Very interesting article, so I took the liberty of quoting it below:
Bank pay in Singapore makes sense
By PETER STEIN
When it comes to pay, Wall Street could learn a thing or two from Singapore.
Outsize bonuses at big banks and securities firms have never been more controversial. Governments are on the warpath, imposing bonus taxes and new rules to force bank paymasters to change the way they compensate their talent.
Singapore's Temasek Holdings Pte. Ltd. could give them a master class on the subject.
Temasek isn't a bank. It is a state-owned investment firm with a portfolio valued at well over $100 billion that holds stakes in some of Singapore's biggest companies. It also invests in companies outside Singapore and in other assets, too, including hedge funds, private-equity funds and real estate.
For years, Temasek has paid its employees with a sensible plan that includes cash bonus payments and deferred incentives. A key part (but not the only part) of the plan links bonus payments to something called "wealth added," a measure of the company's return on its investments in a given year that factors in its risk-adjusted cost of capital.
Basically, calculating wealth added, or WA, tells you whether the company's assets produced more value than the minimum you would expect given their level of risk.
At Temasek, everyone has a WA bonus bank. When WA goes up, more money goes into the bank, which then funds deferred bonuses that take at least three years, and as long as 12, to vest.
Here is the important part: When Temasek loses money, you get what it somewhat confusingly calls "negative wealth added," and money comes out of the bonus bank. So a lousy year at the company cuts into an employee's ability to enjoy previously awarded bonuses. This also is known as a clawback.
Last September, Temasek announced it had a lousy year. In the year ended March 31, 2009, the value of its investment portfolio fell 30%, and its profit fell 67%. Its wealth added was a negative 68.1 billion Singapore dollars, or about $48.5 billion, meaning everybody's WA bonus bank took a big hit.
A system like this has its drawbacks: Deferred rewards can be uncertain, and Temasek could have trouble attracting the best talent.
But Temasek's system keeps employees fixed on the right goals. In its annual report, Temasek says the pay plan is underpinned by the principle of sharing gains and pains "alongside our shareholder," the Singapore government.
"What Temasek is doing is pretty impressive," says Julia Gorham, a lawyer who advises companies on compensation issues at Allen & Overy in Hong Kong. She said it is nearly consistent with standards for banking compensation recommended by the Financial Stability Board and adopted by the Group of 20 nations last year.
Governments now are pushing these standards for compensation on banks in Europe and the U.S., and a number of them have begun deferring more pay and implementing clawback provisions. Morgan Stanley, Credit Suisse Group and UBS AG have such systems, as does Goldman Sachs Group Inc., although it applies to only the top 30 staff at the firm.
Soon, banks around the world may get to the point where this is the standard pay plan. Temasek can say it got there first.
Printed in The Wall Street Journal Asia, page 23
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