THE issue of executive bonus payments in the light of the recent worldwide economic crisis has led to suggestions that such payments be cut drastically or even eliminated.

This is unrealistic because bonuses and incentive payments are important in encouraging good performance. I would argue that the problem is one of timing: bonuses are paid out almost instantaneously, usually after a company's financial results are known. Such a method over-emphasises the linking of short- term performance to executive rewards.

Perhaps bonuses of top executives should be paid out only on a rolling basis, over a five-year period: say, 20 per cent for the first year, spreading the rest of the amount over the next four years, subject of course to the profitability and performance of the subsequent years.

In other words, there is a holding period, which allows for clawbacks if the company's performance in subsequent years turns out negative. For example, executive bonuses for Year 1 which are due in the fourth or fifth year could be cut down, or even none given out, depending on the severity of the company's situation.

The holdback percentage for each subsequent year could also be adjusted to suit the requirements of the individual corporations.

Such an incentive payment method has the advantage of tagging top executive pay to longer-term performance especially for the future if, for instance, five years is considered a benchmark for long-term performance.

Additionally, chief executive officers (CEOs) considering leaving their corporations would have to seriously put products and services, and processes and succession, in place that will continue to do well after their departure so that future access to their bonuses will not be jeopardised negatively due to short-sighted planning.

For example, if such a rolling bonus scheme had been put in place, then the highly publicised mega payouts to chief executive officers, such as Merrill Lynch's Mr Stan O'Neal, would not have been given last year and this year (as a result of record profit achievements in the preceding years) and the company would have saved millions. Under this scheme, bonuses would be retrievable.

Closer to home, perhaps the bonuses and payments to the incoming CEO of the Singapore Exchange (SGX) could be similarly rolled out over the next five years instead.

This would certainly be more palatable to shareholders rather than raising eyebrows as shareholders have yet to see any 'evidence' of performance in the underlying corporation that is SGX.

Harry Tong

This article was first published in The Straits Times.