Singtel

Kim Eng on 2 Jul 2012

A fair day’s wage for a fair day’s work. For running an organisation of SingTel’s complexity and the most highly valued, most profitable Singapore company to boot, SingTel CEO Chua Sock Koong is fairly and not excessively compensated. Arguably, Ms Chua has made a significant contribution to improving SingTel’s executive remuneration system since she stepped up to the role in 2007. We currently have a SELL call on SingTel (with a SOTP-derived TP of SGD2.82) but this is certainly not due to the way its top executive is paid.

Good value for money. Despite our currently negative view on the stock, SingTel’s recently-released FY3/12 annual report showed that Ms Chua has given good value for what she was paid. In FY3/12, she received SGD4.9m in cash compensation, putting her just somewhat above the median for other CEOs of similar stature in Singapore, although SingTel is one of only two Singapore companies that earn an annual net profit of over SGD3b (excluding the Jardine Group).

Executive pay tightly correlated to total shareholder return. In the past few years, SingTel has linked its CEO compensation to Total Shareholder Return (TSR), a benchmark that combines both capital appreciation and dividends. In Ms Chua’s case, this tight correlation is not so surprising as she was group CFO before being appointed to the CEO position in April 2007, and she had played a key role in developing SingTel’s remuneration system. This correlation did not appear to have been so clear with her predecessor, Mr Lee Hsien Yang.

Yin and yang, night and day. While Ms Chua’s compensation has been more closely related to TSR, Mr Lee’s had at times lagged shareholder returns, particularly in FY3/04 when TSR rose 79% while Mr Lee’s pay rose by only 32%. This might have led to the big increase in his remuneration when he stepped down in 2007. In Ms Chua’s case, despite the fact that she had also cashed in on her performance shares recently, the discrepancy was not so large.

CEO compensation was rather volatile before 2008. While there was a rough correlation between Mr Lee Hsien Yang’s cash compensation and total shareholder return (TSR) from FY3/02 till FY3/07 when he stepped down as SingTel’s CEO, there were two periods when he might have been underpaid. For example, in FY3/04 and FY3/06, TSR rose by 79% and 8%, respectively, as SingTel did two capital reductions in those years. However, Mr Lee’s pay lagged behind, rising by only 32% in FY3/04 and 4% in FY3/06. In fact, although TSR accelerated to 8% in FY3/06, his pay increase of 4% that year was lower than his pay increase of 7% the previous year. Note however that we have not been able to find any data on performance share vesting prior to FY3/07.

Arguably, the capital reductions must have been difficult to pull off, given that SingTel under his leadership had taken on more than SGD10b worth of debt to finance the acquisition of Optus in 2001. However, Mr Lee succeeded and by the time he left in 2007, Optus had become a significant contributor to the group’s earnings while debt had been pared down to just over SGD6b. This may have resulted in SingTel’s decision to pay him a substantial cash bonus of SGD1.9m upon his departure in 2007. In addition, as Mr Lee also cashed in most of his performance shares in that year, this resulted in a 413% jump in CEO compensation in FY3/07.

Considerably more disciplined since current CEO came onboard. Things changed considerably after Ms Chua was appointed Group CEO in Apr 2007. There appears to have been more discipline in ensuring that her compensation matches the change in TSR. This was not surprising, given that she must have also played a key role in refining SingTel’s remuneration practices as group CFO.

In Ms Chua’s case, TSR fell by 35% in FY3/09 due to the Great Financial Crisis (GFC), and this led to her cash compensation falling by 5%. She received no CEO-related performance-based compensation in FY3/08 to FY3/09 although she did cash in some performance shares granted to her as CFO (which we have not included in our analysis).

In FY3/10 however, TSR improved by 25% even as SingTel reported a 13% rise in net profit that year. Accordingly, her cash compensation rose by 23%, in line with the improvement in TSR. However, her total compensation shot up by 86% as she was able to vest most of the performance shares granted to her in FY3/07 when she was made CEO. We do not think this was out of line as she very likely was able to make significant improvements to financial KPIs set for her at the time she became CEO.

TSR growth was roughly flat in FY3/11 and FY3/12, which led to her pay increases being a flattish 9% in each of these two years. However, her total compensation fell 24% in FY3/11 as only 7% of her FY3/08 performance shares were vested, likely reflecting the lack of improvement in TSR since FY3/08, the start of the GFC. Subsequently in FY3/12, her total compensation recovered by 49% as she was able to vest 64% of her FY3/09 performance shares.

While the increases in Ms Chua’s total compensation in FY3/10 and FY3/12 seemed large, we note that the discrepancy was not as large when compared to Mr Lee’s 413% jump in total compensation in FY3/07, the year he stepped down as CEO of SingTel. Notably, the recent vestings were for performance shares granted to her in FY3/08 and FY3/09 and reflected the positive returns of 25% that SingTel shareholders enjoyed in the following three-year period, hence it is well-deserved.