The controversial bonus payouts for directors at Lian Beng were calculated using a common industry standard, said pay consultant Freshwater Advisers.
The construction company has come under attack from two former independent directors who resigned earlier this month after a dispute about the way bonuses were calculated.
Freshwater said Singapore-listed companies work out bonuses for directors using a profit-based formula, typically before minority interests are deducted.
Minority interests is the portion of the profits attributable to subsidiaries that are not owned by the parent company.
Freshwater Advisers managing director Jon Robinson told The Straits Times: "The minority interests is usually an insignificant item in most accounts."
This was the case at Lian Beng from its listing in 1999 to 2013 but then minority interests shot up to $39.9 million in 2014, possibly due to an increase in the number of joint ventures, for example. That caused a jump in the payouts as bonuses were calculated before minority interests were deducted.
The two former independent directors - MP Sitoh Yih Pin and former Minister of State Wan Soon Bee - dispute the method used and want a re-computation of the executive director bonus starting from 1999, when Lian Beng was listed.
They want this re-calculation to be based on the "after minority interests" formula, with adjustments to the payouts accordingly. This could result in far smaller amounts.
Dr Wan told The Straits Times that Lian Beng's computation method has not been fair and his role was to protect the interest of the shareholders. "We should pay bonus based on what is earned in this company," he said.
Dr Wan believes the calculation should not be based on 100 per cent of the subsidiaries' profits when the firm only has partial ownership of these companies.
If Lian Beng had changed the formula to one that deducted minority interests first, executive directors would have taken home $2 million less in bonuses last year, according to its statement to the Singapore Exchange on July 16. It added that the difference in bonus payments between the two methods for 2013 would have only been $64,000, given smaller minority interests that year.
Mr Robinson said "using a profit- based formula to compute the bonuses is not the best sort of corporate governance". When the business model of a firm changes, the bonus agreement should change according, he said.
He pointed out that executives are rewarded for both the value they have created for the shareholders and the strategies they have implemented. "But strategies change over time. So using a formula that has not changed over many years will often lead to tears."
Mr Ronald Lee, managing director of HR consultancy PrimeStaff Management Service, said: "From the human resource perspective, the terms and conditions of appointment and compensation packages of company directors are normally discussed and negotiated prior to formal engagement."
Mr Lee pointed out that the practice of calculating the bonuses has been ongoing since 1999 and seemed in line with what was agreed in the service contracts.
However, Mr Robinson said it is better to have the service contracts be silent on the bonus arrangements and let the remuneration committee decide each year or every three years on what is the appropriate reward for the directors.
"Typically, in an IPO, the service agreement term is for three years, and could be renewed on a three- yearly basis. But sometimes, they could also be open-ended," he said.
"If a formula were to be written in the contract, it should have an expiry date, so that it could be reviewed regularly."
