[SINGAPORE] A popular performance assessment model that determines bonuses of top executives in large Singapore firms is going out of fashion where it first originated - in the US.
And some market watchers think it may be time to review if the model has been effective in Singapore, where it has been in use for a decade or so.
The economic value-added (EVA) model, which is measured as the net operating profit (after tax) after deducting the cost of capital employed, is used to determine the bonus payout of several senior executives of top listed companies here.
Up to 30 per cent of the top-50 listed companies here rely on the EVA model to determine the bonus of the CEO and members of the management team, noted remuneration consultancy firm Towers Watson.
Public records show that several companies linked to Temasek Holdings, including CapitaLand, SMRT Corporation and StarHub, also use EVA.
A few years ago, CapitaLand's Liew Mun Leong came out to explain why he was awarded a whopping $20.5 million in EVA bonus. That was an accumulated bonus that was subject to clawbacks. In a bad year, the EVA bonus could be negative, and would be subtracted from the individual's accrued bonus account.
Temasek is heavily influenced by the EVA model. US consultancy Stern Stewart, which designed the EVA, set up its office here in 1997, mainly to work with the Temasek group.
A separate study done by Towers Watson in 2010 showed that just 4 per cent of more than 200 US firms use EVA as a basis for bonus.
Critics say the EVA is complicated, and puts too much emphasis on short-term performance, which can stop senior management from investing in projects with a long gestation period.
"In the US, it has largely run its course - the primary reason being the complexity of the matrix," said Doug Friske, managing principal at Towers Watson.
The EVA was also taken up in Singapore in a bigger way. For example, the prevalent use of a bonus bank - a partial long-term incentive feature - was not adopted in the US, he noted.
"EVA is just saying you have to have a profit above the cost of capital. The resolution that US firms have come to is: do we need the window-dressing around the design that leads to greater complexity?"
Senior vice-president at Stern Stewart, Martin Schwarz, noted that EVA is less popular in the US because of the large and diversified shareholder base.
But he also agreed that few senior executives who receive the EVA bonus understand the concept.
For ill-informed executives, the bonus is a reward for good results, not an incentive for good behaviour, said Fermin Diez, Mercer's senior partner and Asia Pacific business leader of human capital consulting.
"In the case of one Singaporean company using EVA, a key executive confided that he does not understand how EVA is calculated and how that drives his bonus," he added.
"He only looks at the statement on bonus day and, if the amount 'feels' right, he's happy. In cases where the EVA-driven incentive programmes are too complicated, it may actually become an obstacle to decision-making."
Companies using EVA have also reflected a greater sense of risk aversion, noted Kumar Subramanian, regional practice leader at Aon Hewitt.
"There are several levels at work: cut costs, improve margins, or invest in growth. But investing capital takes time to gestate," he said.
Even with a bonus bank feature to deter against short-termism, the executive may not be around to deal with the mess from underinvestment, if problems surface much later.
In response to queries, an SMRT spokesman said EVA encourages employees to think and act like owners, though it has its pros and cons. The disadvantages include a "rigorous reliance on financial growth", he said.
StarHub, which implemented EVA in 2006, acknowledged that the plan can be complex, but that it motivates the efficient use of capital. It has no plans to replace EVA, but is open to looking at other possible ways to reward senior management, said Chan Hoi San, head of human resource at StarHub.
The broad problem is that Singapore companies seem to prefer short-term incentives, which is partly a legacy problem, noted Kevin Ong, director of executive compensation in Southeast Asia at Towers Watson.
Taking away EVA does not mean that executives will have a less hefty paycheck, noted Mr Friske.
In Singapore, Hong Fok - a small property company - has been criticised for "overpaying" key management personnel, though it doesn't use EVA. US banks have also come under scrutiny for paying big bonuses.
What is key is the way companies ensure that the long-term incentives are properly fleshed out.
"Many of the issues faced around the world by the financial industry have been, in part, due to complex pay-for-performance programmes that detract from the principle of having a simple, clear line of sight between outcomes and incentives," said Mercer's Mr Diez.
"Incentive plans relying on EVA solely may be in this category. We encourage the use of a balanced set of easily understandable measures to complement EVA."