shares in Blumont, LionGold and Asiasons. Quah resigned from ISR on Dec 31, 2017.

Now, Chen is still trying to complete the proposed acquisition of the rare earth mining concession in Madagascar. “It remains my resolute belief that the successful completion of this transaction will augur a corporate transformation which will enhance shareholder value,” says Chen in ISR’s latest annual report.

“The People’s Republic of China — one of the few nations currently capable of mining rare earths on an industrial scale — announced in October 2016 that it would limit national output to 140,000 tonnes by 2020. This is likely to result in higher demand for rare earths, and underscores the significance and value of the Madagascar asset,” he adds.

Yet, ISR does not appear to be solely focused on that investment. In September last year, ISR said it will pay $2.7 million for a 25% stake in Straits Hi-Rel, a provider of high-reliability engineering services. Straits Hi-Rel plans to open a technology centre in Singapore to test and manufacture hi-rel integrated chips and electronics modules for the automotive, energy and industrial sectors. Separately, on Dec 5, ISR was placed on the Singapore Exchange Watch-List for failing to maintain a minimum trading price of 20 cents and market capitalisation of $40 million. “The board is currently considering all options available to the company to comply with the [minimum trading price] requirement within 36 months from Dec 5, 2017,” Chen says in its latest annual report.

Clearly, while Chen might not have been entirely responsible for the massive fall in ISR’s market value last year, he will be closely watched by investors this year.

Paying more than one performer

Back among the top performers, Hi-P International reported bumper profits and paid its CEO significantly more in bonuses. For FY2017, the company reported a 122.8% y-o-y rise in earnings to $121.5 million, on a 9.3% y-o-y improvement in revenue to $1.4 billion. Its CEO, Yao Hsiao Tung, was paid $3.2 million for the year, up from $1.2 million the previous year. The remuneration consisted of 33% in salary and 64% in bonuses.

The strong performance continued into 1QFY2018, with Hi-P reporting a 20% y-o-y rise in earnings to $10 million on a 15.1% y-o-y increase in revenue to $281 million. The company is also looking for opportunities to enlarge itself through acquisitions.

“With our strong ability to generate positive operating cash flow, we have also begun to explore inorganic growth opportunities that are synergistic to our existing operations. We are exploring opportunities within the automotive and medical space, which will help to further diversify our product mix and mitigate the impact of seasonality on our performance,” says Yao in the company’s annual report. If he succeeds, investors should be able to look to another good year for Hi-P, and Yao to another year of elevated remuneration.

It was a somewhat different story at AEM Holdings, which also performed very well last year. For FY2017, AEM reported a 216% y-o-y surge in revenue to $221.6 million, and a 570.2% y-o-y jump in earnings to $31.5 million. The company’s CEO, Charles Cher, was paid between $750,000 and $1 million for FY2017, which was not all that much more than the $500,000 to $750,000 he was paid in FY2016. Bonuses and performance shares accounted for 50% of his FY2017 compensation, versus 34% in FY2016.

However, Cher was not the best-paid executive at AEM last year. According to the company’s annual report, its executive chairman, Loke Wai Sun, was paid between $1.5 million and $1.75 million. Some 94% of this consisted of bonuses and performance shares. In the previous year, Loke was non-executive chairman of AEM and received total remuneration of only $94,000. As AEM expands, it appears that it is tapping the talent of more than its CEO alone.

Another AEM executive whose compensation was mentioned in the annual report was its chief operating officer, Chok Yean Hung. For FY2017, Chok was paid between $750,000 and $1 million, up from between $250,000 and $500,000 in FY2016. Bonuses and share benefits accounted for 70% of his FY2017 pay, versus 21% in FY2016.

Paying those departing their posts

Another interesting case was that of Allied Technologies, an original design manufacturer that transferred its listing from the Mainboard to Catalist last year. The company reported a 123% y-o-y jump in earnings to $3.5 million for FY2017, on an 11% y-o-y rise in revenue to $94.8 million. Even against the strong rise in earnings, and taking into the account the financial scale of the company, the headline figure paid to its CEO, Hsu Ching Yuh, might have raised some eyebrows.

Hsu was paid between $3 million and $3.25 million for FY2017, up from between $500,000 and $750,000 for FY2016. However, a large chunk of the recent payout to Hsu appears to be related to the termination of his service agreement. According to filings by the company, Hsu resigned on Dec 27 to pursue his personal interests. Only 15% of his pay in FY2017 was related to his salary. Some 85% was classified as “benefits in kind” and included compensation for termination of service agreements.

Given the jump in Allied Technologies’ earnings in FY2017, and the steep 317.6% rise in its share price last year, few investors might have bothered questioning the payout to Hsu. Shares in Allied Technologies have, however, fallen some 37.5% since the beginning of this year.

Over at Noble Group, the beleaguered commodities trader, a big slump in its stock price and a controversial proposal to restructure itself have turned the issue of executive remuneration into an acrimonious matter. For FY2017, the company reported a loss of US$4.9 billion ($6.5 billion), and its auditors warned that it might not be able to continue as a going concern. The company has also proposed a debt restructuring that will significantly dilute the interests if its existing shareholders.

Against this backdrop, Noble’s latest annual report shows that its then co-CEO, Jeffrey Frase, was paid more than $1.5 million in 2016 and 2017. The bulk of his pay, some 72%, was in the form of bonuses. In 2016, some 96% of his total pay was his salary. That raises questions about exactly what was achieved in 2017 that warranted his bonuses.

Further stoking investor irritation was the fact that Noble’s executive chairman, Paul Brough, and chairman emeritus, Richard Elman, were each also paid more than US$1.5 million in FY2017. And, Frase, who resigned in November, received a US$20 million pay package, a large portion of which comprised “benefits in kind” that the company did not elaborate in its annual report. “Why should this same management that had created Noble’s present debacle be rewarded, let alone so richly?” said Goldilocks Investment, a shareholder of Noble, in a statement.

Is more disclosure necessary?

To be clear, none of these companies are breaking any rules. Nishant Mahajan, head of executive remuneration and rewards consulting, Singapore at Mercer, notes that there is no requirement for a pay-for-performance rule for listed companies. “It is not part of the SGX listing rules, but the Corporate Governance Code requires that companies demonstrate how their executive compensation practices are linked to company performance and value creation in the business,” says Mahajan.

Yet, many public-listed companies in Singapore, including some of the largest ones, are not doing this in a consistent way. According to a study published in January by Mak Yuen Teen, associate professor at the National University of Singapore Business School, and Chew Yi Hong, an MBA graduate from the London Business School, the more companies paid their executives, the less transparent they were about their remuneration. The report covered 609 companies with a primary listing on SGX and is based on information from annual reports for the financial years ending from April 2016 to March 2017, published between August 2016 and July 2017.

“Companies often cite fear of poaching for not fully disclosing remuneration. Fear of poaching would imply that companies are paying below the market. Our findings do not support this. On the contrary, they are consistent [in showing that] companies that disclose less may be trying to avoid drawing attention to relatively higher remuneration. We should point out that we are not advocating that companies should pay below-market remuneration, as that can adversely affect their ability to attract and retain talent,” said the writers of the report.

Worryingly, many companies do not seem interested in making more information available. “Public disclosures of executive pay are not that prevalent in Singapore as yet. The recent 2017 Board of Directors Survey by the Singapore Institute of Directors and SGX reports that less than half the responding companies complied with Guideline 9.2 of the Code, that is, CEO remuneration disclosure,” says Mahajan.

“In addition, 95% of those that did not comply indicated that they have no intention of doing so in the next two years. Given it is not an SGX listing requirement, many companies tend to get away with non-disclosure by providing arguably weak justifications,” he adds.

Things do appear to be changing, though. In January, the Corporate Governance Council held a public consultation for recommendations to revise the Code of Corporate Governance. A proposed revision is greater emphasis on disclosures linking remuneration with value creation. While the council does not recommend laws to provide shareholders with an advisory or binding vote on the remuneration of directors and key executives for now, it is recommending a revision to the code for companies to disclose the relationship between remuneration and value creation.

“It is more important for companies to provide meaningful disclosures so that stakeholders can understand the alignment in the level and structure of remuneration to the companies’ long-term objectives, business strategy and performance,” said the council in the consultation paper.

Difficult to define performance

Yet, executive pay is not always about long-term performance. Sometimes, ailing companies need to hold on to a talented CEO, and paying them well in the face of weak performance is necessary. “We have seen companies sometimes use such discretionary top-ups to address challenges like flight risk and to recognise broader contributions made by their executives. While these are as such contradictory to the pay-for-performance philosophy, it may not be an easy practice to change,” says Mahajan.

Indeed, defining what constitutes good performance is tricky, and likely to vary from one company to another. “Boards and remuneration committees constantly grapple with the whole idea of defining good performance, especially in a volatile business environment where setting long-term performance targets is becoming increasingly difficult,” Mahajan says. Nevertheless, most large Singapore companies have pay-for-performance-based structures in place for their executives, he adds.

Whatever the case, investors can detect faulty remuneration policies by watching out for some red flags, Mahajan says. Among them is the CEO’s pay not being related to performance at all. Another red flag would be contractually guaranteed payments on top of salary, or increments that are unrelated to performance, especially if these are exclusive to the CEO. Excessive focus on short-term results with no accountability for the long-term performance and the sustainability of the business would be yet another warning sign. There should also be some reference to the external talent market in determining whether their executives are appropriately paid.

Mahajan adds that investors should look at the structure of the remuneration committee. According to him, the independence of the committee when determining the CEO’s pay, especially in the cases where the CEO is also the chairman of the board, needs to be absolute. Mahajan also cautions against setting unattainable targets, and that key performance indicators used for incentive programmes should be influenceable by participants and tested for achievability. “Please note that not all of the above apply to everyone, and pay design can and should be contextualised to a company’s priorities and circumstances,” he adds.

According to the study by Mak and Chew, many companies could do more in terms of setting and disclosing remuneration for their top executives. “The findings from our study confirm that there is considerable room for improvement among SGX-listed companies, even for basic issues relating to executive and director remuneration, such as composition of remuneration committees, disclosure and the appropriate types and mix of remuneration,” the report says.

“Weaknesses in these areas increase the risk of inappropriate and excessive remuneration, which could be harmful to the interests of minority shareholders. However, they may also result in directors and executives not being adequately remunerated for their responsibilities, contributions and performance, resulting in difficulties in attracting and retaining talent, which can be detrimental to the long-term performance of companies,” it adds.