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Wednesday, October 28, 2009

Esos, a way to reward

To me ESOS is a good way to reward, what do you think?

  • WITH the continued brouhaha over big bonuses for corporate head honchos globally, it is more pressing than ever for institutional investors to ensure that their interests are well aligned with the way the executives are paid or compensated.

    That being the case, such investors must adopt a broader view for remuneration that covers proper alignment, good corporate governance and incentives to pursue optimal capital allocation.
    To this end, a leading investor network, which represents assets worth about US$9.5 trillion, has adopted guidelines that reflect the views of long-term investors worldwide on all major aspects of remuneration, including employee option schemes.

    Well-designed remuneration programmes have a noticeable positive impact on the long-term performance of a company. Conversely, poorly designed or poorly executed executive payment plans can have a serious negative impact on shareowner value.

    Such critical impact, positive or otherwise, lies in the hands of each company’s board of directors, which is responsible for, among other things, deciding how much executives should be paid, disclosing clearly and fully the details of such programmes and explaining to shareowners the how’s and whys of its company’s overall remuneration policy.

    In so doing, boards of companies should explain fully the relationship between such remuneration programmes and performance measures, which should include specific performance targets or hurdles. The key point here is that the ways in which the boards go about doing so should be independent, transparent and fair.

    Drilling down further into this, a plan design for good compensation programmes should cover the major elements (cash and other short-term incentives, equity and other long-term incentives, as well as post-employment and other benefits) and carefully construct it to suit the peculiar needs of each company. For example, many organisations today believe that the use of benchmarks or peer analysis to set compensation levels should be kept to a minimum. There is a similar belief that companies should restrict the use of employment contracts, severance agreements as well as change in control agreements unless the overall remuneration policy justifies it.

    On our recent visits to some companies around Malaysia, we had extensive discussions about their overall remuneration plans and employee share option schemes (Esos) in recent years.

    In principle, we welcome their performance-based incentives, which are relatively new to corporate Malaysia.

    To our minds, companies need to consider two main issues about Esos.
    First, we strongly believe that Esos should be awarded in the long-term and be linked to appropriate performance hurdles because doing this will help align effectively the interests of all corporate stakeholders, be they managers, shareholders or investors and drive up shareholder value in the long term.

    Second, given that Esos dilutes the value of existing shareholders, it is imperative that a company’s board be transparent through appropriate disclosure to them.

    With these issues in mind, we believe that the current Listing Requirements need to strengthen the existing Esos framework so that companies will be made more accountable to shareholders. In particular, we would like to raise the following issues:

    ● Pricing and terms.
    We note that the current Listing Requirements allow the setting of an exercise price for options at a maximum discount of 10% to a five-day weighted average market price when the share options are offered to employees. We are skeptical about such discounts because they weaken the link between reward and performance, ergo, the alignment of interests of management and shareholders. This is especially true if there are no additional performance hurdles. We would also welcome further clarification on when and how these options may be exercised. If options can be exercised at a discounted price when they are offered, such options should not be allowed to exercise for at least a couple of years.

    ● Improving impartiality and transparency.
    We understand that the board of directors may determine the eligibility of employees for, and allocation criteria of,Esos under the current Listing Requirements. While all on the board should approve and take responsibility for any Esos plan, to ensure greater impartiality, we would encourage the boards to delegate deliberations for design and administration of Esos to a specialised committee.

    Also, to avoid any conflicts of interest, we believe that anyone who is to benefit from an Esos should not take part in making decisions which may affect how much he or she is to be paid. For fullest transparency, we welcome details of such Esos discussions in the annual reports of companies.

    ● Deepening disclosure to shareholders
    Besides the above suggestions, we believe that disclosures on Esos can be enhanced further by, among others, the regulator introducing a disclosure requirement in which the total share options granted to an employee should represent a significant percentage (say, more than 5%) of the total amount of available share options. Shareholders should be notified of such shareholdings when they vote on an Esos as well as in company annual reports.

    All told, a company’s remuneration policy, and ensuing programme(s), is a crucial component of its ability to recruit and retain the talents needed to ensure its success and sustainability. Thus it is critical for it to balance well its timing as well as appropriate performance measures. To do so, a company’s board should seek and maintain constructive dialogue with its shareholders, including their views on the ways in which company employees are being motivated and rewarded, including its Esos, if any.


uLi.佑莉 said... long la this post. Can summarize abit ar? :p Anyway, we have no esos now looo...

vialentino said...

uli: haha...i copy and paste one la...yaloh...we got no cham ler..

kenwooi said...

dont copy paste la.. summarize and tell us the REAL THING! =P

CH Voon said...

yalor too long... put in point form

vialentino said...

okok...ESOS is good for the staff whoever got money and lots of money! it is better than your year end and contractual bonus ....

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