By Mak Yuen Teen
Six years ago, I published a commentary in The Business Times on the remuneration disclosures and policies of the Singapore Exchange (SGX) (“SGX Makes Good Disclosures, But Needs More Transparency on Share Plans”, Oct 9, 2018).
I questioned the changes in performance measures, performance targets and peer companies for SGX’s performance share plan (PSP) following the appointment of the current CEO, Mr Loh Boon Chye. During the tenure of his predecessor, the late Mr Magnus Bocker, return-on-equity (ROE), absolute total shareholder return (TSR) and relative TSR compared to peers – measured over a three-year period starting from the grant year – were used in determining the vesting of shares under the PSP. The peers were those in the FTSE/MV Exchanges Index which consists of listed global exchanges.
That PSP expired in 2015, the year the current CEO joined SGX. A new PSP, called SGX PSP 2015, was approved by shareholders at the September 2015 AGM. The performance measures under this new PSP were earnings per share (EPS) growth and relative TSR “against selected peers” also measured over a three-year period, with each being equally weighted. ROE and absolute TSR were dropped and peer companies changed, with no explanations provided.
I wrote: “The new performance measures are, in my view, inferior to the earlier performance measures. I generally consider ROE (or other accounting return type measure) to be better than EPS measures because it takes into account the investment required to generate earnings – even though admittedly, there is no perfect measure. Dropping absolute TSR also means that SGX can have negative TSR, but shares will still vest on the TSR criterion as long it performs relatively better than its peers. Relative TSR certainly has its merits but is arguably better used in combination with absolute TSR (since a negative absolute TSR means SGX’s shares have lost value). Further, unlike the FTSE/MV Exchanges Index used previously where the identity of the exchanges included is determinable, it is unclear what “selected peers” means.”
In FY2018, the performance measures were changed again, as were apparently the peer companies. Since then, the performance measures for the vesting of the PSPs are strategic and non-financial priorities (40 per cent weighting), EPS (30 per cent), relative TSR against selected peer exchanges (15 per cent), and relative TSR against selected Straits Times Index companies (15 per cent).
Again, SGX did not explain the rationale for these changes or provide much detail about the “strategic and non-financial priorities” that are now the single most important vesting criterion, nor did it disclose what are the “selected peer exchanges” and “selected Straits Times Index companies” now used for determining relative TSR.
However, what really caught my attention then was the change from EPS growth to absolute EPS and an apparent loosening of the EPS target. In FY2017, the average three-year EPS growth rate required for 100 per cent payout of the shares under this criterion was at least 6.2 per cent. Average EPS growth rate of at least 9.9 per cent would result in 150 per cent payout.
In FY2018, after the change from EPS growth to EPS, an average EPS of 34 cents over the next three years would result in a 100 per cent payout under this measure, while a minimum of 37 cents average EPS would result in a 150 per cent payout. SGX’s diluted EPS for FY2018 already stood at 33.8 cents, just 0.2 cents below the average EPS target that would result in a 100 per cent payout.
What this means is that even if EPS for SGX remained relatively flat over the next three years starting from the grant year, there would be a 100 per cent payout under this criterion.
Up, up and away
SGX’s EPS increased to 36.4 cents in FY2019 and then to 43.9 cents in FY2020, before declining to 41.1 cents and 41.0 cents in FY2021 and FY2022 respectively. In FY2023, the trend was reversed, with diluted EPS increasing to 51.8 cents in FY2023 and then 54.5 cents in FY2024. Although the average 3-year EPS target was increased each year, the actual average 3-year EPS was sufficient for the CEO to receive the maximum 150 percent payout based on the EPS criterion.
Since the current CEO joined SGX in July 2015, SGX’s share price has also increased from around S$8 to S$11.68. Based on various financial metrics, SGX has arguably done quite well from the perspective of its shareholders. So has its CEO’s remuneration.
Unfortunately, the equities market operated by SGX has not done well at all, with both total number of listings and total market capitalisation of these listings falling by nearly 13% between 2019 and 2023.
In FY2016, SGX’s CEO was paid S$3.2 million in total. In FY2024, it is S$7.57 million. Other than this year, when his remuneration remained flat, his remuneration has increased every year since he joined. Over the 9-year period from FY2016 to FY2024, his average remuneration is about S$5.2 million, and his remuneration in FY2023 and FY2024 is about 2.36 times his remuneration in FY2016 – and about double the last drawn remuneration of his predecessor.
While his fixed pay has only increased by 3.3% in FY2024 compared to FY2016, his annual cash bonus is now 57% higher. But it is his long-term incentives (LTIs), including performance share grants, that have increased most substantially. In FY2016 and FY2017, he did not receive any LTIs. In FY2018, he received S$327,421 in LTIs. For FY 2023 and FY2024, they are $3.15 million – or 9.6 times the amount he got in FY2018. The LTI grants has increased substantially every year until FY2023, and for the last two years, accounts for nearly 42% of his total remuneration. Note that the amounts for the LTIs are based on fair values at the time of grant.
For the CEO and other senior management, the LTIs comprise of both performance shares and deferred LTIs awarded under the Deferred Long-Term Incentives Scheme (DLTIS), with each making up half of the LTIs.
The performance shares are awarded based on past contributions and services, and subsequent vesting depends on meeting various performance targets measured over three year-performance periods. However, for the incentives under the DLTIS, there are no future performance conditions to be met. They are awarded based on past contributions and services like the performance shares but are designed to “strengthen the Company’s ability to reward and retain high-performing recipients whose contributions are essential to the long-term growth of SGX”. The shares under the DLTIS vest in equal instalments over three years, starting from one year after grant date. In other words, the vesting of half the LTIs does not depend on future performance of SGX or the recipient.
Comparisons with peers
Let’s now look at how the remuneration of the SGX CEO compares with his peers in a few other exchanges. For this purpose, I picked three other exchanges – Australian Securities Exchange (ASX), Hong Kong Exchange (HKEX) and London Stock Exchange (LSE).
During the tenure of the current SGX CEO, all the other three exchanges had changes in the CEO. ASX changed its CEO in 2023, HKEX in 2021 (and again in 2024), while LSE did so in 2018. In comparing remuneration across the markets, I used “accounting values” for LTIs based on fair value at the time of grants.
Based on the latest remuneration, SGX CEO’s total remuneration is about 2.2 times that of the ASX CEO, 49% that of the HKEX CEO, and 88% that of the LSE CEO, after converting to Singapore dollars using average exchange rates. If we look at the entire period of the tenure of the SGX CEO, the SGX CEO’s average remuneration is about 1.4 times that of his counterpart at ASX, about 51% of HKEX’s and 74% of LSE’s. The new CEO of HKEX, Ms Bonnie Chan, was appointed on 1 March 2024. In her previous role as Head of Listing of HKEX, her remuneration in FY2023 was S$2.54 million. It remains to be seen how much she will be paid in her new role as CEO.
However, ASX, HKEX and LSE are all substantially larger than SGX. In 2023, ASX had about 3.26 times the number of listings and 2.94 times the total market cap compared to SGX. For HKEX, they were 4.13 times and 6.53 times respectively, and for LSE about 3 times and 5.23 times respectively.
For ASX and LSE, the remuneration of their CEOs seemed to be more variable over the years, with significant dips for the ASX CEO in the past two years. For the LSE CEO, there was a significant increase in FY2020 followed by a significant dip in FY2022.
In contrast, the remuneration of the SGX CEO has never fallen in any year since he joined. This raises questions as to how sensitive is his remuneration to the current and recent performance of SGX – but perhaps more importantly, to the state of the equities market. Further, given the time-based vesting of 50% of his LTIs, there is also the question of whether the vesting of his LTIs is sufficiently sensitive to the future performance of SGX.
Lack of transparency
Compared to ASX and LSE, the disclosure of how the annual bonus of the SGX CEO is determined, how LTIs are granted and how performance is measured, leaves something to be desired.
I am not a fan of EPS as a performance measure for the CEO as explained earlier. However, given that it has been adopted as a performance measure, it may be somewhat surprising that the SGX CEO bonus and LTI grants have consistently increased even though EPS fell in FY2020 and FY2021. This raises questions as to how stretched are his performance targets for the award of the bonus and LTI grants. SGX does not disclose clearly what are used to determine his annual bonus or LTI grants, the performance targets for their award, and weighting. We only know that EPS measured over three years makes up 30% of the weighting for the subsequent vesting of the performance shares but we do not know whether and to what extent this affects his annual bonus or LTI grants.
SGX said: “In measuring performance, achievement of goals in five categories, namely, financial, products and services, stakeholders’ trust, operational excellence, people and culture, are assessed. Climate and sustainability-related goals are included in relevant goal categories. Employees’ demonstration of SGX values – Trust, Passion, Service – and A.I.M behaviours – Accountability, Innovation, Making a difference formed part of the overall assessment as a measure of “how” performance is delivered and used to determine an overall performance rating based on a blended, qualitative assessment. In addition, under the consequence management framework, feedback from the control functions on an individual’s regulatory and controls performance as well as any policy breaches will be considered in the individual’s performance and compensation decisions.”.
There are a lot of words and jargon but essentially, performance measurement is highly subjective and the specific criteria opaque.
Creating the right incentives
Given how the SGX CEO’s pay has consistently increased as the equities market deteriorated, one may also ask whether the performance measures for the CEO adequately capture what are strategically important for SGX and Singapore. To be clear, the ails in our equities market are in my view 25 years in the making, and arise from a combination of factors, including internal structural issues in the market and external factors. However, one may also ask whether the remuneration policies for the present and past CEOs have motivated them to prioritise financial performance of SGX without adequate consideration for the long-term sustainability of the equities market.
Note: The link to my commentary was fed to AI and it came up with a podcast, which I have attached for those who prefer to listen.
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The author is Professor (Practice) and Director of the Centre for Investor Protection at the NUS Business School. The views in this article are his personal views.
