Thursday, January 21, 2010

Management compensation

Needless to say, if the management team is paying themselves too well, pls avoid the company. Most annual reports of Singapore co.s these days have a section on management payout. I make it a point to find out how much they are paid.

Just some rough no.s (since I can’t really remember all the figures), the CEO pay package is usually about $1mn for a few hundred million revenue firm. For smaller co.s, it is about $500k or so. Of course, as we all know, the record is a whopping S$20mn.

What is a good sum to pay a CEO? And how to actually determine the formula for the payout? Well I don’t have a good answer, but what I do think is wrong is to base it off revenue. Bcos a firm could have high revenue but zero profits to shareholders. It is also wrong for it to be mechanical, like based on formulas. So maybe a basic package and then bonus to be based off a comination of factors like net profit growth, impact of past decisions and qualitative appraisal by stakeholders of the firm.

Well there is also the social pay scale to consider, in our crazy world where a 23 yr old analyst could be paid S$100k a year, surely we cannot expect CEOs to be paid like S$150k a year right? So actually there is a floor for CEO’s pay. Since senior managers in big firms get around $200-300k so it is not unusual for CEOs to be getting around $500k at least.

Most of the time, when reading the annual reports, you won’t find anything strange until it gets out in the news. Usually the annual report just says that top management is being paid in a range of S$1-5mn, which is reasonable, considering what we have discussed.

Strange things happen once in a while and astute investors’ warning bells should sound and put companies that pay their CEOs or top management too well on the blacklist.

The infamous case of Sing Power comes into mind. I cannot recall the whole story but apparently the compensation package for the top management exceeded the net profits of the firm or something. This was bcos is was based on some arcane formulation and the management argued that it was ok. My foot!

Noble group made the news paying 11 directors $30+mn in 2008. Not sure if this is a lot or not. Net profit was a record $500mn or so. So maybe it’s reasonable. After all, only 5% of net profits right? But I checked out their dividend payment – it was also $30+mn. Hmmm...

Of course we always have our favourite CEO who was paid $20mn – highest paid CEO ever in the history of Singapore in a year when his firm profits was down 50%. Again the formula excuse was used to justify this absurdity.

The lowest paid CEO in a Fortune 500 firm, by the way, is our favourite hero from Omaha. He pays himself US$100k annually.