Linking shareholder returns and ESG metrics to incentive plans
A few notable benchmark proposals on long-term incentive plans have come up in Taiwan in the first half of 2021. The two common themes are:
Though with different features in their respective designs, these benchmark programs may well lead to new trends in the use and design of long-term incentives for executive compensation in the Taiwan market.
In the order of the date of respective board approvals, here are the three benchmark programs that are worth noticing:
01
MediaTek is an IC (integrated circuit) design firm with US$57 billion market cap, listed on the Taiwan Stock Exchange. On March 19, 2021, the board of directors approved the issuance of performance shares with Total Shareholder Return (“TSR”), relative to the TSR of top 50 market-cap listed in Taiwan electronic component industry, as one of the performance vesting metrics.
TSR is used widely by global companies and supported by institutional investors as a preferred equity incentive plan performance metric. But this market-based metric has long been viewed by the traditionally operationally-minded Taiwan firms to be external and non-controllable.
MediaTek is the first major Taiwan company to use TSR to add an explicit shareholder value perspective into its equity incentive plan design. Along with TSR, MediaTek’s 2021 plan also has three operational performance metrics: revenue growth, gross margin, and operating margin. Together, these metrics lay out MediaTek’s strategic priorities both on shareholder value performance as well as operational performance. For Taiwan companies looking for examples of LTI plan design that creates a relatively more holistic performance linkage, MediaTek’s 2021 program could be a good benchmark.
02
TSMC, the largest company in Taiwan by market cap (over US$560 billion), announced on April 22 that it plans to issue performance shares for the first time in company history.
The TSMC plan will be limited to its executive level and will use only one main performance vesting metric: Total Shareholder Return (“TSR”) relative to the S&P 500 IT index. The TSMC plan also features an ESG(Environmental, Social and Governance) modifier that can add or subtract 10% in addition to its relative TSR results. This is the first time a major Taiwan company has explicitly linked ESG to equity incentives.
There could be challenges in implementation for TSMC, though. The TSMC plan does not specify what the ESG measures are and has left the modifier to be at the discretion of its remuneration committee upon future vesting.
The use of ESG as executive compensation metrics is becoming much more common globally. According to a Willis Towers Watson analysis, more than half of US S&P 500 companies have tied ESG performance to executive incentive plans. But only 4% have applied such metrics to their long-term incentives, which is typically more formulaic and less discretionary. Still, we expect the TSMC proposal to create a precedence for other Taiwan companies, especially those who prioritise the linkage with shareholder value and sustainability over other considerations in their plan designs.
03
China Development Financial Holding Corporation (“CDF”) has long been the only major financial service firm in Taiwan to use performance shares as a significant component for executive compensation. In May 2021, its board approved a new performance shares plan that requires three years of performance vesting and three years of service vesting, a combined five-year vesting period that will span across six fiscal years.
Although longer vesting and retention periods are consistent with trends in the global financial services industry – often driven by regulatory mandates – CDF’s new vesting requirement is currently the longest among large-cap financial service companies in the Taiwan market. CDF’s 2021 LTI plan also features the use of relative TSR, relative ROE (Return on equity) and relative EPS (Earnings per share), all measured against its financial holding peers listed in Taiwan.
While common in other Asian and global markets, such LTI grants and performance metrics are pioneering in the Taiwan financial service industry and could become a benchmark reference for other Taiwan financial service peers.
Taiwan has long lagged other markets in the use of long-term incentives, with less than 10% of companies adopting such compensation tools, according to the Willis Towers Watson 2020 Compensation Survey. With the emergence of high-profile cases by leading companies like TSMC and MediaTek, more companies may start to use performance shares as part of their total reward structure and make their executive compensation programs more aligned with company strategy and long-term shareholder value creation.
This article is also available in Traditional Chinese version.
