Reducing the remuneration gap in GLCs

AN out-of-sync announcement during the recaliberated budget speech in January this year is a small part of the widening remuneration gap between the top executives and the lower-paid employees in government-linked companies (GLCs).

Prime Minister Datuk Seri Najib Tun Razak called on GLCs to implement initiatives to narrow the income gap between higher management and employees gradually. And he reminded them that these efforts would be monitored by the Economic Planning Unit.

Never before has a policy speech touched on the executive remuneration scheme of those in GLCs. And this speech was about recaliberating the economy amidst the steep fall in oil prices. It was neither about reducing pay gaps nor implementing pay cuts.

So, the mention of GLC remuneration and closing the gap in salaries did indeed intrigue.

Only a few weeks ago did some at the corridors of power in Putrajaya relate why this small part was included in the speech. Apparently, the remuneration and incentives of top management in some of the GLCs were way too high in comparison to their job skills and responsibilities.

There is also chatter that the remuneration packages and incentives received by the top executives at the holding company levels did not commensurate with the risks and responsibilities that come with their jobs.

Ten years ago, when the transformation programme of the GLCs began under the watchful eye of Khazanah Nasional Bhd, the executive compensation package was one of the key areas that was enhanced to attract the best talent to manage the country’s investments.

It has produced results. For instance, companies under Khazanah have seen their realisable asset values grow to RM150.2bil as of the end of last year from RM65.3bil in 2004.

However, the companies have also become major employers for a large number of people, catering especially to a special group. Although the GLCs are supposed to be managed like any other private company, they are also required to fulfil the aspirations of the Government, which is the reason why they adopt special policies. Considering that GLCs are large employers, a disparity in remuneration schemes becomes apparent.

While it is undeniable that remuneration packages are important, they are also double-edged swords. Big salary packages are a source of motivation for top executives to outperform. At the same time, it demotivates those who are not benefiting.

The remuneration packages of GLC executives are often compared with their peers in the private sector. However, in reality, this is not a good gauge because the risk and reward factors are completely different.

For instance, the chief executive of Rayani Air that has suspended its services is probably wondering when his next paycheque would come. In contrast, Malaysia Airlines can fail many times but the top executives are rest assured that their salaries would be paid because the owner, which is the Government, would ensure that the company stays afloat.

On the contrary, there is an effective check-and-balance mechanism on the performance of the top executives in the private sector.

Shareholders can vote down remuneration salary hikes of CEOs when they don’t like the performance of companies.

The latest examples of shareholder revolt against large executive salary packages are in companies such as British oil giant BP plc and mining company Anglo American plc. Shareholders voted against a resolution calling for a pay hike for BP’s chief executive Bob Dudley on the grounds that the oil and gas company was losing money.

Such things can happen in large corporations outside Malaysia. Unfortunately, it rarely happens here. It is because most large companies are family-owned and they would not favour a pay cut.

The highest-paid chief executive among listed Malaysian companies is from the Genting group. However, the company is managed and majority-owned by the family itself. Hence, it would be unthinkable to suggest any pay cut for the top executives irrespective of the performance of the company.

As for the GLCs, their shareholders such as the likes of Khazanah, Permodalan Nasional Bhd and the Employees Provident Fund are not known to publicly take an active role in cutting down executive compensation when there is a need to do so.

At most, the salaries remain stagnant in bad times.

Shareholders of GLCs must play a pivotal role in maintaining check-and-balance mechanisms in the wages of top management. The scrutiny should go beyond the top few only.

The top management should be made accountable when their companies do not deliver the desired results.

A vigorous check-and-balance mechanism is an avenue to narrow the salary gap between the few who manage the company and the large numbers who are merely lower-rung employees.

It would help discard those earning handsome packages and not delivering and allow more room for the lower-level employees to move up the ladder.

Institutional shareholders are increasingly taking an active role in determining remuneration schemes of the top executives of companies where they are invested. Towards this end, Norway’s US$870bil oil fund, the world’s biggest sovereign wealth fund, has already sounded out plans to exert influence on curbing the high salaries of companies under its portfolio that are underperforming.

The best part is it wants to make public its stance on executive remuneration for other shareholders to support its move.

It’s high time Malaysia’s institutional funds, which are mostly influenced by the Government, make their stance on executive compensation packages of top employees in companies where they are invested.

The scrutiny can go beyond the CEO or executive director. It can go right down to the senior executives in the companies and the fund that is supposed to monitor the performance.

najib glc