Samil PwC "Linking Executive Compensation to Performance, First Step to Increasing Shareholder Value"

Publication of Governance Focus
Examining Executive Compensation and Shareholder Value

A report has emerged suggesting that performance-linked compensation plans, which pay executives based on their performance, can be the first step toward enhancing shareholder value. In South Korea, such plans are gaining attention as a means to motivate executives and mitigate agency problems, with increasing adoption cases.

On the 12th, the Samil PwC Governance Center announced the publication of "Governance Focus No. 28," which includes a research report by Professor Lee Ji-yoon of Yonsei University’s Business School covering these topics. The report, titled "Executive Compensation and Shareholder Value ? The Role of Performance-Linked Compensation," analyzes the necessity of performance-linked compensation, its impact on increasing shareholder value, and the requirements for effective operation.

According to the report, as of 2022, 94% of the top 250 U.S. companies adopted performance-linked stock compensation, and this trend is spreading in Korea as well. A representative example is Elon Musk, CEO of Tesla, who has received compensation based on Tesla’s market capitalization and operational goal achievements since the board approved a performance-linked compensation plan in 2018. Recently, performance-linked compensation plans have been recognized as a useful tool to align executive incentives with shareholder interests and alleviate agency problems.

There are four types of performance-linked compensation: the most basic is Stock Grant, where companies provide shares to executives and employees free of charge. Stock Options and Restricted Stock Units (RSUs) grant the right to purchase or promise to deliver shares at a future date. Performance Stock Units (PSUs) are paid only when pre-set performance targets are met. There is also cash bonuses paid based on whether predetermined goals are achieved.

However, the report points out that for such compensation to effectively enhance shareholder value, board independence and transparent disclosure must be supported, and companies should establish compensation committees to decide and manage these plans.

Professor Lee noted, “Choosing a compensation method should vary according to a company’s unique characteristics and strategic goals, but it must be supported by board independence and transparent disclosure to operate effectively.” According to a previous board trend report published by the Samil PwC Governance Center, only 31% of KOSPI-listed companies with assets exceeding 500 billion KRW have established compensation committees. Many companies still lack separate bodies for systematic compensation policy management.

Status of Committee Establishment in KOSPI Listed Companies (Non-Financial) with Total Assets Over 500 Billion KRW. Provided by Samil PwC Governance Center

Professor Lee also mentioned the U.S. Say on Pay system, which strengthens shareholder roles in establishing and operating compensation systems. This system grants shareholders the right to express approval or disapproval of executive compensation policies. She emphasized the need for careful composition when using Compensation Peers, which are groups of companies selected to compare and benchmark executive compensation levels and structures.

Professor Lee stated, “If Compensation Peers are not carefully composed, there is a risk of justifying excessive compensation, so a compensation system reflecting a company’s unique performance and strategic goals should be implemented in parallel. Considering the current state of compensation disclosure in domestic companies, using Compensation Peers is premature,” she added. Detailed information on the report is available on the Samil PwC Governance Center website.

This content was produced with the assistance of AI translation services.