Wall Street Journal is quite happy with this bonus plan from Temasek Holdings, one of Singapore's two Sovereign Wealth Funds.
Bonus Plan? Take a Look At Singapore
25 Jan [WSJ] 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 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, 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. ....
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