Australia Post chief executive Christine Holgate recently joined the ranks of disgraced corporate executives who have been involved in pay scandals, including former Nissan executives Carlos Ghosn and Hiroto Saikawa.

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In these times, when people are struggling amidst a pandemic-driven economic downturn, CEOs’ salaries seem more divorced from reality than ever. Massive compensation packages, contrasted with job losses and wage cuts, underscore the inequalities between the C-suite and the rest of the company, and further deepen public mistrust in corporate organisations.

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The individual investor – either as a shareholder of a public-listed company (PLC), or a contributor to a pension fund or unit trust that has invested in a PLC – has two concerns related to executive compensation: how it affects the performance of their shares, and what is their role in oversight. 

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In the last 10 years, many global pension funds have adopted rules concerning shareholder approval of executive compensation.

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The 2007-2010 financial crisis was the catalyst for the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US. This Act serves as the foundation for how pension funds would vote and how often they would vote on the executive’s compensation.

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Using this as a backdrop, further due diligence has been carried out to look at how some of the local companies in Malaysia have fared with regard to this issue, as well as how shareholders can scrutinise the compensation of top executives.

                  

Arguably, top executives should be well-compensated to ensure that they do not lean towards doing side deals that benefit themselves over the institution. But there are guidelines to determine how the compensation package is arrived at. 

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For any astute investor, looking at the pay disclosure for the top executive cannot be limited to looking at the base salary alone. There are many other payments in the executive’s total package that have to be included in the assessment.

The base package of the top executive can be a multiple of the median salary of the entire staff headcount. There are, of course, variations to this. Some companies do not include unionised staff compensation, while others include consultants as part of the compensation paid out. Some companies use industry competitors locally and from within the region, or even globally, as a benchmark.

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However, one key factor that needs to be evaluated when looking at top executive compensation is how the company is actually doing. So while it is all very well to pay a fat salary plus benefits to the top executive, smart money will start to look at the KPIs set for that top executive to actually justify earning that supernormal bonus or rewards package – which, incidentally, could work out to be almost seven times their annual salary. (For example, if the top executive earns RM5 million a year, that same executive can earn up to RM35 million in bonus payments for that year.)

The key to analysing this is to ask, “How did that top executive earn up to seven times his annual salary?” The KPI or the performance scorecard should be the first place you go to, in order to analyse if this top executive is actually worth his/her salt. 

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Take the example of the top executive of a high-profile PLC in Malaysia. An initial, rough calculation of his salary and declared bonuses showed that his salary may have eased off slightly over the last five years by approximately RM3 million, but his bonus payout remained between nine and seven times his salary each year. So, if this executive was earning an average of RM7 million per year, he would still be taking home a significant bonus of RM49 million in a poor bonus paying year, and up to RM63 million in a good year.

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It is worth noting that, in one particular year, when the announced bonus paid out was reduced for this top executive, the pension plan contribution for this same top executive went up by a further RM7 million in the same year.

Just from looking at the remuneration package of this top executive, you would assume that this company is growing by leaps and bounds – but this is an erroneous assumption.

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The revenue numbers have been consistently coming off in the five-year period. From the first year to the fifth year, the revenue numbers have fallen by half. The profitability of the company also shows that the net profit margins are ridiculously low; in two out of the last five years, the company has actually been loss-making. 

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By now, you can probably see where this is going: towards an eight-figure payout. 

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The other aspect of this top executive’s compensation that needs to be explored is the annual claims and expenses. What does this include and how much would an estimate of the claimable expenses come up to? In many of these top executives’ packages, the claims can be quite significant as they include business travel (in first-class, or through privately-chartered aircraft), 5-star accommodation, pension fund contribution rates, personal security, as well as business-related meals and entertainment.  

                                                

In the case of the earlier top executive, the annual claims seem to be in the region of a further RM5 million. This means that there is an annual salary of RM7 million, with claimed expenses that can almost reach RM5 million. The final straw is the air travel expenses, which comes up to a further RM3.8 million a year (clearly, no expenses were spared for this top executive). From just this basic review of the available data, the conclusion is that the total amount paid to this top executive is now closer to RM16.8 million per annum!

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How can shareholders put a stop to this? First, they need to demand for explanations at the company’s annual general meeting after reviewing the annual report. 

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The second course of action is to question the pension funds (assuming you are a pension fund investor), to demand an explanation as to how the remuneration can be so obscenely lavish, when the company’s revenue and the returns to the shareholders are so dismal. 

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Your pension fund should be able to explain to its investors why this lavish executive compensation has been allowed and what it is based on. The pension fund should also reveal to investors whether the company has a clawback clause that can be executed when the company doesn’t do well.

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In many other institutions where top executives are remunerated very well, clawback clauses are a norm, in order to safeguard the institution against abuses due to executive compensation. The clawback clause can require that the top executives return their bonuses, should the company perform poorly in the years following their bonus payment.

Clawback clauses have been in the limelight again, with the recent news that Goldman Sachs Group Inc is clawing back US$174 million in executive compensation in order to pay US$2.9 billion over its role in Malaysia’s 1MDB corruption scandal.

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As investors of a PLC, or as pension fund holders, your hard-earned dollars are paying for the lavish lifestyles of these underperforming top executives. The approach to empower yourself is to ask for answers to these questions on executives' salaries, and to demand for the inclusion of clawback clauses.