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Desmond Kuek

More than meets the eye with SMRT CEO’s 20% pay cut?

Recently news emerged that SMRT Corporation’s top boss Desmond Kuek has taken a significant cut in remuneration.

The president and group CEO of SMRT Corporation is reportedly taking home a total remuneration of SG$1.87 million for the financial year ended March 31, as seen by Marketing. The number was SG$2.31 million last year, signalling a 20% cut.

This was despite his base salary increasing and number of shares allocated to him not changing. According to the SMRT financial documents, the dip came due to the variable/performance related income/bonuses. Here’s a chart of the performance:

SMRT

 

(Click  here for the source)

Kuek who came on board in 2012 joined at the height of SMRT crisis due to aging operating systems and breakdowns. Now, will the pay cut affect its brand perception in any way?

In the recent years, the company has tried hard to get its act together. Over the last three years alone, SMRT grew the number of rail maintenance staff by almost a quarter. For executive rail engineers alone, the staff count grew by 80%.

Nonetheless, it still continues to face breakdowns along the way.

Whether or not this was the reason behind Kuek’s performance cut remains unknown. SMRT Corporate did not respond to Marketing’s queries as to what factors led to the pay cut.

According to the financials, the corporation ended the financial year with total Group revenue of SG$1.30 billion. Group Profit (PATMI) was SG$109.3 million, which was 20.1% higher than the previous fiscal year.

The Rail business continues to be under pressure under the current financing framework despite the slight revenue hike of 4.1% to $681.0 million in FY2016. This was mainly due to higher ridership and average fares being higher. Meanwhile, rental and ad business continued to be major contributors for non-rail revenues which saw a growth of 5.9%. 79.6% of the Group’s Non-Rail Business’ operating profit came from them.

Lars Voedisch, principal consultant and managing director of Precious Communications said if SMRT would have wanted to liken the CEO’s pay cut to a reputation matter, and let it be perceived as service related, then they should have definitely come forward saying so. He added:

Right now we can only speculate the reasons for the pay cut as we don’t know the indicators defining his variable salary component.

However, what is more interesting is, if one looks at the changes in operating profits from 2014 to 2015 – which grew 43%. From 2015 to 2016, however, the growth was strong but relatively moderate at 15% compared to the previous year, said Voedisch.

He noted SMRT’s earnings from its rail operations have been steadily declining and profit coming from other activities like especially rental, advertising or bus and taxi operations has been increasing.

“I would argue it’s not so much a cut this year. Rather, it had a possibly extraordinary year before in terms of profit growth. The interesting question to ask SMRT would be if the strong focus on profit growth and margin in the past years might have any correlation to perceived reliability issues of the train services,” he added.

Lawrence Chong, CEO of Consulus said from the business angle, SMRT is facing challenging times and most likely this pay out adjustment reflects the current state. But to the man on the street, it might be read differently; that the company is holding the CEO accountable for ongoing rail reliability issues and recent mishaps.

This, he says, could be a positive move for SMRT because globally consumers are increasingly calling for accountability in the board rooms. He added:

By demonstrating that the corporation is sensitive, it will make it easier for the current CEO to communicate his new business vision as Singapore adopts a new regulatory framework for public transport.

Nick Foley, president of the Southeast Asia and Pacific regions, Landor, said the move to him seemed unusual and many might find the pay cut to be demotivating.

When CEOs don’t perform, they usually leave the company. The SMRT CEO is not going to be feeling a sense of inspiration out of the reduction in remunerations nor the publicity that surrounds it.

But this does not necessarily imply negativity for the brands image, he added explaining most CEO’s are on remuneration packages where the variable component is significantly larger than the fixed component – i.e the base salary.

“Shareholders should expect that when a company fails to perform, the variable remuneration to the leadership team decreases. This type of remuneration structure is tried and trusted and aligns with pay for performance,” he added.

 

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