BDO study shows Hong Kong director pay doesn't translate into higher profits
Study shows Want Want China pays its directors the most for every HK cent of earnings; China Shenhua Energy pays the least
A study comparing the salary packages of company directors with the earnings of their companies has shown that big executive pay cheques do not always translate into big profits.
The Hong Kong office of Belgium-headquartered taxation and accounting firm BDO used the financial results of companies in the Hang Seng Index for the financial year 2012 to calculate ratios of director pay to earnings per share.
Topping the list with the highest director pay per HK cent of earnings per share was snack-maker Want Want China, which last year paid its directors a total of HK$114.57 million and reported earnings per share of 32.598 HK cents. That meant it paid directors HK$3.51 million for every 1 HK cent they produced in earnings per share.
The second-highest pay level compared to earnings came from Lenovo, the world's second-largest supplier of personal computers, which paid its directors the equivalent of HK$2.78 million for every cent of earnings per share.
Hong Kong airline Cathay Pacific Airways came in third, at HK$2.19 million for every cent of earnings per share. Fourth was Hong Kong-based global trading group Li & Fung, at HK$1.83 million.
At the other end of the scale, Hang Seng Index shareholders getting the biggest bang for their buck paid to the directors of their companies were investors in China Shenhua Energy - the listed unit of the mainland's largest coal producer - which paid directors HK$13,436 for every HK cent they reported in earnings per share.
The second best outcome for shareholders was with China Mobile, the mainland's biggest wireless network operator, which paid directors HK$25,572 for every HK cent of earnings per share. Coal miner China Coal Energy paid directors HK$32,791 for every HK cent the firm reported in earnings per share.
Patrick Rozario, BDO director and head of risk advisory services, said the study showed that companies that were paying more than HK$1 million to produce earnings per share of just 1 HK cent needed to review their business model and strategy.
"It may not necessarily mean that the directors are being paid too much, but the high ratio of remuneration for every cent of earnings per share may mean the company is finding it difficult to produce a profit," Rozario told the South China Morning Post.
Want Want China last year paid its chairman, Tsai Eng-Meng, US$13.44 million.
That was five times more than what it paid its four other executive directors and substantially higher than the HK$1 million to HK$4 million pay cheques received by most directors of Hong Kong listed companies. But, aside from pay levels of directors, company business models and the environment in which they are operating may prevent them from making higher profits, said Rozario.
Cathay Pacific, for instance, had to deal with a higher oil and fuel prices, while Li & Fung's performance was affected by weaker consumption in the United States, since it supplied US retailers such as Wal-Mart and Target.
Mainland companies generally paid their directors less. Rozario pointed out this was because they were often civil servants appointed to their positions on company boards by the central government.
"As such, they are in a different situation compared with other non-Chinese company directors."
The majority of Hang Seng Index companies excluding the top and bottom four, had a ratio of director remuneration per one HK cent of earnings that ranged from HK$34,000 to just below HK$700,000, which was in line with the ratio to be found in the United States and Europe, said Rozario.
German carmaker BMW had a ratio of HK$40,381 in director remuneration per HK cent of earnings. US bank JP Morgan was at HK$82,044. British insurer Prudential was at HK$407,064. Canadian insurer Manulife was at HK$566,667.
"Small investors are now paying more attention to director pay and performance. They now want to see that their payments to the directors are value for money, and, as a good corporate governance practice, companies should link director pay with the long-term performance of the company."
But rather than the knee-jerk reaction of cutting director pay, companies should conduct a review of their business models and strategies with a view to increasing earnings, he said.
"It would not add value to the company if they simply paid lower fees to directors as they would then not be able to attract talented people, and some companies need specialised people to run their businesses.
"What is more important is having a remuneration system that can encourage directors to seek ways to lift profits and add income. That way shareholders can benefit from the system."