SHOULD company bosses whose shares have performed worse than the broad market have their pay docked because of poor performance?

AGM season is upon us and rather than attending these meetings perfunctorily or simply to savour the gastronomic freebies on offer as is usually the case, shareholders should consider raising some of the issues that govern top management pay, especially since paying-for-performance is widely accepted as the best basis for remuneration and so far this year, there really hasn't been much performance - in terms of share prices - to shout about.

Recall that at this time last year, corporate chiefs were happily patting themselves on their collective backs for churning out record profits that led to record share prices, both of which were used to justify record salaries. Nobody asked whether record performance was simply the result of a liquidity-driven market - investors were kept happy with rising stocks and dividends, so no questions were needed.

Conversely, if share prices are sharply lower, possibly along falling profits and dividends, then surely executive pay must follow suit.

Of course, it would only be fair to expect such cuts if the performance was worse than some agreed-upon benchmark, just as it is reasonable to pay top dollar if performance exceeds expectations.

If we accept that senior executives and company directors are stewards of a firm's assets and that they perform a function similar to fund managers who look after clients' money, why not reward them the same way fund managers are? Money managers are paid according to how well they beat a benchmark on the upside as well as downside, so why don't companies structure executive pay along similar lines?

So if a company's profit beats expectations as expressed by consensus analyst forecasts and its share price outperforms a benchmark such as the Straits Times Index or perhaps one of the FTSE ST sector indices, then giving a hefty pay packet to the firm's bosses is probably justified.

But if a company's shares have lost significantly more than the agreed-upon benchmark over the period in question, then executive salary should also be lowered in the interests of consistency.

It's something certainly worth thinking about and debated on. Since managements themselves can hardly be expected to initiate such a discussion, it is incumbent on shareholders to at least make some attempt to protect, what is after all, their own interests at AGMs.

Unfortunately, one big problem faced by shareholders who wish to take up these issues is poor transparency when it comes to executive pay disclosures.

A leading financial institution in its latest annual report did not reveal the exact pay of its top executives because 'such disclosure does not appear to be standard industry practice currently, given the highly competitive industry conditions'.

You have to wonder at this sort of faulty logic which dictates practising transparency only when conditions are non-competitive, as if shareholders would only want to know this information when employment opportunities for top bosses are bad and don't want to know when the job market is good.

Whatever the case, companies should not be allowed to get away with this sort of opacity, but until the authorities do something about beefing up disclosures in this area, it is left to shareholders to ask the hard questions at AGMs.

And while they're at it, they should also ask whether poor or underperforming share prices should lead to pay cuts for the bosses.

This article was first printed in The Business Times on Apr 14.

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