Business Times August 24/25 1991

CEO salaries in S’pore: do they make sense?

A recent Forbes article noted that the pay given to CEOs in the US didn’t always make good sense: these people were being paid millions even in the face of mediocre results. Peter Lee takes a look at the local situation

THE current system under which some chief executive officers are paid does not make a lot of sense, according to a recent article in Forbes magazine.

“Some people are paid in the tens of millions of dollars, even in the face of mediocre results. This encourages little except cynicism among investors, workers and the general public,” said the article.

If this is the situation in the US, what about Singapore? Are CEO salaries in Singapore just as senseless? There are some similarities, but there are also some differences.

CEO salaries is not an issue in Singapore because little is known about them. But with more companies going public, it may well become an issue.

At present, Singapore CEOs are far behind in their pay cheques compared to their US counterparts as the companies they run are nowhere near the league of the large US companies.

According to Forbes, the typical CEO in the US is in charge of 26,000 employees and accountable for about $9 billion (US$5 billion) of annual sales, for which he was paid $1.6 million (US$932,000) in salary and bonus in 1990.

In Singapore, CEOs of the larger companies are more likely to be in charge of 1,500 employees and accountable for around $500 million in annual sales, for which he is probably being paid around $300,000 in salary and bonus each year.

This typical US company is twice the size of SIA, which is Singapore’s largest company; and about 17 times larger than the typical large Singapore company. Interestingly, while our typical large company is only about one-seventeenth of its US equivalent, our typical CEO’s pay is about one-fifth of his US counterpart’s.

Is there a market rate or job “value” for CEOs? Forbes said no. Its survey of 800 CEOs showed that their pay in 1990 varied a great deal. But a closer examination of the data suggests a different conclusion.

The US data suggests a relationship between the CEOs’ pay and the size of their companies as indicated by the sales turnover. The median CEO pay increased with the sales, but only up to a point. (Although it is far from being a perfect indicator, sales turnover is often used as a rough and ready indicator of company size.)

For sales turnover of between US$300 million and US$5 billion, the median CEO pay increased from about US$300,000 to US$1.25 million. However, for sales turnover above US$5 billion, the median pay remained at US$1.25 million, irrespective of the level of sales turnover.

This suggests that the CEOs of the very largest companies are generally underpaid compared with the CEOs of the smaller companies.

To cite specific examples: the pay of a CEO of a US$5 billion company like Black and Decker was about US$1.3 million, while the CEO of a US$100 billion company like Exxon was paid just US$1.551 million.

The other US$100 billion companies are Ford and General Motors, and their CEOs were paid only US$1.221 million and US$869,000 respectively in 1990. This relationship applies even if other forms of long-term remuneration such as stock options gains are included.

Does this relationship apply in Singapore? Yes, according to several executive search consultants, but to a smaller and lesser extent. Previous surveys conducted by this writer also confirm that this is so.

Though exact figures are hard to obtain, published as well as unofficial figures from several executive search firms are available. And these indicate that the median CEO pay in Singapore, in terms of salary and bonus, increases from about $150,000 for those in charge of medium-sized companies with annual sales turnover of around $20 million, to about $350,000 for those in charge of larger companies with sales turnover of over $700 million.

The median pay of CEOs of the very large companies in Singapore is not very much more than $350,000.

Why do CEO salaries in both US and Singapore not increase with increasing company sales turnover after a certain level? Arguably, because there are only 24 hours in a day.

No matter how large the company is, a CEO can do only so much. Or, as one executive search consultant puts it: above a certain level, CEOs are not motivated by more money, and it is really the challenge, the chance to accomplish something big or the satisfying company culture that are the true motivating factors. Whatever the reason, it is ultimately the market that determines pay levels.

How are CEO salaries set? There is no fixed system. In the US, levels are usually set by the board of directors based on recommendations from a compensation sub-commitee composed of non-executive directors, or from recommendations of outside specialist consultants.

Much depends on the circumstances of the company and of the individual. For instance, if the CEO was recently promoted from within the company, his pay would have been his previous package plus a suitable promotion increment. If the CEO was recruited from another company, his pay would have been scaled up from the package at his previous company.

In some cases, the pay may be a result of special circumstances such as the specially difficult nature of the start-up, turn-around, or rescue assignment; or the special status or track record of the CEO himself. In most of these cases, an appropriate market adjustment will also be made to ensure the pay is competitive within the industry sector.

In Singapore, the so-called system (or rather lack of system) by which CEO salaries are set is actually quite similar to that in the US. What is different here, perhaps, is that because top civil servant salaries are regularly adjusted to reflect market levels, these salaries might also be used as a guideline.

How about performance? To what extent is CEO pay related to performance? The Forbes article implied there was hardly any relationship but this may not be entirely correct. This is because more than 25 per cent of the CEOs had their pay cut in 1990, presumably due to reduced company performance and hence reduced bonuses.

However, with performance, it is often difficult to analyse the exact relationship with current pay. There are two reasons why this is so.

One is that only part of the total salary consists of performance bonuses. The fixed salary portion, which often makes up the larger portion of the total salary, is paid regardless of performance. This is standard for all levels of executive pay.

The other reason is the time lag between the setting of the pay plan and the time it takes to achieve the performance target, be it the profit or share price improvement.

For example, what might happen is this: at the beginning of the first year, a higher fixed salary is negotiated and set for the CEO. But the results do not come in until, say, the second year. The bonuses, however, are only paid during the third year, by the end of which the CEO’s performance may start to decline.

Another example of this time lag distortion is when the CEO is newly appointed with a relatively modest salary but, during his first year on the job, the company turns in exceptional results due mainly to the groundwork laid by his predecessor or to windfall factors.

In Singapore, the performance bonus is less widely used. And where they are, they usually make up for a smaller portion of the CEO’s total salary. So the relationship between CEO pay and performance is even more difficult to analyse.

What are the implications arising out of the similarities and differences between the CEO pay levels in Singapore and US?

CEOs in Singapore may now be paid significantly less than CEOs in the US, but their packages are going to increase because Singapore’s continued economic growth will mean high demand for top management talent. CEO salaries here are thus increasing at least as fast as lower executive salaries. For the last few years, the salaries of lower level executives have been increasing at around 8 to 9 per cent per year.

With the move to flexi-wages, use of performance bonuses will become more widespread. And with more companies going public, it is only a matter of time before CEO salaries become an issue in Singapore too. If they wish to avoid adverse publicity, CEOs and companies should be able to account for high salary levels to shareholders.

The writer is a remuneration consultant and co-founder of RDS,
a non-profit making company specialising in salary surveys.