Share of Performance-related Pay Small
The Korea Insurance Research Institute said on Dec. 16 that base pay accounts for 64 percent of the annual salary of the CEOs of South Korean insurers whereas the ratios of short-term and long-term performance-related pay are 19 percent and 17 percent, respectively.
According to the institute, the respective ratios are 16 percent, 5 percent and 73 percent in the case of their U.S. counterparts. “The South Korean CEOs are getting a high pay regardless of their performance and this means that no incentives are being provided for their corporate value enhancement efforts,” it said.
In its report, the institute pointed out that a higher ratio of performance-related pay has a more positive effect on ROA, ROE and long-term performance. “South Korean insurance companies need to increase the ratio of performance-related pay such as restricted stock units and stock options,” it said, adding, “There are analyses that the corporate value of an insurance company rises along with the CEO’s shareholding in the company.”
At present, shares account for approximately 10 percent of domestic insurance company CEOs’ performance-related pay whereas the ratio of cash amounts to 74 percent. On the other hand, listed U.S. insurance companies’ CEOs are required to own treasury shares equivalent to 300 percent to 500 percent of their annual base pay.
The institute also pointed out that the ratio of deferred payment in the performance-related pay should be raised so that the CEOs can focus more on long-term performance and risk reduction. “Insurers handle long-term products in most cases and, as such, the compensation systems for the CEOs have to be designed in the interest of long-term profits,” it explained, continuing, “In general, four- and seven-year deferred payments are applied to performance-based variable pay in the United States and the United Kingdom, respectively.”