Singapore - The current financial crisis has increased the spotlight on the substantial executive compensation granted to CEOs. Yet restrictions on executive pay might just handicap companies' ability to attract and retain talent.
The recent bailout by the US government has restricted the executive compensation given to CEOs of troubled financial firms, including limiting corporate tax deductibles to S$737,000 and eliminating large severance pay cheques, otherwise known as "golden parachutes". Yet taking away the very incentives that companies in financial crisis need most to attract and retain top talent could cause more harm than help, says Don Lindner, compensation practice leader for WorldatWork, a global human resources association. "When you arbitrarily cap anything, it doesn't work."
Lindner further warns that capping the compensation and benefits now would lead to companies finding another way to maintain their competitive total rewards structure, which could have consequences. He cites the creation of mega stock grants that led to huge multimillion-dollar payouts for CEOs eight years ago as a classic example of how US companies tried to skip around the salary cap issue previously.
Instead, Lindner believes deferring contingency payments such as bonuses or large exercise in stock options for a period of two years would help ensure CEOs earn their keep "the legitimate way" and not take all the money and leave. "That way, you don't take away the tools but you prevent abuse. Shareholders benefit, companies benefit. It doesn't prohibit companies from hiring the best people."
When asked whether companies in Asia Pacific should adopt similar compliances on executive compensation to prevent financial fallout, Lindner says it is unnecessary, as there are no payout problems in Asia. However, he adds that it might make sense for companies here to implement the deferred payment scheme to help shareholders avoid future detrimental situations.
Other than enforcing compulsory disclosure rules on compensation and benefits packages, Lindner says inserting performance-based incentives and stock options would also reduce the massive payoffs given to CEOs. "That would add some sanity to executive compensation."
