Pay linked to performanceBanks are losing profits this year following a lackluster 2012. But chief executives’ earnings are untouched by the overall dull performance in the financial industry. A chairman of a financial holding company earned as much as 3 billion won($2.5 million) a year - 8 million won a day - a figure ordinary people can hardly imagine as pay for a day’s work.
The earnings of the financial holding company that paid such a lofty check to its chief executive sharply fell last year from the previous year. Net profit sank 24 percent, but salaries jumped 40 percent. The employees were rewarded for performances that did not match their pay.
The problem is in the compensation scheme of financial companies. Executive compensation in financial holding companies is comprised of fixed pay, short-term cash incentives as well as long-term stock grants. The secret lies with stock grants that take up a large part of compensation paid out to top ranking executives. Unlike option awards, grants are given without any conditions as special incentives. Long-term bonuses make up nearly half of annual payouts to top chief executives. The board decides on stock grants regardless of corporate performance and does not need to disclose them to the public. They are used to increase executive pay. Thanks to stock incentive awards, chairmen of financial holding companies can build wealth regardless of how poorly their companies perform. In fact, chairmen are generously paid and yet do not have to answer for mismanagement. Financial holding companies have the appearance of an advanced governance system, but all the legal accountability and management obligation falls on presidents of the subsidiaries. The chairmen are exempted from legal responsibility.
That is why such unreasonable payout to chairmen often provides pretext for labor unions to demand an increase in general staff pay. Employees of banking and other subsidiaries of financial groups come up with various compensation excuses to increase their salaries annually regardless of their performance. When the Financial Supervisory Service in 2010 issued a guideline to pay bonuses according to performance, banks sharply raised fixed salaries without changing bonuses. That alone underscores how salaries in financial companies are increased without any correlation with corporate and employee performance. The Financial Services Commission recently announced measures to overhaul governance in the financial industry, including compensation package. It did not specify a cap on how much executives and employees can receive a year, but proposes to have companies scale down salaries through strengthened public disclosure guidelines and supervision by the regulatory authority. But it remains uncertain how effective such voluntary guidelines will be. It is doubtful that former senior Financial Ministry bureaucrats that mostly dominate the chairman seats in holding companies will pay heed to the FSC. Out of five financial holding companies that recently replaced the chairmen under the new government this year, two are former senior officials from the Finance Ministry.
Since the financial holding structure was introduced, executive payout to group chairmen ballooned by 20 to 40 times while median national income growth only doubled during those years. If performance is muted, so should financial rewards. A certain guideline on top-ranking executive compensations should be set in a reasonable range that the society and industry can comprehend. Annual packages should be linked to corporate performance.
Companies should set specific guidelines on executive pay turnover and disclose them as well as invite outside auditors to study them. They also should consider appropriating executive pay according to the financial market growth rate as well as compensations in other industries. Otherwise management in financial institutions will continue to be resented and distrusted by shareholders and consumers.
*The author is the head of the Financial Consumer Agency.
By Cho Nam-hee