Creating Effective Salary Packages for CEOs

CEOs and key top management staff are enjoying higher total salary packages as more organisations move towards performance-linked incentives and long-term rewards for the compensation mix, said management consulting firm Hay Group Malaysia.

"The era of fixed salaries for firms operating in Malaysia is waning. Bonuses too are seen as incentives which are too short-term focused, whereas longer term rewards are better at driving sustainable value creation for the organisation," said its director Shahrizal Suffian.

He added that CEO total salary benchmarks are not always linked to the organisation's profitability.

"Market reach, customer service levels and other business aims have become more important as firms are embracing a more holistic outlook, recognising profits are positive outcomes when key performance targets are achieved," he said.

Hay Group Malaysia, which has been involved in crafting CEO total remuneration packages for several major organisations have discovered that stock options are not always seen as attractive perks any more.

According to Hay Group Malaysia, the adoption of the International Financial Reporting Standards (IFRS) since 2006 has resulted in stock options becoming an expense item in the reporting of earnings, with an impact on revenue and profit when previously it was seen as "free" rewards that cost the company nothing.

Shahrizal said many companies had stock options in the past but the simplistic formula does not necessarily spur the CEO to drive growth while long-term incentives that are customised to business strategies and takes into account the firm's culture and operating nuances have produced far better results.

How do you craft long-term incentives to spur a CEO to grow the company? He suggested sophisticated profit-sharing models with features like hurdle rates and tiering of profits to trigger rewards.

 He said a retention mechanism should also be included, allowing the firm to better manage its cash flow for example "bonus banking" where CEOs don't get the rewards unless the company's targets are achieved and continuous growth of those targets are also maintained over a set number of years.
"For instance, if the CEO has achieved the targets in the previous five years, the sixth-year bonus can be huge. Conversely, the 'banked bonuses' will be lost if subsequent year targets are unmet," he said.

Shahrizal said a long-term incentive is especially useful for firms seeking to turn around operations and reduce losses as they would otherwise be unable to offer enough to attract top talents. He added that such a strategy would work if the CEO is able to institute the right team behaviour within the firm.

Source: theSUNdaily 05-02-2014

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