Lower profit, higher pay for key execs: Is it justifiable?

Lian Beng was in the news recently, but among its peers, at least 3 other companies paid key executives or directors more even as net profits fell

Oct 12, 2021


IN spite of uncertainties caused by the Covid-19 pandemic, several Singapore-listed companies have seen fit to raise the remuneration of their directors and key executives this past year - raising questions about how to adjust remuneration policies in exceptional times.

Building contractor Lian Beng Group had on Sep 27 responded to a shareholder asking why the remuneration for its key executives was higher than the previous financial year when net profit, excluding government grants, was lower.

Lian Beng's response, that the remuneration factored in both Covid-19 grants as well as Covid-related expenses, led to a heated debate over whether grants are fair game in such calculations.

In a subsequent clarification sent to The Business Times, Lian Beng said Covid-related expenses were "higher than the grant amount received", therefore implying that the grant money had not gone into executives' pockets.

This clarification, however, failed to satisfy some parties.

Corporate governance expert Mak Yuen Teen, who is associate professor of accounting at the NUS Business School, said Lian Beng's clarification "doesn't really address the concerns".

"An active remuneration committee with the ability to exercise discretion in handling such situations would probably have handled it differently," he said, while noting that Lian Beng's remuneration committee only meets once a year.

Prof Mak questioned if Lian Beng's bonus determination for its executives was overly formulaic with "little room for discretionary adjustment by the remuneration committee". His concern was based on a 2016 dispute between Lian Beng's executive directors and its then-independent directors over which profit figure should be used to calculate cash bonus and profit share.

Unfortunately, Prof Mak added, Lian Beng is not the only publicly listed company to have raised the remuneration of its top executives.

"I know of at least one other listed company which got money from the Jobs Support Scheme (JSS), but appeared to have paid workers less based on the amount of CPF contributions disclosed while the executive directors got bigger bonuses."

Among Lian Beng's peers in the construction industry, at least 3 other companies increased the remuneration or bonuses paid to its key executives or directors even as net profits fell.

Keong Hong Holdings' annual aggregate remuneration paid to its 2 key management personnel rose from S$360,000 to S$500,000 in FY2020. The company reported a net loss of S$18 million for FY2020, versus a profit of S$16.3 million in FY2019.

Steel stockist AnnAik paid S$968,000 to its directors and CEO in FY2020, up from S$837,000 a year earlier. Directors' fees increased to S$97,700 from S$82,700 a year ago. AnnAik's profit for the year declined to S$177,000, from S$2.2 million a year earlier.

Construction and property development company BBR Holdings reported that annual aggregate remuneration paid to its top 5 key management personnel excluding the chief executive officer rose from S$1.4 million to S$1.5 million. Losses in FY2020, meanwhile, widened to S$26.4 million from S$12.8 million.

Keong Hong declined to comment when approached, while AnnAik and BBR could not be reached for comment at press time.

Outside the construction sector, some of the biggest companies by market capitalisation on the Singapore Exchange (SGX) also raised management personnel and directors' pay despite declines in net profits.

Directors of Jardine Matheson Holdings (JMH) saw a 7.5 per cent boost in remuneration, on aggregate. But the company reported a full-year loss of S$394 million in FY2020, reversing from a net profit of US$2.8 billion a year ago.

Thai Beverage (ThaiBev) paid its top 12 key management personnel remuneration that was 6.2 per cent higher, even though profits fell 2 per cent.

JMH and ThaiBev did not respond to BT's request for comments.

It is worth noting that both companies generate most of their revenue outside Singapore.

Hong Kong-based JMH, which has a secondary listing in Singapore, also owns SGX-listed Hongkong Land, Jardine Cycle & Carriage, Mandarin Oriental International and Dairy Farm International Holdings.

Beverage producer and distributor ThaiBev is mainly based in Thailand.

The thorny issue of remuneration in tough times is not, however, limited to Singapore.

In its 2021 AGM Season Review, shareholder services advisory Georgeson found an 18 per cent increase in shareholder dissent over remuneration-related resolutions. Its review - covering shareholder meetings in the United Kingdom, the Netherlands, Germany, Spain, France, Switzerland and Italy - also found that remuneration was the most contested resolution category.

A similar review by ISS Corporate Solutions of shareholder voting on executive compensation found that failure to gain shareholder support had reached a high-water mark of 16, for S&P 500 companies that had sought shareholder approval for the 2021 season to Jun 30.

Another study, published in June by the Harvard Law School Forum on Corporate Governance, said Say-on-Pay failures among Russell 3,000 companies were higher than at the same time last year. Analysis by the study's authors pointed to more than a quarter of those failures being at least partly attributable to Covid-19.

Even at companies that have performed well financially, larger pay packages have been rejected. Starbucks shareholders, for instance, had in March voted down a compensation proposal for CEO Kevin Johnson. The directors of Walgreens Boots Alliance had asked shareholders to support a compensation plan with bonuses for its key executives, arguing it would be "unfair and unwise" to penalise the leadership team for the Covid-19 pandemic. But shareholders disagreed.

The strongest criticism, however, has been reserved for companies that have received government funds.

In Australia, there is growing support for requiring companies to repay funds received under a JobKeeper programme. In a survey by The Sydney Morning Herald, 68 per cent of respondents also wanted the government to reveal the top 10,000 companies that received funds.

When debating its Covid-19 relief for companies, United States politicians had attempted to limit pay increases for top executives at companies that tapped relief funds.

"The problem with government grants is that they are a blunt tool," said TSMP Law Corporation joint managing partner Stefanie Yuen Thio.

"When Covid first struck and our nation had to go into a full circuit-breaker apocalypse, I think all businesses appreciated the grants. For many companies, they were a lifeline. But I think it should not be calculated in the profits of a company and certainly not for determining bonuses," she said, adding that the law firm had put its Jobs Support Scheme (JSS) grants aside in a separate account.

Nevertheless, Yuen Thio said, it is hard to be "too prescriptive" about how the government grants should be applied.

"The grants were given as an emergency financial response and were necessary then. However, as we start to come out of Covid and the temporary relief granted under the Covid-19 Temporary Measures Act are rolled back, we need to take a fresh look at the terrain and decide what assistance will be more effective," she said. "I think jobs support schemes targeted at employers only are too blunt an instrument to tackle the next phase of our response to the economic effects of Covid."

Prof Mak agrees that it is "very difficult to impose very detailed guidelines" on how government grants should be used.

"Even if the government does (impose these guidelines), how is it going to monitor and enforce?" he said. "But I think companies should be reminded that government grants are meant to help businesses defray exceptional costs, prevent job cuts and losses, and improve worker welfare and safety - not to add to the bonus pot for key executives."

Some S$27.6 billion in JSS grants have been disbursed since the introduction of the scheme at the Unity Budget in February 2020, including payouts totalling over S$900 million from Sep 30 to cover wages from April to July 2021.

On Sep 24, the government announced another S$650 million in support for sectors expected to be significantly affected by restrictions to curb the spread of Covid-19, including wage support of 25 per cent under the JSS from Sep 27 to Oct 24.

The government has provided financial assistance specific to the built environment sector by way of a S$1.4 billion construction support package which is on top of manpower support and legislative relief through the Covid-19 (Temporary Measures) Act.

Tan Ern Ser, associate professor of sociology at the National University of Singapore, is not surprised that Singaporeans are upset that some of these government grants could have ended up enriching top company executives even further.

"Singaporeans do possess a sense of fairness," Prof Tan said. "Fairness means abiding by the principle that all members of a business organisation share the blessing in prosperous years; and, by the same token, they share the burden in lean years.

"There is also an expectation that, in hard times, as evident by the need to receive government support, senior management and shareholders ought to stand in solidarity with lower-level employees by taking a higher pay cut or bonus cut, let alone receive a raise in these benefits," he added.

Market watchers believe that the "sensitive approach" is to exclude net proceeds from government grants from the performance evaluation for the key executives.

Prof Mak cited the positive example of mainboard-listed supermarket operator Sheng Siong Group, which last year gave out generous bonuses to its rank-and-file employees, ranging from about 4.7 months for part-time staff to nearly 16 months for assistant managers and above.

"(Sheng Siong) has consistently taken the approach of sharing the profits more widely across different levels. More companies should emulate such an approach if we are going to get anywhere in improving the 'S' part of ESG (environmental, social and governance)," he said. "Sadly, at the moment, the distribution of rewards is generally largely skewed towards those at the top in most companies."