Question 1

CIMBs new compensation plan

YVONNE TAN

Saturday, 24 Apr 2021

The Star, Malaysia

CIMB Group Holdings Bhd will embark on a group-wide long-term incentive plan (LTIP) for the first time ever which the bank says will enhance the accountability of its senior management in delivering the groups strategy and targets.

The plan will see its key executives receiving their full bonuses or incentive payouts only in three to four years time from now, and not yearly as they normally do. They will be paid in shares and have up to seven years to cash in on the shares. To be sure, the value of the payouts they receive will depend on the companys share price performance at the point of cashing in. In other words, the higher the CIMB stock price at that point in time over the current market price, the higher the value of their payouts. However, an agreed set of performance targets, such as those involving return-on-equity, must be delivered before they can obtain the shares.

This will create greater alignment between compensation and performance outcomes, and enhance the accountability of senior management in delivering on the groups strategy and targets, a CIMB spokesperson tells StarBizWeek. The exercise, which is expected to be effective by the end of the second quarter of this year, comes amid a softer overall economic environment and recent poorer showings in the financial performance of the lender. To be sure, most banks have also seen their profits fall as provisions for doubtful debts rose by multi-folds over the past year, no thanks to the Covid-19 pandemic.

Share plans are not entirely new for CIMBs executives but it is understood that this is the first time a full LTIP exercise is being implemented. An industry observer and former senior banker says that the LTIP is generally a good plan and should align key management staff with shareholders interests. On the whole, the LTIPs aggressive targets for profits and share price increases as set by the board will drive management including its CEO to achieve stronger results. Nevertheless, it doesnt save cost as the imputed cost of the shares to be allotted will be charged to the banks P&L. But it will save cash flow for the company, he says.

Having said that, in the case of CIMB like most banks cashflow and liquidity are not major issues as the LTIP amount tends to be relatively smaller in comparison with the overall revenue that it makes. Generally, the plan will ensure that compensation is paid out to commensurate actual performance. Likewise, MIDF Research head Imran Yusof says he does not view the LTIPs to be a way for companies to manage costs or improve its financials, per se. Although there may be some slight cost savings from a remuneration point of view, it will be minimal if assessed through wider lens. We believe that LTIPs are more geared towards making sure that the growth of a company will be sustained, as it is in the best interests of the executives to ensure that. He adds that an LTIP, while geared towards company executives, is a function of the business itself striving for long-term growth. When objectives under a companys growth plan match those of its LTIP, key employees know which performance factors to focus on for improvement.

That said, Imran believes it is possible for LTIPs to become a trend here even as companies strive to strike a balance between compensation and performance against an increasingly challenging business backdrop.

Meanwhile, shareholders have already approved a resolution to award CIMBs highest-ranked executive, group CEO Datuk Abdul Rahman Ahmad, with some 12 million shares under the LTIP exercise. Of these 12 million shares, a predominant portion comprises Employee Share Option Scheme or ESOS shares which is the right to buy shares at an agreed exercise price. The exercise price is set at a premium of 15% above current market price which translates to RM4.80 based on CIMBs current market price of RM4.19. This means he will get value only if the eventual market price exceeds RM4.80. The bank says accordingly, the actual grant will reflect a fair reward for Abdul Rahman in the situation where CIMB achieves its targets and the share price performs. If that does not happen, then the CEOs total compensation would be materially lower than the past, as well as against the market benchmarks.

CIMB, the second largest lender in Malaysia by asset size, reported a net profit of RM1.19bil for its financial year ended Dec 31,2020,74% lower than its net profit of RM4.56bil recorded a year earlier. The drop in profits were largely due to elevated loan provisions arising from accounting adjustments incorporating macroeconomic factors and management overlays, as well as specific provisions made against Covid-19 related and legacy accounts, it said in an earlier statement. The group will continue to drive strategic core programmes under its new strategic plan, named Forward23+, including capital optimisation, cost management and portfolio reshaping initiatives, says the banks spokesperson.

Notably, the group was able to exceed its cost reduction target of 5% in 2020, and stringent cost optimisation will remain a core focus in 2021 to further improve productivity and efficiency, according to the bank. The group will make focused investments in key segments that offer strong opportunities for profitable growth such as wealth management, treasury and markets, transaction banking and intra-Asean wholesale banking. It will also continue to monitor asset quality and maintain a prudent approach to credit underwriting to achieve the right balance between profitability and growth. The CIMB stock was traded between RM2.90 and RM4.75 in the last 52 weeks. Based on its last traded price of RM4.19, the banking group is valued at close to RM42bil.

The agency problem can be better defined as a conflict taking place when the agents who are entrusted with the responsibility of looking after the interests of the principals chose to use the power or authority for their personal benefits. It can be explained as a conflict of interest taking place between the agent and the principals. Using agency theory or any other relevant theories evaluate how the reward mechanism being introduced by the bank, CIMB could help to mitigate agency problems.