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Feature: Shareholders likely to gain influence over bonus costs

It used to be difficult for shareholders of Taiwanese electronics companies to combat the decades-long practice of awarding high bonuses in exchange for retaining talented employees. The tides are changing, however, in favor of the shareholders.

With amendments to the Business Accounting Law (商業會計法), major changes in corporate bookkeeping will be required starting next year. Shareholders will have greater clout in determining bonus policies, allowing them to better protect their interests.

Taiwan Semiconducter Manu-facturing Co (TSMC, 台積電), the world's top contract chipmaker, was challenged on Monday by shareholders upset by what they said was excessive spending on employee bonuses. They expressed concern about the potential impact on the company's bottom line at a marathon shareholder's meeting.

This year, TSMC planned to spend NT$9 billion (US$270.4 million) on employee bonuses, paying half in cash and half in stock based on face value, making the company the most generous Taiwanese listed firm when it comes to rewarding employees.

"The bonus arrangement is unreasonable. In addition, the increase in shares outstanding will dilute earnings per share," a TSMC shareholder complained.

TSMC planned to distribute NT$3 per share in cash dividend and 0.05 percent in stock dividend for shareholders based on last year's earnings of NT$127 billion.

Local electronics manufacturers usually issue new common shares to pay employee bonuses.

Employee bonuses will dilute shareholders' earnings after the firm's outstanding shares increase by 1.7 percent, TSMC chairman Morris Chang (張忠謀) said on Monday.

The good times may end soon for workers once the new accounting rule takes effect next year.

Local companies will have to book stock bonuses, based on market value, as operational expenses rather than distributable profits.

"As employee bonuses will be deducted from earnings, the financial report will more truly reflect the companies' profitability," said Yeh Yin-hua (葉銀華), director of the Graduate Institute of Finance at Fu Jen Catholic University.

Shareholders must now be concerned about whether corporations distribute bonuses fairly to give reasonable returns to shareholders and at the same time keep talented workers, Yeh said.

Finding a balance that is fair to both shareholders and employees is a headache for many local companies, especially high-priced stocks such as High Tech Computer Corp (HTC, 宏達電).

MediaTek Inc (聯發科), which ranked No. 2 in doling out employee bonuses this year, could be the next target of dissatisfied shareholders after the TSMC shareholders' meeting.

MediaTek, which designs chips for DVD players and mobile phones, planned to spend around NT$1.18 billion in cash and shares to reward its workers.

The company is scheduled to hold a shareholder meeting on June 11.

"We have not reached any significant conclusion about a new bonus distribution policy," Tsai Ming-kai (蔡明介), MediaTek chairman, said in response to an investor's question last week.

To avoid a sudden plunge in profits caused by the need to make bookkeeping changes, local companies will be allowed to award bonuses in the form of stock options, or restricted stocks.

The alternative may prove a better option for Taiwanese firms who want to award employees, as companies will not have to list those rewards until transactions of stock options or restricted stocks at a later date. This is the practice of most US corporations.

TSMC led changes among local companies late last year when it introduced its blueprint for a new bonus distribution policy.

It said at the time that it would cap employee bonus spending at 15 percent of annual net income starting next year.

TSMC's blueprint could set an example for Taiwanese companies as they decide how to deal with the bonus distribution issue.
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