Asian companies shifting to ‘pay for performance’ schemes - 18 March 2010

Labor and Management

BusinessWorld Online

BY , Reporter

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
consulting firm Mercer.

Companies in Asia are using executive pay programs to take advantage of
economic recovery in the region, according to consulting firm Mercer.The Asia Executive Remuneration Snapshot Survey revealed 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 revealed that many
organizations are now factoring individual performance into their
short-term incentive or 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 were 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.”



According to the survey, approximately 30-40% of an executive’s total
pay package is linked to variable pay (STI plus long-term incentives or
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.



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 said they plan to provide
base salary increases for executives, compared with only 30% in 2009.
While the overall median base salary increase for executives was
expected to be around 4-5% in 2010, compared with 0-1.6% in 2009, this
figure varied substantially across Asia. The number of organizations
planning to reduce base salaries for executives in 2010 declined year on
year (down from 11% to 3%).



The highest salary increases of the year were reported in India, where
organization heads can expect a 10% raise. Mercer said this was 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 South Korea will see a significant increase
of 5% across the board, up from zero last year, despite a still
struggling economy.



Short-term focus



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%).



Mercer said this suggested that organizations were more optimistic
about economic conditions in 2010, and that companies in Asia were
moving towards a pay-for-performance culture.



Despite the fact that long-term incentives continue to form a
significant part of executive remuneration packages throughout 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%).



Mr. 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.”

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