Spotlight on executive pay
From here on in, investors - and juries in some cases - are making transparency their watchword when vetting company performance via the merits of management. And following that lead, the business and investor communities in Poland are increasingly looking to management board compensation, as a part of an overall corporate governance initiative, for answers on how to further propel the convalescing economy, as well as how to combat corporate fraud.
The Polish Securities and Exchange Commission (KPWG) recently began requiring Warsaw Stock Exchange listed companies to provide aggregate salary figures for what they pay their management board. This is a conscious effort to primp the image of publicly listed companies and provide investors with more vital information. At the same time, consultants are noting an increase in demand for compensation scheme advice.
At the heart of the issue are the individual WSE investors - the number of which are growing despite the lack of companies to invest in - and the sometimes lackluster returns from the exchange. As such, the investor class is homing in on management board remuneration. The companies must hire management based on merit, they say.
"Compensation of management boards has always been an important issue," says Bartosz Dziemaszkiewicz, vice president of the Individual Investors Association (SII). Return on investment indeed fomented investors' concern, "Especially when the bear market started and most companies' shares dropped radically - while salaries stayed in most cases on the same high level," Dziemaszkiewicz notes.
He maintains that Polish management at listed companies should be compensated based partly on stock performance. At present, there is too high an incidence of management pay that ignores company performance.
"At the moment, the management boards of Polish public companies are not paid based on their stock performance," he says. "They have fixed salaries that are, in most cases, not connected with stock performance."
He points out that it extends beyond just share prices; that management should be liable for other potential mishaps at the companies and be remunerated thus. "We also support any proposals on directors' responsibility, which will hopefully discourage mismanagement in the long term," he says.
But for all of Dziemaszkiewicz's concern, the Polish investor is impotent in the face of capital markets when it comes to influencing what management boards are paid.
For instance, listed banks - however they're performing - offer little leeway to investors.
"The strategies are mostly decided by the strategic investors in Polish banks," says Marcin Materna, banking analyst at Bank Millennium. "Other investors don't really have that much of a say."
Analysts explain that in many listed companies, management and supervisory boards are stacked with former employees of their strategic investors, whose pay is not linked to the company performance. In many ways, investors have their hands tied because often strategic investors pay scant attention to the share price - that is, until they plan to sell their stakes.
Materna points out that BRE Bank, for one, is an exception to this rule. On top of the zł.11,131,000 it paid its entire management board last year, it also provided stock options.
But otherwise, stock exchange investors view companies' strategy of pay without stock incentives as a cold shoulder, deliberately freezing them out. Their interests are being overlooked, which further detracts from the attractiveness of the WSE.
KPWG has been hard at work stabilizing the exchange for investors - partly through enforcing a "soft law" to provide information on management board pay.
Michał Stępniewski, KPWG spokesman, admits it was a difficult proposition to ask companies what they pay their boards. "The situation in Poland is not perfect for it," Stępniewski says. "We are a special country, a new democracy and revealing what anyone's paid is not popular. But it's very popular with the media... they ask 'How Much?'"
In terms of management pay, he says that part of the reason that Polish companies will not become as transparent as those in the U.S. anytime soon is Polish culture. There's a different "mentality" on the Polish capital markets. When people have a lot of money, he says, "the reaction is that someone must have stolen the money. That is a problem."
Interestingly, Jacek Socha, KPWG chairman, gets paid zł.18,000 per month.
Besides prompting companies to become more transparent, KPWG is pushing consultants to act as well. "Right now, at this exact moment, we are in talks with key people at companies listed on the WSE," Krzysztof Gugała, partner at IDEA! MC. "We are probably going to put together some kind of remuneration research on publicly traded companies."
He adds that there was an impetus for the move: "Of course there's some trigger for this," he says, pointing to the KPWG's soft law. But on top of that, he notes that as a consultant, his research might be valuable because of cultural proclivities to shy away from publishing salaries.
"It's still very tough to find out the salaries of particular people," he says.
Gugała gives another explanation for the impetus, as well: "Comparing it with the global scale there is much less pressure in Poland (to publish salaries)," he says.
Some reason for the lesser pressure is probably the fact that while Enron and WorldCom - by virtue of their respective scandals - have became household metaphors for corporate greed in the U.S., Poland has been able to distance itself from such exposure.
Nonetheless Gugała is preparing a report on remuneration research. "I think we felt the need, especially during the summer time when the supervisory boards meet, to discuss business strategies - an important part of which is management compensation."
Besides just looking at the remuneration issue from the shareholders' perspective, payment consultants say that methods by which management gets paid directly affect company performance and, in turn, the performance of the whole economy.
In this particular vein, Mik Kuczkiewicz, managing director at Hay Group, a Warsaw-based management consultancy, notes a recent trend in Poland. He says that companies are moving toward rewarding management with more long-term incentives and other performance-based packages. On average, Poles' salaries are 73 percent based on base pay, compared to 60 percent in Belgium and 63 percent in the UK (see graph), according to a forthcoming Hay Group annual report in which they surveyed public and private companies. This is significant because it shows how Polish peoples' pay is less based on incentives, when compared with Western European employees.
Kuczkiewicz expects Polish enterprises to begin migrating toward more mid- and long-term incentives and benefits packages, such as pension schemes, as opposed to just paying out base salaries.
But there is an exception to this trend, that being the state-owned companies. Executives at state-owned companies have shorter-term time horizons because they tend to be hired and fired depending on which political party is in power. So it makes little sense to tie compensation to future revenues and the like.
In the private sector, however, adopting more western-style payment schemes will aid in improving the economy. But there is still more work to do on the issue of remuneration in terms of corporate governance.
"Corporate governance is more of an issue in non-Western companies," Kuczkiewicz says. He notes, however, that through the natural course of time, local companies will begin to be as transparent as those in the West.
And that would be happy news for investors.
"(Lack) of respect for shareholders rights by public companies is one of the reasons many investors retire from the capital markets," SII's Dziemaszkiewicz says.
The Polish Securities and Exchange Commission (KPWG) recently began requiring Warsaw Stock Exchange listed companies to provide aggregate salary figures for what they pay their management board. This is a conscious effort to primp the image of publicly listed companies and provide investors with more vital information. At the same time, consultants are noting an increase in demand for compensation scheme advice.
At the heart of the issue are the individual WSE investors - the number of which are growing despite the lack of companies to invest in - and the sometimes lackluster returns from the exchange. As such, the investor class is homing in on management board remuneration. The companies must hire management based on merit, they say.
"Compensation of management boards has always been an important issue," says Bartosz Dziemaszkiewicz, vice president of the Individual Investors Association (SII). Return on investment indeed fomented investors' concern, "Especially when the bear market started and most companies' shares dropped radically - while salaries stayed in most cases on the same high level," Dziemaszkiewicz notes.
He maintains that Polish management at listed companies should be compensated based partly on stock performance. At present, there is too high an incidence of management pay that ignores company performance.
"At the moment, the management boards of Polish public companies are not paid based on their stock performance," he says. "They have fixed salaries that are, in most cases, not connected with stock performance."
He points out that it extends beyond just share prices; that management should be liable for other potential mishaps at the companies and be remunerated thus. "We also support any proposals on directors' responsibility, which will hopefully discourage mismanagement in the long term," he says.
But for all of Dziemaszkiewicz's concern, the Polish investor is impotent in the face of capital markets when it comes to influencing what management boards are paid.
For instance, listed banks - however they're performing - offer little leeway to investors.
"The strategies are mostly decided by the strategic investors in Polish banks," says Marcin Materna, banking analyst at Bank Millennium. "Other investors don't really have that much of a say."
Analysts explain that in many listed companies, management and supervisory boards are stacked with former employees of their strategic investors, whose pay is not linked to the company performance. In many ways, investors have their hands tied because often strategic investors pay scant attention to the share price - that is, until they plan to sell their stakes.
Materna points out that BRE Bank, for one, is an exception to this rule. On top of the zł.11,131,000 it paid its entire management board last year, it also provided stock options.
But otherwise, stock exchange investors view companies' strategy of pay without stock incentives as a cold shoulder, deliberately freezing them out. Their interests are being overlooked, which further detracts from the attractiveness of the WSE.
KPWG has been hard at work stabilizing the exchange for investors - partly through enforcing a "soft law" to provide information on management board pay.
Michał Stępniewski, KPWG spokesman, admits it was a difficult proposition to ask companies what they pay their boards. "The situation in Poland is not perfect for it," Stępniewski says. "We are a special country, a new democracy and revealing what anyone's paid is not popular. But it's very popular with the media... they ask 'How Much?'"
In terms of management pay, he says that part of the reason that Polish companies will not become as transparent as those in the U.S. anytime soon is Polish culture. There's a different "mentality" on the Polish capital markets. When people have a lot of money, he says, "the reaction is that someone must have stolen the money. That is a problem."
Interestingly, Jacek Socha, KPWG chairman, gets paid zł.18,000 per month.
Besides prompting companies to become more transparent, KPWG is pushing consultants to act as well. "Right now, at this exact moment, we are in talks with key people at companies listed on the WSE," Krzysztof Gugała, partner at IDEA! MC. "We are probably going to put together some kind of remuneration research on publicly traded companies."
He adds that there was an impetus for the move: "Of course there's some trigger for this," he says, pointing to the KPWG's soft law. But on top of that, he notes that as a consultant, his research might be valuable because of cultural proclivities to shy away from publishing salaries.
"It's still very tough to find out the salaries of particular people," he says.
Gugała gives another explanation for the impetus, as well: "Comparing it with the global scale there is much less pressure in Poland (to publish salaries)," he says.
Some reason for the lesser pressure is probably the fact that while Enron and WorldCom - by virtue of their respective scandals - have became household metaphors for corporate greed in the U.S., Poland has been able to distance itself from such exposure.
Nonetheless Gugała is preparing a report on remuneration research. "I think we felt the need, especially during the summer time when the supervisory boards meet, to discuss business strategies - an important part of which is management compensation."
Besides just looking at the remuneration issue from the shareholders' perspective, payment consultants say that methods by which management gets paid directly affect company performance and, in turn, the performance of the whole economy.
In this particular vein, Mik Kuczkiewicz, managing director at Hay Group, a Warsaw-based management consultancy, notes a recent trend in Poland. He says that companies are moving toward rewarding management with more long-term incentives and other performance-based packages. On average, Poles' salaries are 73 percent based on base pay, compared to 60 percent in Belgium and 63 percent in the UK (see graph), according to a forthcoming Hay Group annual report in which they surveyed public and private companies. This is significant because it shows how Polish peoples' pay is less based on incentives, when compared with Western European employees.
Kuczkiewicz expects Polish enterprises to begin migrating toward more mid- and long-term incentives and benefits packages, such as pension schemes, as opposed to just paying out base salaries.
But there is an exception to this trend, that being the state-owned companies. Executives at state-owned companies have shorter-term time horizons because they tend to be hired and fired depending on which political party is in power. So it makes little sense to tie compensation to future revenues and the like.
In the private sector, however, adopting more western-style payment schemes will aid in improving the economy. But there is still more work to do on the issue of remuneration in terms of corporate governance.
"Corporate governance is more of an issue in non-Western companies," Kuczkiewicz says. He notes, however, that through the natural course of time, local companies will begin to be as transparent as those in the West.
And that would be happy news for investors.
"(Lack) of respect for shareholders rights by public companies is one of the reasons many investors retire from the capital markets," SII's Dziemaszkiewicz says.
