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Types of Incentives
Incentive plans distribute rewards according to the achievement of company objectives. Well designed incentive plans take stock of the total budgeted value of the reward components & formulate how to strategically allocate & divide these incentives based on merit.
A C&B plan that combines both short & long term incentives ensures a balanced reward structure, & guarantees that compensation will commensurate with performance.
Short term incentives
Companies in Singapore depend largely on fixed renumeration, like base salary & executive benefits, & short term incentive renumeration such as annual bonuses are commonplace. However, unlike in America where annual bonus payouts range between 67% & 282% of base salary, annual bonuses doled out by companies in Singapore typically represent a smaller portion of the total pay package, averaging only 16.2% of total salary.
In Singapore, there generally is an inadequate association between C&B & pay-for-results due to an over-reliance on base pay. The use of long term incentives such as equity is uncommon, leading executives & employees to focus on short term rather than long term results. Management often cite the convenient excuse that highly cyclical business conditions prevent them from designing & implementing long term incentive plans, though the real reason stems from cultural & societal norms & not cyclical business conditions.
Profitability metrics are predominantly used by companies in Singapore to measure & determine short term performance. Absolute goals are also used more widely as opposed to relative peer group comparisons.
Increasingly, companies in Singapore are showing interest in implementing performance management & measurement systems, mostly borne out of necessity due to the current persistently challenging global economic climate. Companies in Singapore are gradually gravitating toward the American approach of the use of equity when constructing long term incentive plans.
Long term incentives
In America, executive C&B is principally disbursed through variable performance pay, which represents a significant quantum of the total compensation package. Whether this variable performance-for-results reward is earned is conditional on the individual successfully achieving & exceeding their performance metrics.
Companies in America use a combination of several long term incentives that vest over differing time frames to achieve the company’s long term targets. These companies “stress-test” & rigorously analyze the correlation between reward & performance levels to ensure that C&B rewards paid out under all possible performance outcomes are reasonable & within budget.
In America, long term incentive equity amounts to a significant percentage of the total compensation package for executives, typically in excess of 70% for chief executives & 55% for other C-suite executives.
These long term incentive equity values are based on evaluations of market compensation benchmarking data as well as internal equity (employee perception of their earned rewards relative to other employees in the same company performing the same job scope).
The following are some of the more commonly used long term incentive equity employed by large public companies:
A C&B plan that combines both short & long term incentives ensures a balanced reward structure, & guarantees that compensation will commensurate with performance.
Short term incentives
Companies in Singapore depend largely on fixed renumeration, like base salary & executive benefits, & short term incentive renumeration such as annual bonuses are commonplace. However, unlike in America where annual bonus payouts range between 67% & 282% of base salary, annual bonuses doled out by companies in Singapore typically represent a smaller portion of the total pay package, averaging only 16.2% of total salary.
In Singapore, there generally is an inadequate association between C&B & pay-for-results due to an over-reliance on base pay. The use of long term incentives such as equity is uncommon, leading executives & employees to focus on short term rather than long term results. Management often cite the convenient excuse that highly cyclical business conditions prevent them from designing & implementing long term incentive plans, though the real reason stems from cultural & societal norms & not cyclical business conditions.
Profitability metrics are predominantly used by companies in Singapore to measure & determine short term performance. Absolute goals are also used more widely as opposed to relative peer group comparisons.
Increasingly, companies in Singapore are showing interest in implementing performance management & measurement systems, mostly borne out of necessity due to the current persistently challenging global economic climate. Companies in Singapore are gradually gravitating toward the American approach of the use of equity when constructing long term incentive plans.
Long term incentives
In America, executive C&B is principally disbursed through variable performance pay, which represents a significant quantum of the total compensation package. Whether this variable performance-for-results reward is earned is conditional on the individual successfully achieving & exceeding their performance metrics.
Companies in America use a combination of several long term incentives that vest over differing time frames to achieve the company’s long term targets. These companies “stress-test” & rigorously analyze the correlation between reward & performance levels to ensure that C&B rewards paid out under all possible performance outcomes are reasonable & within budget.
In America, long term incentive equity amounts to a significant percentage of the total compensation package for executives, typically in excess of 70% for chief executives & 55% for other C-suite executives.
These long term incentive equity values are based on evaluations of market compensation benchmarking data as well as internal equity (employee perception of their earned rewards relative to other employees in the same company performing the same job scope).
The following are some of the more commonly used long term incentive equity employed by large public companies:
- Restricted stock units - RSUs are paid in shares of common stock upon vesting, & generally vest between 2 & 5 years from the grant date. RSUs are employed for their retention value.
- Total shareholder return units - Total shareholder return (TSR) is defined as the differential in stock price plus dividends. The value of TSRUs is realized based on absolute total shareholder return. TSRUs ordinarily vest 3 years from the grant date & are paid in shares of common stock upon settlement. 5 year TSRUs are settled 5 years from the grant date. 7 year TSRUs are settled 7 years from the grant date. Dividend is accrued on TSRUs during the 5 or 7 year period. The settlement price is the 30 day average of closing prices of common stock, ending on the settlement date. The grant price is the closing price of common stock on the date of grant. Whether the TSRUs are paid out is subject to results being positive.
- Performance share awards - The value of PSAs over the performance period is realized based on relative TSR. The number of shares earned over the performance period is based on the company’s TSR relative to the TSR of its peer group. In most public companies, relative TSR compared to its peer group is a top strategic priority. PSAs ordinarily vest 3 years from the grant date & are paid in shares of common stock upon settlement. The performance period is usually between 3 & 5 years. Dividend is accrued on PSAs during the 3 to 5 year period.
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