Asian executive pay surpasses European levels

Yet concerns on pay inflation in Asia resulting from rapid growth, leadership shortages and inflation surface.

Increased pay restraint in Western Europe and North America, combined with economic growth in emerginmarkets, is pushing pay for executives in Asia beyond levels in the West and is raising questions about long-term sustainability, says Mercer. Executive pay in Asia has already surpassed European levels and is predicted by Mercer to surpass the US within three years. However, the company has cautioned that inflationary drivers behind remuneration in Asia risk creating a bubble, fraying the link between pay and performance and distorting company salary structures.

According to Dr. Hans Kothuis, Mercer’s Asia Pacific leader for Rewards, Human Capital, “Historically, executives in western economies have been paid the most but the centre of gravity is moving inexorably East. In 2010, average executive salaries in Asia surpassed those in Europe and we anticipate that they will surpass those in the US by 2013. The trend has spread across many emerging economies; in the Middle East, for example, executive salaries have already caught up with those in Europe. Pay in Western economies is being restrained by poor economic growth and continued pay scrutiny in light of the current Euro-zone, banking and debt crisis. To-date, Asia has been largely unaffected by these issues, so haven’t had the brakes applied to executive remuneration as much.”

“We should remember that Asia is an attractive place to work for many executives and better pay is only one factor in attracting many western executives to the region,” continued Dr Kothuis. “Companies in the Asia should review their remuneration policies to ensure that they can maintain sustainability and capitalize on rapid changes in technology, trade and financial conditions, as their share of the world economy increases.”

Western European trends
The worldwide economic crisis has led to new regional and national rules and regulations that have curbed executive pay inflation. Large organizations are turning away from short-term incentives towards deferrals, long-term incentives (LTIs) and improved leadership development. Mercer has highlighted the changes in the financial services sector as indicative as it tends to be copied by other industry sectors. Broadly, organizations are attempting to balance risk and sustainability in their remuneration plans.

The intense pressure in countries such as the UK, Spain, Portugal and Germany, from regulators, the media, the public and shareholders are resulting in executive remuneration plans with closer ties to business performance and value creation. The ability to withstand external scrutiny is vital. There have been widespread reviews of, and reductions in, generous severance pay packages in countries such as Italy, for example. Executives in largeorganizations are well-qualified for international roles and, given the opportunities in Asia, remuneration plans are focused on retaining them.

More broadly, however, as part of their normal annual salary reviews, the vast majority of European organizations are increasing their executive salaries by an average of 2.5% in 2011 according to Mercer data. With this increase often being under the rate of inflation, the buying power of executives, like that of the broader employee population, is being eroded.

North America
In Canada and the US there is also intense scrutiny of executive pay. Shareholders, corporate governance advocates, legislators and regulators are demanding increased transparency in executive compensation programmes and stronger alignment of pay and performance. Management and compensation committees are under pressure to be responsive and accountable to stakeholders. More emphasis is being placed on rigorous pay-for-performance benchmarks, longer term equity holding requirements, claw-backs, and deferred bonuses in the financial sector. In the background, pay inflation is restrained with 2011 salary increases averaging around 3% in the US and Canada.

Asia
The picture is very different in Asia. In 2011, average executive salaries in Asia increased by an average of 7%. Executive pay in the Asia Pacific region is increasing across the region, especially in China, India, Indonesia, Vietnam, the Philippines and Malaysia. Contributing factors include continued strong GDP growth, accelerating inflation and, crucially, a scarcity of executive talent. The exception is the struggling Japanese economy which is suppressing pay.

The limited talent pool in this executive employee group and the competition to attract and retain them is driving up pay in some sectors. This may prove unsustainable in the medium term but in the meantime, it is leading to the use of innovative methods of attracting and retaining staff. There is evidence of LTI plans that reward not just over three or four years, but perhaps over 10 years or 20 years and even up to retirement.

In China, as mobility from multinational to local companies has increased, so the pay gap has narrowed. Companies in China, while continuing to focus on growth are also making sure that executive compensation is measured, through productivity based performance metrics. In India, strong growth of around 9% has increased staff mobility and pay. As increases in pay have not always been matched by improved performance, greater scrutiny by boards and compensation committees on fair use of remuneration benchmarks, increased use of performance criteria and more clawback provisions, is likely.

Gulf Cooperation Council
Executive remuneration practices and standards across the six states (Saudi Arabia, Kuwait, the United Arab Emirates, Oman, Qatar and Bahrain Gulf) are rapidly catching up with those in the rest of the world. Deferred bonus plans are being introduced and annual incentive programs are linked more closely with specific corporate and division/business unit performance measures. Mercer survey results are forecasting base salary increases in 2011 ranging from 6% to 7.5% which for many companies this will be the first pay increase in two years.

According to Dr Kothuis, “The overarching trend is a move towards better governance of executive remuneration, tighter association of pay with performance and increased use of long term incentives. Companies should ensure that they keep a sufficient component of pay as variable and flexible so that they only pay for sustained performance improvement and that total remuneration levels are sustainable over time”.