Published January 19, 2009

How much did you say the CEO is making?

By CHEW XIANG

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FOR many rank-and-file employees, it will be comforting - ahead of what is shaping up to be an empty bonus season - to reflect that, at least, their bosses will have it worse. That's because bosses generally have more variable pay in the form of profit-linked bonuses or share grants, which means that in bad times they take the bigger hit.

But how much are the bosses actually paid? Is it the amount the company discloses in its annual report? Is it how much they get, in cash and bonuses plus the market value of performance shares, options and other benefits? Or is it how much the company actually has to pay out?

The differences can be substantial, according to an analysis by BT. For instance, according to the Singapore Exchange (SGX) annual report, CEO Hsieh Fu Hua was paid $7.18 million in FY2008. But that year, Mr Hsieh (going by one measure) actually received $8.41 million - $1.23 million more than indicated. For FY2007, he was paid $6.38 million but may actually have got $8.56 million, or $2.18 million more.

The difference lies in how 660,000 shares he was given under the company's FY2006 performance share plan are valued.

The shares were vested over two years - half the allotment each time in July 2007 and July 2008 - and based on the company's return on equity from 2005 to 2007. Under accounting rules (principally FRS 102, which came into effect four years ago), these shares have to be expensed over the vesting period, and valued at their fair value at date of grant. For SGX in this case, that is $3.13 for those shares vesting in 2008, and $3.26 for the shares vesting in 2007 (against a market price of around $3.50 at the time of grant). But when the shares were actually given to Mr Hsieh, at the end of June in 2007 and 2008, the market price was $9.80 and $6.91 respectively.

So valuing Mr Hsieh's share payments at market price when he received them gives a higher figure than that disclosed in the annual report. And the market value is relevant because although (according to the fine print) SGX executives have to keep half the shares for a year, the other half can be sold immediately. (Mr Hsieh, to his credit, has not done so, and has even donated a substantial portion to charity.)

There's another discrepancy. Those 660,000 shares given to Mr Hsieh have to be bought from the open market. Over the two years, the average price of SGX shares was $8.11, according to Bloomberg data. This means the company may have paid up to $5.35 million in cash to buy those shares from the market - against the total sum of $2.11 million, as reflected in the annual reports. While the final cash outlay is likely to be less than $5.35 million (since SGX could and did time its purchases), the actual figure still should not be anything approaching the fair values used.

Having said that, the difference between cash outlay and booked expenses is charged straight to equity, so there is nothing sinister in the discrepancies. These result from the extraordinary run-up in SGX's share price since 2005, when they traded at around $1.65.

But in other cases, the fair value of the shares could differ markedly from the market price. SingTel used Monte Carlo valuation to arrive at a fair value of $1.41 and $1.44 per share for two share award schemes for top executives in May 2005. The market price then was around $2.50 - about 75 per cent higher. The difference was due to the market vesting conditions, such as total shareholder return, that the company uses to judge executive performance.

By the time the shares vested, in June 2008, SingTel was trading at over $3.70. CEO Chua Sock Koong, previously CEO (International) and group CFO, received up to $1.97 million - $937,904 of which may have been settled in cash at $3.73 a share, the market price on the date the shares were vested, and which is over 2.5 times the fair value (the share-based payment should rightly be thought of as reward for three years of performance, and split accordingly).

There are two issues here. First, should executive pay valued at market price be disclosed as well? Pay for performance means that actual pay - that is, the market value of what executives actually get when they get it - matters too. Shareholders shouldn't have to parse annual reports and regulatory filings for the information, and possibly get it wrong. Second, fair values matter too. Share grants are meant to partly replace cash bonuses and, in theory, help create better alignment between managers and shareholders. But if fair values are artificially depressed - say, if gloomier assumptions are used in the calculations - then the executive ends up with more shares and more pay than he or she should. And it's very hard to tell when this happens.

Both SGX and SingTel are what one senior accountant calls 'first in class' in terms of disclosure and corporate governance, so no worries there. But others with weaker standards might find loopholes.