By Yang Huiwen

ONLY one in five big companies in Singapore offers some form of long-term equity compensation to their top executives, a new study has found.

This finding has prompted concerns among remuneration experts that an over-reliance on short-term incentives, such as bonuses, may not motivate executives to act in the longer-term interests of the companies and their shareholders.

The results of the study, based on a review by consultancy Freshwater Advisers, contradicts a widely held belief that corporate compensation policies are increasingly moving towards long-term incentives.

'There has been a lot of talk on long-term compensation, but not many companies are adopting it and that comes as a surprise to us,' Mr Kwong Hui Hen, research director at Freshwater, told The Straits Times.

He said there needs to be more of a balance between short- and long-term compensation, to make sure that an executive's remuneration rewards long-term performance, instead of just emphasising short-term incentives.

Short-term incentives refer to performance-related income or annual bonuses and are typically paid in cash.

Long-term incentives typically measure directors' performance over a two- to three-year period. They are paid in the form of equity, such as stock options.

It is important for companies to include such equity-related compensation as this encourages directors to care more about sustained long-term growth of the company, said Mr Kwong.

This helps to mitigate against excessive risk taking. It also helps to ensure that the long-term interests of shareholders, such as creating shareholder value and dividend payments, are taken care of - and not just those of its top executives.

Freshwater Advisers, which advises on a range of compensation-related issues, conducted a study of 129 of the biggest companies here with at least $100 million in market value as at April. It analysed their executive compensation structure, using details taken from annual reports.

Of the 129 companies, only 26 offered long-term equity compensation. The local study's findings mirror those of a study in the United States, conducted by independent compensation consultant James F. Reda & Assoc earlier this year.

Instead of seeing a greater reliance on long-term incentives, the US report found that changes in these companies' plans made short-term incentive pay a bigger part of the compensation pie.

Aspects of executive compensation practices came under fire amid the financial turmoil, when senior executives in the US and Europe were awarded hefty bonuses even as their firms were on the brink of collapse and needed bailing out.

Bonuses of bank executives in the US and Britain were based on short-term speculative gains instead of sustainable profits. This encouraged them to take on excessive risks, such as the trading of certain securities, which triggered the financial collapse.

There was also public fury over the generous severance packages for executives who resigned for poor performance.

Mr Jon Robinson, managing director of Freshwater Advisers, said while compensation practices in Singapore 'are more prudent compared to those in the US', it is time for companies 'to look again at the way they structure pay, particularly the way performance is measured while recognising the risks involved'.

'In the past, companies have been pursuing pay-for-performance philosophy. In the new era, companies will have to consider first, the time horizon over which performance ought to be measured and second, what kind of risks are associated with the performance,' he said.

The review also showed that one in four companies paid their top executive director a bonus of more than twice his base salary - which works out to more than 24 months of bonus.

'We are seeing investors and regulators placing an increased emphasis on risk and with this comes concerns that the ratio of bonus to base pay should not be extreme,' said Mr Robinson.

A bonus greater than five times base pay is a rough indicator that risk and reward might be 'out of kilter'.

Eight firms, or about 6 per cent of those covered under the review, paid bonuses of more than five times base pay - which works out to at least 60 months of bonus. One firm, Yanlord Land, paid a bonus of 13 times base salary.

According to the firm's annual report, chairman and chief executive Zhong Sheng Jian earned between $3.5 million and $3.75 million, of which basic salary made up just 7 per cent of total takings.

This article was first published in The Straits Times.