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Formulate CEO Compensation
to Drive Productivity

Take due care when formulating your compensation system. Click here for information on Compensation Strategy.

Your organization cannot pay an unreasonably high salary and offer a string of benefits to the CEO. However, offering a "poor man's compensation package" is as bad. As stated, aim for a balanced CEO compensation package.

For example, there are instances of CEOs who continue being paid high salary although they are not doing a good job as corporate heads. Clearly there is no contractual term specifying salary reduction for poor performance or in the worst case scenario, termination of service.

CEOs are concerned about the quantum and the components of their pay, among many other matters.

But CEOs are not the only party concerned with this important but difficult and sensitive matter.

Compensation is very high in the organization's agenda. The organization's Boards of Directors have the final say in this important matter.

The question is whether they are making the right decision on CEO compensation.

There are others who closely watch CEOs pay. Loop-sided CEO compensation usually cannot escape criticisms from compensation experts.
(Loop-sided: not balanced; biased towards one party)

Governments sometimes intervene indirectly to force organizations to put right poorly-designed CEOs pay package.

Other stakeholders are also interested in matters of compensation. They include all employees, financiers, and clients.

Criticisms alone will not resolve the issue. Organizations may decide that the criticisms are a nuisance and unimportant.

However, right-minded organizations will take positive actions to put things right.

Likewise, right-minded CEOs are well aware that they were engaged for reasons that are important to the organizations' continued existence.

Main Responsibility of CEOs
CEOs' compensation does not fail to attract criticisms for many reasons.

CEOs are the highest paid employees playing the most important HR strategic business partner role. This is why their main responsibility is to increase organizations' shareholders' value as well as to look after the interests of other stakeholders.

The high pay of CEOs is aimed at motivating them to perform to the highest possible level of the highest standard.

Interests of Stakeholders
Stakeholders include both internal and external customers, shareholders, as well as the government and banks.

The stakeholders in public companies differ to those in private companies especially shareholders in the former case who exercise control over such companies.

"Value" can refer to the value of shares or some other returns on the investments made by people in the organization.

Individuals look forward to dividends on their investments. Banks expects to earn through the interests on the money they had loaned to businesses. Owners look to the appreciation in the overall value of their companies.

Whether it is a company financed by equity financing, debts, or investment by private individuals, "increasing value" is an effective measure of CEOs' performance and whether they can retain their positions.

To put it bluntly, failure to perform means heads must roll.

Poorly-Designed CEO Compensation Package
Instances of poorly-designed pay package continue to occur.

Among some of the interesting things reported regarding the connection of CEOs' pay to increasing shareholders' value include the following.

• There is evidence that some CEOs' pay is related to companies' performance. (Article by Kevin J. Sigler, Joseph P. Haley, 1995)
• CEOs' compensation changed very little during economic recession. And "that the link between CEO pay and firm performance remains very weak." There was a great decline in shareholder value. (The Corporate Library Survey 2008)
• CEOs can easily survive during recession. (Rick Newman, 2009)
Click here for more information on the reason(s) why.
• Possible connection between CEOs' pay, performance and nation's economic growth. (As reported in www.chiefexecutive.net, 1999)
• CEOs' bonus increases correlate to companies overall performance. (Mercer Annual Study of CEO Compensation, July 1 2005)
Click here for more info...
• Setting the maximum range of CEOs' pay will help create responsible corporations. (David Moberg, March 23, 2009) Click here for more info

Components of CEOs Compensation
These may consist of:

1. Base Pay
2. Bonus, Contractual or Performance-Based
3. Benefits such as Medical Insurance, Vacation Leave
4. Incentives such as Share or Stock Options
5. Severance Pay for termination "without cause"
6. Golden Handshake which is similar to severance pay
7. Other Termination Benefits such as continued use of company's facilities, for example, use of company's swimming pool for a specified period of time

It was reported that in one CEO appointment, one of the termination benefits was that the company shall engage the CEO as a consultant. This and some of the items above, for example, the continued use of the swimming pool, are the items criticized by many people.

If your organization binds itself to employ the ex-CEO as a consultant, you may end up with someone who had performed unsatisfactorily as a CEO.

You may not easily get out of this situation if the CEO contract had not clearly stated the conditions for engaging the CEO as a consultant.

Designing an Effective CEO Compensation
Your CEO determines whether the organization will succeed or fail.

There are other players but he plays the most important role being the corporate leader.

The board of directors need to adopt an effective compensation model not only for the CEO but for the entire workforce.

HR professionals can to provide the necessary assistance in its design.


CEO's Performance Measure
Shareholders' value shall form the performance measure for CEOs especially of public-listed companies. This is measured by "Return on Equity," "Profit Before Tax," "Profit After Tax and Special Items," and other financial performance measures. It is usually stated as:

Return on Equity = Net Income/Shareholder's Equity

In other cases, the main key performance indicator (KPI) is Return on Investment. This is a measure of cash.

Satisfactory performance which can mean average performance may not satisfy the criteria. CEOs need to demonstrate ability to generate revenue beyond the "break-even point."

Anything lower should invite scrutiny that may involve the possibility of termination. The employment contract must clearly state these to prevent any form of misunderstanding.

Review of CEO Compensation
You need to conduct a regular compensation review. You may want to make an overall review once in three or five years.

It is a good idea to review CEO compensation each year at the end of company's financial year. Have this stated in the employment contract.




If you have any inquiry relating to compensation, Email Me
or call 6088-717189 (Office Hours) / 6019 - 5367989 (Mobile)

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