16/03/2010
As Asia’s economies continue to demonstrate signs of recovery, an increasing number of organizations are moving towards a pay-for-performance culture by increasing target short-term incentive levels for executives, and placing greater emphasis on variable pay as a more flexible way to increase motivation according to a new study by Mercer.
Mercer’s Asia Executive Remuneration Snapshot Survey reveals a significant increase in the number of organizations that plan to implement base salary increases for executives in 2010 (up to 65% from 30% in 2009), indicating a brighter economic outlook in Asia. However, companies are not increasing base salaries as the primary means of motivating and engaging employees. The study also reveals that many organizations are now factoring individual performance into their STI plans, in addition to traditional financial measures such as revenue and profitability. Few changes have been reported across the region in terms of long-term incentive plan design, signaling companies are very much focused on short-term business turnaround.
Wei Zheng, Asia business leader with Mercer's rewards business, commented, “While many companies in Asia are considering long-term structural changes to their executive remuneration programs in order to enhance the relationship between pay and performance, balance risk and rewards, and ultimately drive long-term sustainable business performance; we are clearly seeing a focus on the differentiation of individual performance for executives right now.”
Executive remuneration packages in Asia
According to the Asia Executive Remuneration Snapshot Survey, approximately 30-40% of an executive’s total pay package is linked to variable pay (STI plus LTI) regardless of the type of organization. Asian companies tend to provide their executives with more short-term incentives in the variable component of their total package, compared with their Western couterparts who tend to favor long-term incentives.
Similarly, larger companies tend to feature greater levels of variable pay in their head of organization’s salary package, which may be due to greater alignment with international practices where a pay-for-performance culture is strongly encouraged.
Implementing salary increases
Having struggled with cost-containment challenges during the past 18 months, resulting in workforce reductions and salary freezes, more organizations are planning to grant pay increases in 2010 as Asia’s economies continue to show signs of improvement.
In 2010, 65% of survey respondents across Asia plan to provide base salary increases for executives, compared with only 30% in 2009. While the overall median base salary increase for executives is expected to be around 4-5% in 2010, compared with 0-1.6% in 2009, this figure varies substantially across Asia. The number of organizations planning to reduce base salaries for executives in 2010 has declined year-on-year (down from 11% to 3%).
The highest salary increases of the year are being reported in India, where organization heads and his/her direct reports can expect a 10% raise. Second-level reports are expected to receive 12%. This is in part a symptom of fierce competition for executive talent coupled with a fast-growing economy.
Following a year of no salary increases, participating companies in Singapore will be affording employees an increase in line with cost-of-living expenses (between 3-3.75%), demonstrating an improvement in the local economic outlook.
Companies in China are also implementing raises. While direct and second-level reports can expect to receive a 5% raise, organization heads will receive only 1.5%, suggesting that while CEO pay has grown rapidly in recent years, the rate is now slowing.
Unsurprisingly, companies in the export-driven economy of Japan continue to freeze salaries, however Korea will see a significant increase of 5% across the board, up from zero last year, despite a still struggling economy.
Focus on short-term incentives
According to the Asia Executive Remuneration Snapshot Survey, individual performance is the most commonly used measure to assess performance among surveyed companies today (79%), followed by profit-based and revenue/sales growth-based measures.
And while companies in Asia are increasingly factoring individual performance into their STI plans, the form this takes varies widely. Many companies are focusing on short-term changes such as raising bonus payouts and target incentive levels, while others are considering structural changes such as amending the number of financial and non-financial measures, adopting deferral mechanism or claw-back provision in response to the changing business environment.
Compared with 2009, respondents expect actual STI payouts to more than double in 2010. In addition, nearly 40% of participating companies intend to increase the target level of their executive STIs in 2010 (up from 21% in 2009); and half of the respondents say that actual STI payout amounts for executives in 2010 are likely to increase (up from 27% in 2009). The study also revealed a slight increase in the number of respondents who plan to increase STI plan eligibility in 2010 (14%), compared with 2009 (8%). This suggests that organizations are more optimistic about economic conditions in 2010, and is a clear indication that companies in Asia are moving towards a pay-for-performance culture.
Long-term incentives
Despite the fact that long-term incentives continue to form a significant part of executive remuneration packages throguhout Asia, few changes have been reported across the region in terms of plan design. The vast majority of respondents do not expect the number of performance measures used and vesting period to change in 2010, and similarly key arrangements such as grant frequency and vesting period will remain the same.
The majority of respondents plan to retain their target and actual LTI grants at the same levels as 2009 (75% and 64% respectively); and there has been a slight increase in the number of companies that plan to increase eligibility for LTI plans in 2010 (17%), compared with 2009 (12%).
Zheng continued, “Companies are clearly using their executive remuneration programs to take advantage of the immediate opportunities provided as Asia’s economies recover faster than the rest of the world, however the challenge lies in identifying the improvements that can be made to LTI plans in order to ensure that incentive programs motivate executives in the long term.”
About the study
In order to gain a thorough understanding of emerging executive remuneration trends in Asia, Mercer launched the region’s second Asia Executive Remuneration Snapshot Survey in November 2009. A total of 233 companies from across Asia participated in the study, representing a wide range of industries, and with median revenue of approximately US$880 million. Responses were gathered from both public and private companies, as well as from subsidiaries of listed companies operating across a wide range of industries.
