Sumatec: Vision and Mission
Sumatec is a Malaysian-based company that aims to progressively and systematically endow itself with the ability to offer integrated services to industrial sector. The company’s services include integrated engineering, procurement, construction and commissioning (EPCC) services. Thus, the main vision of Sumatec is to become a leading conglomerate in Malaysia and beyond. The company’s mission is to turn into an innovative conglomerate that utilizes resources efficiently to provide high-quality products and services to meet customers’ requirements. As a result, the Group aims to generate maximum profits for its shareholders (Sumatec 2011, p. 1).
Sumatec’s financial performance has somewhat been discouraging, especially between FYE 2006 and FYE 2010 (see appendix). For example, the company recorded a pre-tax loss of RM37.9 million for the FYE 2010 compared to a pre-tax loss of RM65.4 million registered in FYE2009. However, the Group generated RM214.7 million revenues for the FY2010. This represents a remarkable improvement in terms of revenue generated given that the Group’s revenues for the FYE2009 were estimated at RM167.2 million. In addition, the Group’s earnings per share (EPS) were -22.08 sen for the FY2010 compared to -40.53 sen for FYE2009. Sumatec’s investor’s fund, for FYE 31st December 2010, was RM16.8 million while the net asset per share was 10.4 sen (Sumatec 2011, p. 8).
Engineering, Procurement, Construction & commissioning (EPCC)
Sumatec acquired a contract worthRM50 million from KNM Group to carry out construction work on the latter’s Ethanol Plant in Thailand. In addition, Sumatec secured a contract from PETRONAS to revamp and rejuvenate Asean Bintulu Fertilizer Complex at Bintulu. The Group is nevertheless actively in pursuit of lucrative contracts in not only Malaysia but also foreign countries (Sumatec 2011, p. 8).
During the FYE 31st December 2010, the Shipping Division of the Group undertook delivery of 11,000 DWT double hull tankers. On the basis of these deliveries, the Division presently runs a fleet of 11 shipping vessels. The fleet’s cumulative tonnage is 101,810 DWT. What’s more, most of these shipping vessels have been contracted, on long-term basis, to a leading Oil Major in Malaysia which transports petroleum merchandises from main oil refineries in Singapore and Malaysia to different oil terminals in Malaysia. In addition, two double hull shipping vessels have been leased to a Korean shipping company which transport chemical merchandises in Middle East as well as Asia Pacific. It is worth mentioning that the Shipping Division has persistently endeavored to attain an exceptional safety culture, top quartile performance, KPIs for performance measurement and apt contract action strategies to gain continuous support from the charterer.
For instance, in April 2011, the Shipping Division sold its 4,999 DWT oil shipping vessel. This constitutes part of the Group’s strategy to dispose old single hull oil shipping vessels. What’s more, during the same period, the Group disposed 49% stake of its Shipping Division to Ebony Ritz Sdn Bhd, a Malaysian’s acquisition vehicle employed by Grand Columbia Holding Sdn Bhd and Hoe Leong Corporation Ltd. The disposal constitutes the Group’s objective to modernize and rationalize its operations by lending credence to its core competency, which is to become the frontrunner in EPCC services in oil and gas sector (Sumatec 2011, p. 9).
Future Outlook, Corporate Governance & CSR
Sumatec’s board is wary of the Group’s future outlook with regard to its EPCC operations which remain extremely uncertain. Nonetheless, the Board and Management will persist to adopt efficient strategies in order to minimize costs and overheads as well as seek more lucrative contracts. Sumatec also aspires to maintain exceptional standards of corporate governance. The Group plans to achieve this goal by increasing the value of its investors as well as offering timely and precise information via announcements and shareholder relations programs. What’s more, the Group recognizes the important role played by its corporate social responsibility (CSR) towards employees, environment and community. It is against this backdrop that Sumatec will continue to fulfill its CSR responsibilities in various spheres in the future (Sumatec 2011, p. 9).
However, the somewhat consistent dismal financial performance of the Group reflects an absence of an effective motivation plan for the senior staff. It is worth mentioning that many companies have achieved remarkable results by linking an effective motivation scheme (for senior managers such as CEOs and CFOs) to organizational objectives. The following sections will address motivation plans that can be adopted (for senior managers) to assist Sumatec achieved its stated goals (i.e. improve financial performance and create more wealth for its shareholders).
Characteristics of an Effective Motivation Plan
There is a widespread perception among some researchers that an incentive pay plan has a negligible effect on the performance of executives, such as Chief Financial Officers (CFO) in terms of achieving organizational goals and objectives. However, it appears that personal incentives as well as an extremely differentiated reward and recognition schemes are quite useful in objective assessment of performance. This is particularly true when performance is mainly the outcome of individual effort rather than the offshoot of mutually dependent activity. For instance, professional golf players perform well when pay is tied to performance (Robinson 2006). Several studies conducted in the past attest to the argument stated above that a bonus scheme can somewhat motivate the performance of senior executives.
For example, a survey done by Watson between 2003 and 2004 (involving 1,700 senior executives from 16 organizations) found that these high performing executives rated ‘positive reputation’ as the principal factor in their motivation. Being appreciated was rated as the second factor; belief that their effort is vital, exciting tasks and financial reward were rated as third, fourth, 9th and 10th in that order (Robinson 2006). Another study found that 68% of the 205 senior executives from different sectors reported that their organizations had a bonus scheme for executives since the board deemed such reward plans would inspire executives. However, the same executives stated that their daily decisions with regard to business operations were not influenced by these reward plans (Robinson 2006).
The findings of the two surveys mentioned above seem to suggest that the performance of many senior executives (i.e. CEOs and CFOs) is least influenced by financial reward schemes. Most of these senior executives consider respect, trust, reputation and being appreciated as the main factors that drive their performances. In other word, their performances are not based on financial rewards. They (financial reward schemes) are vital for other reasons but are not major drivers of performance (Robinson 2006).
Thus, senior executives can be effectively motivated to deliver desired results if they are allowed to see and experience the positive offshoots of their efforts (i.e. being seen as an integral part of supportive team. It is worth mentioning that senior executives derive happiness from their social relations in the workplace. They are bound to perform better if they know that others will benefit from their efforts and that their performance augments their reputation. For example, a senior executive at Philips Medical Systems once stated that corporate goals and objectives must be humanized because majorities of senior executive are not motivated by financial reward schemes or maximization of shareholder value objective (Robinson 2006).
It appears that a number of organizations seem to lend credence to motivation schemes to spur their senor executive staffs to perform better. For example, Southwest Airline’s low fare structure (attributed to its productive workforce) is not only a competitive strategy but one that help passengers to meet their families and colleagues on regular basis. The Men’s Warehouse motivates its senior staff to assist each other to become better individuals.
What’s more, the Warehouse describes their job as assisting men look better and be more productive in their endeavors. DaVita (which operates kidney dialysis centers) displays images of patients and has a video section where dialysis patients as well as their families and friends say “thank you DaVita for keeping the patient alive” (Robinson 2006). In nutshell, these organizations lend credence on celebrating their accomplishment and the spirit of companionship, as a motivational strategy for their senior staff, rather than financial reward schemes (Robinson 2006).
The Impact of Monetary Rewards on Motivation
When intrinsic rewards (i.e. financial rewards) are tied to managerial performance, intrinsic motivation reduces. This outcome is attributed to the fact that when senior executives are offered financial rewards for carrying out tasks that they already enjoy, they perceive themselves as working for the incentive rather than for the intrinsic satisfaction of the task. As a result, extrinsic incentives reduce their intrinsic interest. It can however be concluded that extrinsic incentives can either enhance or impair intrinsic motivation (satisfaction derived from accomplishing a particular task) on the basis of the manner in which the incentives are designed and interpreted (Katz 2000).
Compensation rewards have three salient elements: reward value, performance feedback, and assessment. Each element can influence intrinsic motivation in dissimilar ways. For example, the reward value element (which emphasizes incentive as an emblematic cue of accomplishment) lends credence to competence thereby promoting intrinsic motivation. Similarly, the feedback element enhances feelings of internal control which buttress intrinsic motivation of senior managers.
On the contrary, the assessment element enhances feelings of internal control which dampens intrinsic motivation (Katz 2000). For example, consider the findings reported by Jude Rich and John Larson (formerly employed at McKinsey & Company). In 1982, they assessed reward schemes at 90 major organizations in the United States (using proxy statements and Interviews) to ascertain whether companies with reward schemes for senior executives achieved better returns for their respective shareholders compared to those companies that did not have reward schemes. According to the findings of their study, there were no significant differences between these companies-in terms of increased value of shareholders (Alfie 1993, p.54).
Designing Motivational Plans: Individual Vs Group
Analyses of relevant literature suggest that both individual and group motivational plans have advantages and disadvantages. For instance, when a reward scheme is based on the performance of an individual senior executive, it may exert pressure on the individual to perform as well as to take responsibility for his/her own actions. This may result in an elevated risk-taking behavior. What’s more, an individualist motivational scheme can promote the feeling of meritocracy and provide a precious source of performance feedback if it effectively differentiates between high and low performers.
Thus, an individualistic reward plan can work well in large organizations (i.e. Sumatec) in which senior executives might otherwise feel misplaced in the system. On the other hand, when rewards are structured on the basis of group performance (which implies that each member of the group gets an equal reward), group members (particularly senior executives) gain more enjoyment, lower anxiety, perception of control, increased self-worth and respect for one another (Katz 2000).
However, both approaches (individualist and group-based motivational plans) have serious weaknesses. For example, under the individual-based reward scheme, information and resource sharing among senior executives is more likely to fail. An individual-based reward scheme can aggravate the feeling of a two-tier system of winners and losers within the organization. This means that appraisal for exceptional performance is reserved for a selected few.
As a result, such a system will be discriminatory against those executives who need to improve. Rather than improving their performance, lower performers may justify their dismal performance assessment as simply prejudice on the part of the performance appraisal team. As a result, this system will create a residue of displeased senior staffs who feel they owe nothing to the organization and this will negatively impact the long-term accomplishment of organization’s goals and objectives (Katz 2000).
Group-based reward schemes can as well possess dysfunctional effects. For example, it dampens exceptional contribution while, at the same time, enhancing regression to the mean. As a result, senior executives who perform dismally may have low motivation to acquire training in order to augment their performance. On the other hand, exceptional performers may opt to reduce their work rate or resign from their position to avoid being taken advantage of by low performers. Alternatively, they (exceptional performers) may turn into watchful supervisors who exert pressure on low performers to improve their performances. Consequently, the low performers may feel intense scrutiny and pressure exerted by other group members which further hinder prospects of low performers to improve (Katz 2000).
Therefore, on the basis of merits and demerits of both individual and group-based reward schemes presented above, incentives should be group-based when information-sharing and collaboration are crucial aspects to long-term performance, especially in cross-functional product development. This is because complexity of tasks is likely to shape the requirement for interdependence and collaboration among executives.
On the other hand, individual-based motivational plans will be suitable when attainment of organizational goals and objectives are pegged on individual performance. Thus, the nature of the tasks should determine the manner in which a reward scheme is designed. For example, a study by Gomez-Mejia and Balkin found that a reward scheme based on group performance is ineffective for senior managers who are unwilling to take risks. When such managers are subjected to a group-based reward scheme, they are likely to pull out, either behaviorally or cognitively (Katz 2000).
Characteristics of Incentive Plan
Incentive plans for executives can be divided into two categories: discretionary and non-discretionary incentive plans. Discretionary incentive plan usually do not state the specific performance criteria or the assessment time frame that will be employed to review performance of executives. Non-discretionary plan, in contrast, employs pre-determined assessment periods and precise performance criteria. Long-term performance schemes and annual bonus plans are apt examples of a non-discretionary plan that tie incentive compensation to the attainment of specific goals of the organization. On the other hand, examples of discretionary incentive plans are stock option plans and stock appreciation rights. Usually, the size and timing of these (discretionary) awards is done by a compensation committee (comprising of board of directors) and based on subjective assessment of managerial performance for a specific period of time (Rajagopalan 1997, p. 13).
Annual Bonus Schemes
Many organizations prefer to use annual bonus schemes given that they lend credence to annual accounting indicators as a basis for assessing financial performance of senior managers. Accounting indicators of performance (i.e. earnings per share, return on investments, and return on equity) are quite useful since they enable an organization to target explicit goals and objectives and emphasize on asset management and efficiency. In addition, they offer a strong connection between managerial actions and performances. This is due to the fact that senior executives possess greater leeway over financial performance than over stock performance.
As a result, annual bonus schemes are deemed suitable in circumstances where the accounting indicators, employed to assess performance of senior managers, correspond to the organization’s strategic goals. Given that accounting indicators aim at explicit dimensions of performance, they are suitable in circumstances where organizational performance can be represented by a few. In other words, managerial actions and the resultant outcomes can be explicitly tied to the accomplishment of such outcomes (Rajagopalan 1997, p. 13).
Although accounting indicators offer substantial control over the actions of senior executives, they also hinder managerial actions with respect to certain areas of organizational performance. As a result, they are only suitable for strategies that grant senior executives restricted options to deviate from the past. What’s more, accounting indicators may be suitable when the organization’s strategic goals demand that senior executives adopt more risky options with a prolonged time horizon (such managerial actions usually have a negative impact on short-term earnings). Consequently, prospectors are likely to achieve minimal gains if accounting indicators are employed in their incentive plans (Rajagopalan 1997, p. 14).
Cash (as opposed to stock) is the main type of incentive employed under annual bonus schemes. Cash rewards explicitly tie managerial incentives to past performance and therefore does not create additional commitment or risk on the part of the senior executive given that the value of a cash reward remains unaffected by the future performance of the organization. On the other hand, when stock options are offered as incentives, the future value of the stock is thus subject to the future performance of the organization. As a result, stock rewards may create a long-term orientation on the part of senior executives. This means that cash rewards are less effective (compared to stock options) in terms of aligning managerial interests with long-term strategic goals of the organization (Rajagopalan 1997, p. 14).
Long-term Performance Schemes
Long-term performance schemes usually employ 3 to 5 years to assess managerial performance. Consequently, they enhance a longer horizon among senior executives and result in the selection of strategies that promise long-term benefits. Long-term performance schemes are preferred by senior managers since they impose minimal risks on them compared to the short-term version. Under the long-term schemes, senior executive are scarcely reprimanded for short-term variations in performance over which they have limited sway. Hence, long-term schemes are useful for those organizations with long-term goals (Rajagopalan 1997, p. 15).
What’s more, from the standpoint of the company’s investors, the precise forms of managerial actions (stimulated by long-term reward schemes) will be based upon the performance indicators as well as the nature in which the reward is presented. In a situation where the range of managerial actions create problems (in terms of deconstructing managerial performance into distinct actions/objectives) the organization may employ market-based performance indicators (i.e. market return to stock price growth) to assess the performance of the firm. In addition, market-based indicators are extremely suitable when managerial actions are likely to generate returns in the future given that the stock market benefits from anticipated future earnings based on strategic decisions made by senior executives with regard to the present share price of the firm (Rajagopalan 1997, p. 15).
In addition, market-based indicators enhance risk-seeking behaviors and are therefore useful at aligning managerial interests with those of investors in circumstances characterized by self-serving managerial actions. For instance, market-based indicators are less susceptible to managerial manipulations compared to accounting indicators. All these attributes of market-based indicators make them especially suitable for Prospector strategies (which provide unlimited discretion to senior managers) given that they align managerial interests with the firm’s investors than accounting indicators.
It is worthy to note that long-term performance schemes (tied to accounting criteria) are suitable for a Defender strategy (which provides limited discretion to senior managers) given that they rarely stimulate the implementation of hazardous strategies. What’s more, it is easier to tie them to past managerial actions which mean that they can be utilized to refocus managerial actions to explicit areas that require urgent attention (Rajagopalan 1997, p. 15).
The manner in which long-term rewards are provided (either cash or stock) has far-reaching implications for managerial control and motivation. For example, stock rewards are more suitable than cash rewards in a situation where risk-seeking and long-term decision strategies are preferred. This arises from the fact that when senior managers are offered stock as rewards, they will be willing to maximize the returns on their stock.
Several past studies have revealed that the market value of stock rises with an increment in the changeability of returns. As a result, when senior executives (i.e. CEOs and CFOs) are given stock-based rewards, they are more likely to adopt strategies that augment the variability of proceeds on the company’s assets. In addition, stock-based rewards can be effectively used by the principal to control senior executives’ self-seeking actions than cash rewards. Although stock-based reward schemes are more effective in controlling managerial self-seeking interests, they may be ineffective in other situations where senior executives face elevated personal risks that arise from their managerial actions (Rajagopalan 1997, p. 16).
Stock option schemes resemble stock-based long-term performance schemes, however, with one key exception; they neither specify the precise performance indicators nor the time frame for assessment. As a result, stock option schemes provide unlimited avenues for the addition of subjective and qualitative aspects in the assessment process (including elasticity to employ diverse performance measures for different financial periods).
What’s more, stock option schemes can be employed as suitable compensation plans for senior executives for short-term as well as long-term managerial performances given that they are not tied to any pre-determined assessment time frame. The vagueness and flexibility of stock option schemes make them especially suitable for senior executives in Prospector companies who encounter elevated risks and may be punished if quantitative indicators of performance were employed. If a long-term performance scheme is the only reward plan for senior executives in Prospectors companies, it is likely to generate insecurity and thus have an adverse impact on managers’ confidence that present actions will ultimately pay off (Rajagopalan 1997, p. 17).
Compensation Plan for Senior Managers at Sumatec
One way that Sumatec can turn around its financial performance and accomplish its goals and objectives is through an effective compensation plan for its senior management staff. For example, an Employee Share Option Scheme (ESOS) can be employed as a compensation plan for senior executives at Sumatec. The ESOS (approved by the investors during the 8th Annual General Meeting held on24th June 2005) was adopted by Sumatec on 18th April 2007 after the Group acquired consents from the authorities. The ESOS (valid for a period of five financial years) may be renewed or prolonged up to 10 financial years. This scheme can be used to compensate senior managers in the following ways:
- The ESOS committee (hired by the Board of directors to run the ESOS) may from time to time offer options to qualified senior management staff employed by Sumatec to procure new ordinary shares of RM0.35 per share in the Group.
- The ESOS Committee shall have the discretion to determine the suitability of a senior executive to take part in the ESOS. In addition, the Committee must consider other aspects for example performance track record as well as the number of financial years the executive has served.
- The cumulative number of shares a senior executive at Sumatec will procure (under ESOS) must not go beyond 15% of the total ordinary share issued and fully paid-up capital of the Group at any time (as long as the ESO term has not expired). In addition, not more than 10% of the current ordinary shares (under the ESOS) shall be allotted to any individual manager who (either individually or jointly) posses 20% or more of the issued and paid-up share capital of the Group.
- The option price for every ordinary share will be based on the weighted index of the market price (as quoted by Bursa Malaysia Securities Berhad in the Daily Official List) for the five market days preceding the date on which the option price is provided.
- The option price or the number of outstanding shares to subscribe may be amended on the basis of any issue of extra shares by way of capitalization issue, bonus issues or right issues executed by Sumatec while an option stay unexercised.
- The new ordinary shares allocated upon any exercise of the option will rank pari passu in all regards with the current ordinary shares of the Group apart from the new ordinary shares so issued will not rank for any distributions, allotments, dividends and/or rights (Sumatec 2011, p. 23).
Alfie, K 1993, ‘Why incentive plans cannot work’, Harvard Business Review, vol. 71, no. 5, pp.54.
Katz, N 2000, Incentives and Performance Management in the Public Sector. Web.
Rajagopalan, N 1997, Strategic Orientations, Incentive Plan Adoptions and Firm Performance: Evidence from Electric Utility Firms, University of Southern California, LA.
Robinson, C 2006, Evidence-Based Management: The Science Side of Motivation. Web.
Sumatec 2011, Annual Report 2010, Sumatec Resources Berhad, Kuala Lumpur.