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Asian Firms Offer More Variable Pay than Western Firms
Asian companies are more likely to make changes to long-term incentive plans and increase pay-out targets in 2012

By Stephen Miller, CEBS  3/28/2012
 

 

Significant differences in executive pay practices between Asian firms and Western firms operating in Asia were identified by Mercer’s 2011/2012 Asia Executive Remuneration Snapshot Survey, which found that annual variable pay tends to be higher at Asian firms compared to Western companies. (Results of the survey are summarized in a Mercer report, Executive Compensation in Asia–Best Practices in a Dynamic Environment.)

The growing strength of Asian economies compared with their Western counterparts has been reflected in executive pay. In 2011, average executive salaries in Asia surpassed those in Europe for the first time. And they are on track to overtake those in the U.S., possibly by 2013, according to Mercer, a global HR consultancy. Along with rapid growth, leadership shortages and high inflation have helped boost executive pay in Asia, especially in China, India, Indonesia, Vietnam, the Philippines and Malaysia.

Aggressive Incentive Payments

Asian companies are providing more aggressive incentive payments—both short-term incentives (STIs) and long-term incentives (LTIs)—than Western companies based in the region, the survey found. For example, STIs make up 34 percent of the average Asian company CEO's pay package compared to 25 percent for a Western company.

Executive Compensation Mix (from head of organization to second-level reports)

 

Asian Companies

Western Companies

Long-term incentives

25%

10%

Short-term incentives

34%

25%

Fixed pay

41%

65%

Source: Mercer's 2011/2012 Asia Executive Remuneration Snapshot Survey.

“Asian companies prefer more flexible pay structures, which can be adjusted based on business performance,” said Hans Kothuis, Asia Pacific rewards consulting leader at Mercer. Moreover, the performance metrics on which these bonuses are based are more equally balanced between the top and bottom line measures at Asian firms than at Western firms, which tend to place a greater emphasis on profit-based metrics (83 percent at Western companies vs. 61 percent at Asian firms). In addition, Asian firms give more importance to a bonus determination process that is less formulaic and more discretionary.

Redesigning LTI

While LTI plans are more prevalent at Western firms operating in Asia (63 percent vs. 45 percent of Asian firms), the survey showed that more Asian firms (36 percent) expected to make changes in the design of their LTI plans and to increase the target pay-outs of these awards. “Asian companies are very active in the redesign and re-evaluation of their long-term incentive practices,” said Kothuis. “One of the biggest changes in the LTI landscape is the decreasing popularity of stock options,” used by less than half (48 percent) of Asia-based respondents in the 2011/2012 survey, down from 58 percent in 2009/2010.

The Changing Long-Term Incentive Mix at Asian Companies

 

2011/2012

2009/2010

Decreasing use

 

 

Stock options

46%

58%

Performance units/long-term target cash plans

29%

33%

Performance shares

16%

19%

Stock appreciation rights (SARs)

7%

9%

Phantom stock plans

5%

8%

Increasing use

 

 

Performance-contingent restricted shares/share units

18%

14%

Time-contingent restricted shares/share units

37%

18%

Companies could provide multiple responses. Source: Mercer's 2011/2012 Asia Executive Remuneration Snapshot Survey.

More Discretionary Awards

Asian companies are much more likely to pay irregular, ad hoc awards, outside of the annual grant cycle (32 percent of Asian companies vs. 8 percent of Western firms) for purposes of retention, recognition and promotion. This highlights the fact that retention is one of the top three talent challenges, particularly among Asian firms that are in growth mode, according to Mercer.

Increased Shareholder Communications

Asian companies, like their Western counterparts, have an increased awareness of hot-button compensation issues and the need for more engagement and transparent communication with shareholders, the survey revealed. “Almost half (48 percent) of the Asian companies surveyed indicate to us that they plan to explain the rationale for their pay decisions with greater clarity, not only the ‘what’ of compensation but also the ‘why’ and ‘how’,” said Kothuis.

A total of 201 companies across Asia took part in the 2011/2012 survey; 59 percent were firms with Asian headquarters and 41 percent had headquarters in the West. The average annual revenue of participating companies was $840 million, with an average head count of 1,900 employees. Publicly traded organizations made up 57 percent of respondents, while 43 percent were privately held.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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