05 Executive Remuneration-1

HEALTH WEALTH CAREER
EXECUTIVE TRENDS IN
INDONESIA AND ASIA
C H E RY L W I D J AJ A
ASSOCIATE DIRECTOR, M ERCER
INDONESIA
J U LY 2 0 1 9
T O D AY ’ S A G E N D A
INDONESIA M ARKET TREND
TRENDS OF EXECUTIVE
R E M U N E R AT I O N I N A S I A
LONG TERM INCENTIVE PLAN
Q & A
Copyright © 2019 PT Mercer Indonesia. All rights reserved. 2

R E M U N E R AT I O N A N D G O V E R N A N C E I N I N D O N E S I A
Indonesia Market Trends of Executive Long Term Questions and

Trend Remuneration in Asia Incentive Plan Discussions

INDONESIA 4.0
T R AN S F O R M I N G TO WAR D S T H E
VA L U E - B A S E D E C O N O M Y
A T I M E T O R E T H I N K C O R P O R AT E G O V E R N A N C E & E X E C U T I V E
R E M U N E R AT I O N
Increased Pressure to Greater Scrutiny on Remuneration as a Strategic

Win the War for Talent Corporate Governance Reward Tool
Talent acquisition and retention Expected influx of inbound Leverage remuneration to attract
remains a key challenge against investments with bump in credit and retain talent, extending beyond
a shortage of qualified talents ratings will call for stronger base pay to focus on more
commitment towards corporate engaging and long-term oriented
Great demand for great quality governance. pay elements
professionals (as part of
succession planning for skills to
be imparted to the next
generation executives)

R O L E O F R E M U N E R AT I O N C O M M I T T E E I N I N D O N E S I A
O J K R U L E S A N D R E G U L AT I O N S
Excerpt from OJK regulation on ‘Remuneration Committee”
Duties and Responsibilities

• Nomination and Remuneration Committee must act independently when
conducting their duties
• Provide a recommendation to the Board of Commissioners regarding the
Regulation for performance evaluation for Board of Directors and/or Board of
Commissioners
• Assist Board of Commissioners on conducting evaluation of performance and
the appropriateness of remuneration received by Board of Directors
and/or Board of Commissioners.
Disclosure requirement is becoming increasingly strict on the following items….
B O D AN D B O C PAY F O R EMPLOYEE
PAY M I X
PAY L E V E L P E R F O R M AN C E (FIXED VS VARIABLE) S H AR E P L AN
• Individual pay amount • Link between pay level • Weightage of pay • Performance target
for the financial year and company component on fixed, • Performance
performance short term and long term assessment

E X E C U T I V E P AY I N I N D O N E S I A
R E C E N T S P O T L I G H T O N E X E C U T I V E PAY
In the year of 2016, BoC of one of the state

O V E R - PAY I N G owned enterprise received IDR 7.068
D I R E C TO R S AN D billion, while BoD received IDR 16.3 billion
COMMISSIONERS?
Despite company reporting at loss, BoD I N C R E AS E D

M I S - AL I G N M E N T and BoC of some of publicly traded
O F PAY W I T H According toIResearch
M P O R TAN
BureauC EInfoBank,
OF
companies still receive pay of tens of billions
remuneration ofEstate-owned
X E C U T I Vbank
E
P E R F O R M AN C E ? a year. According to annual report. Even
commissioners,
REM along
U N Ewith
R ATother
ION
higher from previous years.
private banks,Gare
O V E R N AN Con
consistently E the
rise. Despite OJK issuing regulation no 45
year 2015, which is supposed to regulate
remuneration of BoD’s and BoC’s, their
remuneration value are still on the rise.
IS DISCLOSURE
S Y S T E M AT I C AN D
One of the bank announced remuneration for
C L E AR E N O U G H F O R its BoD and BoC, total of 3 commissioners
S TAK E H O L D E R S ? and 7 directors, received IDR 3.6 billion

SOURCE: VARIOUS SOURCES
W H AT M E R C E R F O R E S E E I N T H E C U R R E N T
INDONESIAN MARKET (1 OF 2)
C O R P O R AT E BOARD
GOVERNANCE EFFECTIVENESS
The structure and processes for the Evaluating a Board’s effectiveness to fulfil its
direction and control of companies responsibilities, as a critical element of global best practices
in corporate governance
WHY WE FORSEE A DEMAND FOR WHY WE FORSEE A DEMAND FOR

THE INDONESIAN MARKET THE INDONESIAN MARKET
• Greater Government efforts to improve corporate • Some challenges facing Indonesian Boards
governance o Two-Tier Board System – Resulting in challenges like
o Development of the Indonesia Corporate information asymmetry and reduced Board and Management
Roadmap 2014 - Outlining major reforms to improve engagement
corporate governance standards o Operational Challenges - Owing to country’s vast size where
o Subsequent adoption of OJK- CG Guidelines - To operations are usually spread across wide areas
strengthen compliance as part of the reform program o Oversight of Risk- Accordingly, Boards may be more concerned
under the roadmap with the oversight of risk processes and adequacy of internal
(e.g. comply or explain disclosure statement) controls around operational risk
• “Professionalization” of Family-owned businesses calls
for raising of family governance standards

W H AT M E R C E R F O R E S E E I N T H E C U R R E N T
INDONESIAN MARKET (2 OF 2)
EXECUTIVE EQUITY BASED SUCCESSION

R E M U N E R AT I O N INCENTIVE PLANS PLANNING
Determining management’s and boards of Use of strategic long-term incentive vehicles One factor underpinning Board effectiveness,
directors’ compensation and benefits & pay- as part of executives’ compensation package is overseeing the successful succession of
for-performance alignment to secure and for talent management purposes the CEO in the event of a
motivate executive talent anticipated/unplanned departure of the
current incumbent
WHY WE FORSEE A DEMAND FOR WHY WE FORSEE A DEMAND FOR WHY WE FORSEE A DEMAND FOR
THE INDONESIAN MARKET THE INDONESIAN MARKET THE INDONESIAN MARKET
• Independence and objectivity challenges in • Listed company ownerships structures • Shorter CEO tenures observed for many
designing executive pay as pay level and remain highly concentrated in Indonesia, countries, leaving less time for potential
structure of Board members are commonly indicating potential demand for use of LTI candidates to train for the job
intertwined (especially for SOE) due to dual- vehicle
board structure
• Mounting pressure on Indonesian family
• Yet, long term incentives may still be a businesses to have more robust succession
• Attraction and retention of key executives relatively new concept in Indonesia planning in place
important against a backdrop of increased
competitiveness (e.g. Indonesia improved
ranking in the World Economic Forum’s Global
Competitiveness Report 2017-2018)

M E R C E R S E E S A D E M AN D F O R LT I I N T H E
INDONESIAN MARKET
• Stronger commitment towards corporate

governance and business sentiment has
generated greater interest in inbound
investments
• Independence and objectivity challenges in

designing executive pay due to dual-board
structure in public companies, and primarily
family-owned structures in private companies
• LTI remains a relatively new concept in

Indonesia against a backdrop of increased
business demand and global war of talent



C O R P O R AT E G O V E R N A N C E I N A PA C
TIGHTENING • Increased public awareness and

scrutiny over disclosure of executive
1 C O R P O R AT E
GOVERNANCE (Board and Management) and linkage
between executive pay and
performance
INCREASING • Publication of pay ratios

2 S TA K E H O L D E R • Awareness of inequity/ differentiation I N C R E AS E D
SCRUTINY across groups I M P O R TAN C E O F
EXECUTIVE
R E M U N E R AT I O N
G O V E R N AN C E
• Link key employees with vested interest
ALIGNM ENT TO
3 in company’s performance to maximise
LONG-TERM
organisation’s long-term value
S T R AT E G I C F O C U S
• To attract, retain and motivate

P AY L E V E L S A N D P AY M I X A R O U N D T H E W O R L D
C E O PAY C O M PAR I S O N , B Y C O U N T RY IN USD $M
INDONESIA
There is a wide variety of pay levels in Asia and globally

▪ Generally, CEO pay is positively correlated with size of the company and average per capita income in the
company’s home country
Base salaries tend to fall into a surprisingly narrow band –long term incentives are how pay is
differentiated across various countries
B U T T H E 3 - PAR T M O D E L I S N O W U N I V E R S AL
TOP EXECUTIVES PAY-MIX
2-Part Model Base Salary STI
Top Executives 40% 60%
Senior Management 52% 48%
3-Part Model Base Salary STI LTI
Top Executives 33% 40% 27%
Senior Management 45% 35% 20%
 For top executives, at least half of the total remuneration package is performance linked
variable pay based on Mercer’s total remuneration survey data
 The focus on STI or annual bonus has always been stronger relative to the LTI component
prior to 2010
 The trend is a 3 part model where LTI (performance linked, or time based full value share)
has a meaningful weightage in the total compensation (at least 15% or more)

APAC M AR K E T P R AC T I C E S
LT I V E H I C L E S U S E D
FROM PRIVATE COMPANY… … TO PUBLIC COMPANY
Stock
RSUs Options
25% As companies 21% RSUs
become more 35%
Stock established,
Options PSUs PSP/RSP take
60% 15% the place of stock
PSUs
options
44%
As a company transitions from pre to post IPO… As a company becomes more established…
• The proportion of stock options in the overall LTI mix • Multiple use of LTI vehicles is observed (often 1-2
decreases vehicles)
• Share-unit plans (RSUs or PSUs) become more
prevalent to • PSPs are more common and often make up the majority
- Manage on-going dilution of the mix to incorporate an additional performance
- Complement options with a more retentive and less dimension beyond share price appreciation.
risky vehicle.
While pre-IPO pay mix data is not available, LTI delivery is usually heavily skewed towards stock options based on experience

PERFORMANCE SHARES BECOMING THE MOST
P R E VAL E N T LT I V E H I C L E Combination of vehicles is country-specific and often driven by
accounting, taxation, and corporate governance requirements
Location 1 2 3
Of US
2/3
Canada Options Perf. shares RSP
companies grant USA Perf. Plans RSP Options
at least 2 LTI Brazil Options Phantom options Perf.Based Cash LTI
vehicles France Perf. Shares Perf.Based Cash LTI Options
Germany Perf.Based Cash LTI Perf. shares Options

LTI plan,
1
Netherlands Perf. shares Options Perf.Based Cash LTI
At least multiple vesting Spain Perf. shares Perf.Based Cash LTI Options (SARs)
measures Switzerland Perf. Shares RSP Options
UK Perf. shares Deferred bonus match Options

EMEA/UK: Most companies operate
China Options RSP Perf.Based Cash LTI
at least one LTI plan with more than
Hong Kong Options RSP Perf. shares
one performance measure to be met
for awards to vest; Performance India Perf.Based Cash LTI Options RSP
share plans are most common Japan Options Zero-cost options/ RSP Perf.Based Cash LTI
Korea Perf. Shares Perf.Based Cash LTI Options
Average weighting of Singapore Options Perf. shares RSP
45%
restricted stock/ RSU’s
Taiwan Options RSP
in APAC LTI portfolio,
vs. global average of Indonesi Restricted
21% Options Cash LTI
a Shares



T O TA L C O M P E N S AT I O N S T R U C T U R E
When reviewing a pay structure, it is important to approach from a holistic view of Total
Compensation – each element has unique objective and plays a different role
As a key engine for driving a sustainable long-term performance and promoting a sense of
‘shared destiny’ across operations, it is crucial to have an effective long term incentive plan
in place
Compensation Base Salary Performance

Framework and Allowances + Bonus + Long Term Incentive Plan
TOTAL COMPENSATION
Pay for job and Short-term(annual) Long term alignment and

Objective
skillset result employee retention
Pay for Annual salary increment Long term sustainable

Performance Annual financial/individual performance company growth

T Y P E S O F LT I S
TWO MAIN FORMS
EQUITY SETTLED CASH SETTLED
Stock Option Option to buy shares at a Long-Term Long term incentive plan with
fixed price, thus benefiting Cash unit price assumed fixed.;
from any upside in the price Upside and downside based
during that period. on performance outcomes
Performance Share grants with Phantom Paid in cash, instead of

Shares achievement of Shares shares, the amount of
performance targets which is based on share
value
Restricted Share grants provided after Stock Paid cash for any increase
Shares fulfilling a pre-agreed Appreciation in share value from issue
employment period Rights date to exercise date
Share Grant Share grants without any (SARs)
conditions

LONG TERM INCENTIVE PLAN
COMMON OBJECTIVES
DRIVE LONG-
TERM RETENTION & DRIVE NUMBER &
PERFORMANCE INSTILL SHAREHOLDERS SPECIFIC
LOYALTY ALIGNMENT OBJECTIVES
OF LTIS WILL
DIFFER BY
COMPANY
AND/OR
EMPLOYEE
GROUPS
ENSURE
MARKET BALANCE OUT FACILITATE
COMPETITIVENESS “SHORT-TERM” EXECUTIVE
ANNUAL OWNERSHIP
INCENTIVES

LONG-TERM INCENTIVE PLAN OBJECTIVES
A BALANCING ACT
COMPANY EMPLOYEE
PERSPECTIVE PERSPECTIVE
Performance Linkage Achievability
Retention Sizeable Award
Shareholder Alignment Influenceable/Controllable
Affordability Fair & Simple
EFFECTIVE LONG-TERM INCENTIVE PLAN

T Y P I C AL E Q U I T Y- S E T T L E D LT I V E H I C L E S
C OM PAR I S ON S U M M ARY
# LTI Objectives Share Long-Term Performance Restricted Share

Options Cash Shares Shares Appreciation Rights
Drive long-term
1
performance
Retention and
2
instil loyalty
Alignment with
3
shareholders
Market
4
competitive pay
5 Wealth Creation
Simplicity and
6
Transparency
Fully meets the Significantly Partially meets Somewhat meets Does not meet
requirements meets the the requirements the requirements the requirements
requirements
R E L AT I V E S T R E N G T H S O F E Q U I T Y - B A S E D P L A N S
• There are no “right” or “wrong” equity-based incentive devices
• It should be noted that each device offers advantages and disadvantages to the
company and the employee
Low performance Moderate performance High performance

High retention Moderate retention Low retention
Low share utilization Moderate share utilization High share utilization
Restricted Performance- Price- Vanilla Vanilla Performance- Price- Indexed Premium-

Stock vested vested Stock Stock vested vested Stock prices
Restricted Restricted Options Options Stock Stock Options Stock
Stock Stock with Options Options Options
Dividend
Equivalents

LONG-TERM INCENTIVE VEHICLES
STOCK OPTIONS
 Right to purchase Company stock at today’s price at some point in the future
 Employee receives the appreciation in value per share from grant to the time the option is
exercised
 Normally has vesting and a term to exercise
 Participant determines timing of exercise and measurement period
DESCRIPTION
 Relatively simple to understand

 Alignment with shareholders
 Fixed accounting
 Employee can time taxation
ADVANTAGES  Does not require goal setting
 High leverage
 High dilution
 Fixed equity expense regardless of value delivered
 May have low perceived value among participants
 Stock price movement may be perceived to be beyond the control of some employees
DISADVANTAGES

RESTRICTED STOCK UNITS
 Promise to pay Company stock at some point in the future

 Vesting requirements (typically 3 to 5 years)
 Units are forfeited if employee terminates before vesting
 Participant does not own stock until receipt and has no voting rights
DESCRIPTION  Participant may be eligible to receive dividend equivalents
 Advantages similar to restricted stock

 More flexible for international application
ADVANTAGES
 Tie to performance may not be as strong as other vehicles

 Less upside potential
DISADVANTAGES

PERFORMANCE SHARES / UNITS
 Contingent grant of fixed number of shares at beginning of performance cycle

 Actual number of shares earned depends on degree of attainment of performance goals
 Ultimate value of award depends on (1) number of shares earned and (2) stock price over
performance cycle
DESCRIPTION  Performance cycles are typically 3 years in duration with a new cycle initiated annually,
although 1 year performance periods with subsequent vesting are becoming more common
 Strong link to company performance (internal or external goals) as well as share price
 Mark to market fair value accounting based on probability of achievement
 Reversible expense unless share appreciation metric used
 Can be structured to qualify as performance-based under Section 162(m)
ADVANTAGES
 More risk than time-lapse restricted stock

 Increased complexity due to need to set goals or index
DISADVANTAGES

W H AT ’ S N E X T T O K E E P U P W I T H C H A N G I N G
L A N D S C A P E O F E X E C U T I V E C O M P E N S AT I O N ?
Remuneration Committee • Ensure incentive pay is aligned to long

must ensure the following: term company goal and direction
- Independence • Incentive pay system should reward
- External vision employees for achievement and deliver
- Internal focus Update role meaningful monetary values
of the RemCo Review incentive • Incentive pay should link employees
plans interest with shareholder value creation
• Establish a governance structure with

• Establishing pay clearly defined framework for reward
for performance decisions
• Quantifying potential Understand Clarify • Ensure RemCo has appropriate level of
post employment benefits pay program governance support from BOC and BOD
under various scenarios risks structures • Reflect good governance practices

V I E W P O I N T S O N E X E C U T I V E P AY
FOCUS OF EXECUTIVE REMUNERATION
Shareholder interest Pay for performance focus Long term goal and direction
 Involvement of employees and  Higher quantum in return for  Focus on fixed pay and variable
shareholders performance maximum reductions
 Potentially binding votes on pay  Trust board regarding targets  Lack of trust in performance
 Publication of pay ratios  Less regulation of pay/ target setting
 Awareness of inequity/ governance  Greater regulation of pay /

differentiation across groups  Return to shareholders = governance
success  Encourage longer-term vesting

Q U E S T I O N S ?
CHERYL WIDJAJ A
Associate Director
Mercer Indonesia
Cheryl.Widjaja@mercer.com
KEVIN ONG
Head of Executive Remuneration and Governance
Southeast Asia
Kevin.Ong@mercer.com


05 Executive Remuneration-1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

05 Executive Remuneration-1

Uploaded by

Copyright:

Available Formats

HEALTH WEALTH CAREER

INDONESIA M ARKET TREND

LONG TERM INCENTIVE PLAN

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 2

Indonesia Market Trends of Executive Long Term Questions and

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 3

Increased Pressure to Greater Scrutiny on Remuneration as a Strategic

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 4

Excerpt from OJK regulation on ‘Remuneration Committee”

Duties and Responsibilities

Disclosure requirement is becoming increasingly strict on the following items….

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 5

In the year of 2016, BoC of one of the state

Despite company reporting at loss, BoD I N C R E AS E D

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 6

WHY WE FORSEE A DEMAND FOR WHY WE FORSEE A DEMAND FOR

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 7

EXECUTIVE EQUITY BASED SUCCESSION

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 8

• Stronger commitment towards corporate

• Independence and objectivity challenges in

• LTI remains a relatively new concept in

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 9

Indonesia Market Trends of Executive Long Term Questions and

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 10

TIGHTENING • Increased public awareness and

INCREASING • Publication of pay ratios

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 11

There is a wide variety of pay levels in Asia and globally

TOP EXECUTIVES PAY-MIX

2-Part Model Base Salary STI

Top Executives 40% 60%

Senior Management 52% 48%

3-Part Model Base Salary STI LTI

Top Executives 33% 40% 27%

Senior Management 45% 35% 20%

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 13

FROM PRIVATE COMPANY… … TO PUBLIC COMPANY

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 14

Germany Perf.Based Cash LTI Perf. shares Options

measures Switzerland Perf. Shares RSP Options

UK Perf. shares Deferred bonus match Options

Korea Perf. Shares Perf.Based Cash LTI Options

Average weighting of Singapore Options Perf. shares RSP

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 15

Indonesia Market Trends of Executive Long Term Questions and

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 16

Compensation Base Salary Performance

Pay for job and Short-term(annual) Long term alignment and

Pay for Annual salary increment Long term sustainable

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 17

TWO MAIN FORMS

EQUITY SETTLED CASH SETTLED

Performance Share grants with Phantom Paid in cash, instead of

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 18

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 19

Performance Linkage Achievability

Retention Sizeable Award

Shareholder Alignment Influenceable/Controllable

Affordability Fair & Simple

EFFECTIVE LONG-TERM INCENTIVE PLAN

Copyright © 2019 PT Mercer Indonesia. All rights reserved. 20

# LTI Objectives Share Long-Term Performance Restricted Share

• There are no “right” or “wrong” equity-based incentive devices