Long-term incentives in vogue for executives

Performance-based long-term incentive packages like restricted-share and performance-based cash and share plans have become more popular in Asia, especially among multinational companies, while stock options have lost their dominant status, say senior executives at global consultancy Towers Watson.
The Asia Incentive Design Survey conducted by Towers Watson late last year revealed that stock options no longer dominated the long-term executive pay schemes used in any of the 10 markets covered in the study – China, Hong Kong, India, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea and Taiwan.
Thailand was not included in this survey as the level of interest of Thai companies on long-term incentive (LTI) pay programmes, excluding stock options, was quite low, said Pichpajee Saichuae, managing director of Towers Watson (Thailand).
Douglas Friske, Towers Watson’s global executive compensation practice leader, said executive pay packages normally comprised three components: base salary, generally geared up to cover the executive’s cost of living; bonus for driving short-term results; and LTI for driving long-term performance, as well as retaining the executives and aligning their behaviour with shareholders’ objectives. The mixtures of these three pay components are different in each country depending on factors such as culture and ownership structure of the companies.
Yong Fei Tan, Towers Watson’s senior consultant on executive compensation for Southeast Asia, said not many Thai companies had adopted non-stock-option LTI and among those that have used it, Towers Watson has found some cases of LTI contributing only 5 per cent of the total executive pay packages, while in the region, LTI accounted for 32 per cent of the total pay mix.
Nonetheless, given the changes in line with International Financial Reporting Standards Phase 2 (IFRS 2), Towers Watson foresees a significant change in the LTI landscape in Thailand, he said. This is because the new accounting standard will oblige firms to count employee stock options as their expenses.
Stock Exchange of Thailand authorities have introduced IFRS 2 for the 50 largest listed companies (SET 50) to apply on a voluntary basis, and no date has been announced yet for compulsory implementation. Nevertheless, based on experiences in other countries, Towers Watson expects the new accounting standard to come into force in Thailand within three to five years, he said.
The Towers Watson executives were speaking at an exclusive interview with The Nation held on the sidelines of the firm’s regional meeting of its executive compensation practices leaders in Bangkok recently.
Tan said about 100 companies listed on the SET had applied LTI but they were predominantly stock options. But as shown in the Towers Watson survey, the prevalence of stock options has become less common elsewhere in the Asia-Pacific region, replaced by restricted share and performance-based share and cash plans. Pichpajee said restricted share plans were good for talent retention since they require the executives who receive the shares to stay with the firm for a certain period before they can sell them. Besides time conditions, some restricted share plans impose performance-based conditions such as sales growth.
Friske said a company’s ownership structure could determine the type of restricted share plan. Some companies may opt for a performance-based cash plan, which may also be perceived as a long-term bonus.
“Performance-based long-term incentive plans are good for aligning executive paycheques to the shareholders’ values giving them a long-term rather than short-term perspective,” he said.
Tan said that for family-owned businesses that are reluctant to give up their stakes to non-family members, he would ask them how much they are willing to dilute their ownership, and if they don’t want that to happen at all, he would suggest they consider performance-based cash plans, which may or may not be linked to the stock prices. In cases where the owners agree to share a bit of their ownership in the firm with their staff, he would suggest they consider other types of LTI vehicles.
Friske said performance-based LTI plans helped companies align their specific objectives to the performance of their executives whether the key performance indicators are stock prices, sales growth or other focuses of the company.
“It’s a way to communicate and reinforce the company’s objectives, your focus, to your executives. I think those firms that are successful are able to motivate their managers to go for the company’s objectives.
“On the other hand, if you don’t design it [a pay package] right, people are incentivised wrongly, then it can be a problem. For example, if the pay scheme incentivised managers to focus on sales growth, they might sell the products at a loss,” he said.
Tan said Towers Watson sold its idea of performance-based LTI plans to state-owned and family-owned companies by telling them that while their ownership in the firm is diluted by, say, 10 per cent, their earnings will be ensured to grow by more than 10 per cent, meaning the programme is more than self-funding.
Key findings from the Asia Incentive Design Survey 2011 can be summed up as the following:
-Plan designs are increasingly tied to company performance
-Multiple performance metrics are commonly used in annual incentive plans with greater usage of non-financial metrics (eg, strategic objectives and customer satisfaction) than other regions of the world.
-Desired company performance can lead to high upsides for annual incentive pay-out – the most common maximum pay-out is 200 per cent of target, with some plans having higher maximums or no cap at all (especially plans used by financial-services companies).
-Performance-based long-term incentive plans have become more popular in Asia, especially for multinational companies parented outside of Asia. As a result, stock options are no longer the dominant type of vehicle in any surveyed market.
-Sales/revenue is the most popular metric in annual incentive plans across the region, followed by cash flow (including earnings before interest and taxes and EBIT including depreciation and amortisation) and profit-based measures. Total shareholder return is the most popular metric in long-term incentive plan in most surveyed markets.
-Discretion plays an important role in further aligning pay and performance
-Asia-parented companies apply more discretion in assessing annual performance outcomes and determining individual bonus allocation than Western multinational corporations.
-The pattern of annual incentive pay-out levels in the past five years generally followed global and regional economic conditions over the period – the prevalence of below-target pay-outs increased from 2006 to 2008 and then declined since. For 2010, 42 per cent of annual incentive plans paid above target and 27 per cent paid at target, while only 31 per cent paid below target.
-Long-term incentive practices continue to evolve
-Granting of long-term incentive awards has become more frequent – most surveyed plans now grant annually, especially performance-based plans.
-Some companies are rethinking their long-term incentive-plan designs. In particular, Asia-parented companies expect more changes than Western multinational corporations – those changes are likely to be related to vehicle type/mix, performance conditions, eligibility and grant size.

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