By SHAI GANU

SAMUEL Johnson, the cel-ebrated English author,once said: “What is writ-ten without effort is ingeneral read withoutpleasure.” Johnson’scounsel seems as applica-ble to seventeenth centu-

ry English literature as it does to mod-ern-day company annual reports.One particular section in the annualreport that is read with much interestis the company’s remuneration re-port. Executive remuneration issuesare closely scrutinised by sharehold-ers, proxy advisers, and the businessmedia. However, shareholders oftenexpress concerns about the amountand clarity of information providedon this subject.

This article suggests six effectivetips for boards of Asian companies toenhance their remuneration disclo-sures, and in doing so, comply withtheir relevant listing rules or corpo-rate governance codes.

The first tip and probably the easi-est to implement is a letter from theremuneration committee chairman toshareholders. These opening re-marks should introduce the remuner-ation report and provide sharehold-ers with important information likebusiness context, executive pay is-sues reviewed by the committee inthe past year, and likely focus areasfor the next year. It should also ex-plain the rationale for any changes tothe executive remuneration frame-work. Not only does such a letter adda personal touch, it also sets thescene for reading the remainder ofthe remuneration report.

Second, and this logically followsthe committee chairman’s comments,is a discussion of the company’s exec-utive remuneration framework. Mostcompanies do this in some shape orform, but progressive companies pro-vide detailed information on their re-muneration philosophy: the role ofeach remuneration element and howeach of these is intended to drive thecompany’s business objectives. Dis-cussion about the peer groups usedfor pay benchmarking, the commit-tee’s assessment of the executive tal-ent pool (that is, where they hire peo-ple from or lose people to), and theconstruct and execution of incentivearrangements, all provide sharehold-ers with a better understanding of thecompany’s remuneration philosophy.It is also prudent to split this sectioninto two parts: one focusing on pastyear’s outcomes, and the other onnext year’s policies, particularly ifthere have been changes.

Third is the issue of disclosing actu-al pay levels for the CEO and seniorexecutives. Regulators in most juris-dictions suggest that companies dis-close pay levels for the CEO and atleast the top five executives. Progres-sive companies, however, disclose re-muneration details for all key manage-ment personnel (KMP). From an exec-utive’s perspective, the most impor-tant pay driver is a sense of fairness(not greed, as is a popular belief). In-creased remuneration disclosuresmay actually help with the assess-

ment of fairness – particularly if com-panies start disclosing actualtake-home pay – which is the nextpoint.

Fourth is the practice of disclosingrealised pay. Most jurisdictions re-quire companies to disclose the ac-counting values of certain pay compo-nents, particularly equity-based pay-ments, which can end up being differ-ent from the actual economic value re-ceived by executives. Realised pay in-cludes the executive’s annual base sal-ary, the cash component of the bonuspaid during the year (that is, non-de-ferred element), and the value of anyequity that may have vested from pri-or years’ awards. This is differentfrom target pay levels, which reflectthe earning opportunity if certain per-formance conditions are met. Compa-nies are beginning to disclose real-ised pay for their senior executives,as this is more representative of theirannual “take-home” pay. Realisedpay disclosures can also help quellperceptions of egregious pay levels,particularly in cases where the ac-

counting disclosures are much higherthan actual take-home pay. This canoccur due to the accounting treat-ment of equity awarded during theyear that may, or may not, vest threeor five years down the line.

Fifth is demonstrating the align-ment between pay and performance.Many companies claim to practisepay for performance, however, it isimportant to understand where per-formance truly lies. Generally, share-holders want to understand twothings: the impact of the executiveteam’s actions on the value of theirshareholding, and whether theywould have been better or worse offhad they invested in a peer companyinstead. The remuneration report canhelp address these issues in the fol-lowing ways:

Better disclosure of KPIs: withoutdivulging commercially sensitive tar-gets or strategic objectives, compa-nies should share how they faredagainst targets for key KPIs. Providedshareholders have confidence in theboard’s ability to set appropriately

stretched targets, understanding actu-al performance against said targetshelps shareholders assess the effec-tiveness of the executive team.

Detailed peer comparisons of rela-tive pay and performance: assess-ments of executive pay and corre-sponding performance indicators inrelation to the company’s peers. Forinstance, relative ranking of fixed payagainst company size (market cap,revenue); fixed pay plus annual incen-tives against one-year performancemeasures (revenue growth, profits,economic value), and total packageagainst long-term shareholder valuemeasures (relative total shareholderreturn, earnings per share, wealthadded, return on equity).

Time orientation of executive pay:assessment relative to peers regard-ing what proportion of the total pack-age is delivered as equity or deferredbonuses versus the length of the defer-ral or vesting period.

Proxy advisors are increasingly us-ing such pay-for-performance analy-ses to inform their voting decisions.

Leading companies are being proac-tive and including these analyses intheir remuneration reports.

The sixth and final tip relates todisclosures of non-executive director(NED) fees. While companies are re-quired to disclose the base and com-mittee fees paid to NEDs, only a fewdisclose the philosophy behind NEDpay; for example, peer group for paybenchmarking, desired positioning af-ter considering the workload and rep-utational risks, and delivery of feesvia shares to help increase NED share-holding. Companies should also dis-close the target fees for chairing andmembership of the board and commit-tees. This helps shareholders assessthe company’s cost of governancevis-a-vis its peers.

Implementing these tips will helpAsian companies satisfy, and in mostcases exceed, the disclosure require-ments included in their jurisdiction’slisting rules or corporate governancecodes. Singaporean companies imple-menting these tips will likely meet therequirements of the Monetary Author-ity of Singapore’s revised Code of Cor-

porate Governance. Within the re-gion, Singapore’s code and HongKong Stock Exchange’s listing rulesand Corporate Governance Code areperhaps the most comprehensive,and at par with global practice. It isimportant to note that Asian coun-tries follow the “comply or explain”model rather than the legislativeroute adopted by their Western coun-terparts, which while difficult to en-force, does minimise the risk of unin-tended consequences.

Asian companies generally lagtheir Western counterparts when itcomes to remuneration-related disclo-sures. A concise, well-structured re-muneration report with the ideas dis-cussed in this article will go a longway towards bridging the gap, en-hancing the company’s reputation,and bolstering shareholder confi-dence regarding the governance ofAsian companies.

The writer is a principal in Mercer’stalent consulting business based in

Singapore. He leads Mercer’sexecutive remuneration segment

for Asean.

By LINDA LOH

IT seemed like a good business op-portunity at the time. Company X,a metal roof tile manufacturer,had been very successful in USand Europe, and was looking to

expand its market presence in Philip-pines.

The company had good reasons tobe bullish about the Philippines mar-ket. In that period, rising remittancesfrom overseas foreign workers werecausing a property boom – so the out-look for the housing market seemedpositive.

However the sales did not seem tomaterialise. The company was puz-zled. They knew that they had a highquality lightweight product with fea-tures such as thermal and sound insu-lation and wind-proofing, which wereparticularly suited for Philippines’ cli-mate.

“But we didn’t understand theground”

On closer examination, there weresome flawed assumptions about themarket readiness for metal roof tiles.

Firstly, even though there was agrowing number of competing brandsin the market, the awareness of metalroof tiles and their advantages wasvery low, even among architects andproperty developers. Some industryplayers mistook metal roof tiles as gal-vanised iron sheets, which resulted inperceived shortcomings such as lowheat and sound insulation.

Secondly, the channel partners didnot do justice in conveying the fullbenefits of metal roofing. The salesrepresentatives in this trade were gen-

erally less knowledgeable than thosein US and Europe, and were unable toarticulate the more complex productfeatures.

Thirdly, the marketing positioningwas focused on technical functionali-ties which did not appeal to consum-ers. Most consumers were more inter-ested in whether the roofing would ac-commodate design styles, such as a“Mediterranean” or “Modern Asian”theme. They couldn’t see the aesthet-ic fit of metal roof tiles with the over-all housing design.

These are typical issues when com-panies try to replicate a developedcountry strategy in emerging marketswithout fully appreciating the differ-ences in market maturity and consum-er mindsets.

The challenges that lie aheadAlthough these issues could be appli-cable to any new entrants, emergingmarkets seem to present their ownunique set of challenges.◆ “Where’s the data?”

To start with, it’s not always easyto gather sufficient market intelli-gence to support your business strate-gy. Finding reliable statistics or indus-try reports is often a problem. Formany countries, the data is only avail-able at a national level or for key cit-ies. Sometimes the companies thatyou want to contact may not have awebsite, or even a phone number thatis listed in a business directory.

Macro indicators do not alwaysgive the full picture because of un-even economic development acrossthe country, or even within a region.

◆ “There’s a lot of diversity to grap-ple with”

Companies sometimes look at mar-ket opportunities at a country-level.In reality, it is difficult to deploy acountry-wide strategy because of thediverse mix of market dynamics andcharacteristics across different re-gions or cities.

Companies need to invest timeand effort to understand the marketand the characteristics of different ge-ographical regions.◆ “The market is not mature yet”

Having superior technical function-alities is no guarantee of market suc-cess. Customers may not always besavvy enough to appreciate the moreadvanced features and may just re-quire a “good-enough” product.

This doesn’t mean that customersonly go for cheap brands. We have al-so seen examples of foreign brandswho are able to achieve market lead-ership, while still charging a premi-um for their products. For example,Tupperware was able to command asizeable share in India’s food storagecontainer market, despite being sub-stantially more expensive than the lo-cal brands.

In emerging markets, most multi-nationals seem to agree that theyneed to spend a significant portion oftheir marketing efforts on educatingcustomers and raising awareness.◆ “Who am I working with?”

The foreign brands who succeed-ed were often the ones who havestrong local partners or distributors.This applies to established players aswell.

For instance, when Carrefour de-cided to buy the stake of its local part-ner in Indonesia and become a whollyowned subsidiary, it became especial-ly susceptible to the pressures from lo-cal political groups. Without the back-ing of its local partner, Carrefour’shigh profile acquisition of Alfamartquickly escalated into a public rela-tions and legal nightmare.◆ “There are several operating chal-lenges”

In most emerging markets, poor in-frastructure, corruption and govern-ment bureaucracy remain the key con-cerns for investors.

Regulations within the countrycould also be unclear and are usuallygoverned by “unwritten” rules. For ex-ample, in Vietnam, customs clear-ance procedures for cross-border lo-gistics can be both lengthy and tedi-ous, due to inconsistent regulatorystandards across government agen-cies.

Finally, adapt, not reactVenturing into emerging markets

is a journey of discovery. It couldsometimes mean leaving behind thetried and tested strategies whichworked in developed markets. Toquote from Christopher Columbus:“You can never cross the ocean untilyou have the courage to lose sight ofthe shore.”

The writer is an associate directorwith Ipsos Business Consulting’s

Singapore office. Ipsos is a globalmarket research company with

offices in over 84 countries with16,000 staff worldwide

Executive remuneration is closely scrutinised by shareholders. Here are tips to improve a company’s annual pay report

The challenges of growingin emerging markets

It adds up: From an executive’s perspective, the most important pay driver is a sense of fairness (not greed, as is a popular belief). Increased remuneration disclosures may actually help withthe assessment of fairness – particularly if companies start disclosing actual take-home pay. ST FILE PHOTO

Knowing the market: When Carrefour decided to buy the stake of itslocal partner in Indonesia and become a wholly owned subsidiary, itbecame especially susceptible to the pressures from local political groups.

PHOTO: BLOOMBERG

Enhancing disclosures on exec pay

The Business Times, Thursday, December 19, 2013 ● EDITORIAL & OPINION 19