Market- or performance-based compensation?

With dry bulk rates reaching heights not seen for more than 10 years, it is a good opportunity to discuss compensation structures in the sector, argues Anders Liengaard of Liengaard & Roschmann – Maritime Advisors.

I happened to be so privileged to take part in the dry bulk super cycle back in the years 2003-2008. And by privileged I am referring to several aspects.

First of all, everything was vibrant. Attitude was positive. Charterers were making money, Owners were making money, charter parties were fairly balanced. Everyone was happy.

Furthermore, organisations grew. This gave opportunities for individuals with a bit of experience and business cleverness.

But the period also gave many an extraordinary opportunity to build a solid financial foundation to pave the way for the rest of their lives. Provided of course that they did not spend all the money on booze and fast cars – to quote a famous former football player.

Fast forward to today

We are almost one quarter of the way into 2021 and it looks like the year will be a profit-making one for most dry bulk owners. Not just a year scrambling to make it into black figures. No, this year could end up being extraordinarily good. This is likely to cause many chartering managers to fondly anticipate thick envelopes by the end of the year. Well, good on them. It has been a long time in the making.

But this also raises a relevant question. Should commercial staff be compensated with the market levels as a proxy, i.e. get a bonus just because the market is high? On one hand it seems to make sense that when your owner is making money, the company will share some of that profit with the staff. That is a very noble thought, but does it give the employees the right incentives? Maybe some of the compensation should be linked to the overall market – but it also makes sense to create a bonus structure whereby your individual staff members are able to shine in both high and low markets. Studies support the notion that clear objectives and measurable targets/KPIs is the way forward to give employees the right incentives that will enable companies to improve performance.

Creating a bonus structure that is clear and fair – i.e. one that in an objective and measurable manner awards performance – can be challenging. But for those working within dry bulk chartering it should be quite straight forward.

There is a well-defined market in the Baltic indices, and earnings are well documented. Hence, if you are a pure play owner it is all about comparing the market against your realized fleet time charter equivalent (TCE) – adjusted for its income potential.

This relative performance concept – where you adjust your TCE earnings with the income potential of your fleet – gives organisations a way to objectively measure the commercial effectiveness of its staff and strategies.

Let us look at an example in a $10,000a day market:

1. The smaller private owner with an older fleet.
– Achieved TCE of $9,000
– Average fleet index of 85% -> performance breakeven = 10,000 x 0.85 = $8,500
– Market outperformance -> 9,000/8,500 -1 = 6%

2. A stock listed company with a new and modern fleet:
– Achieved TCE of $11,000
– Average fleet index of 120% -> performance breakeven = 10,000 x 1,2 = $12,000
– Market outperformance -> 11,000/12,000 -1 = -8%

The example shows that the organisation behind the smaller owner should be eligible for a bonus as they have managed to squeeze more value out of the market on the basis of the tools (the fleet) at their disposal.

If you are purely an operator it’s all about the bottomline result and if a combination (owner-operator) it’s still doable to apply the concept discussed above.

Having analysed the TCE performance of some 25 listed companies over the last three years, Liengaard & Roschmann have made suggestions and recommendations on how to measure performance in a like-for-like way. These guidelines can also be used to set KPIs and bonus structures for chartering staff members.

Oh, and one last thing. Get rid of these stupid additional clauses in employment contracts that overall bonuses are at the employers’ ‘full discretion’. It works against transparency and removes the clear incentives.

Happy fixing and may the market be with you!