Executive pay formats heading in new direction
Changing business models, rising costs and increased scrutiny from shareholders and corporate governance advocates is prompting companies to break out of the conformity box and consider alternative executive-incentive remuneration structures.
Mercer’s 2012/2013 Asia Executive Remuneration Survey, which saw participation from 650 organisations from across the region, reveals that executive pay in Asia is beginning to take a new direction. Changes include new pay-mix structures, the use of multiple long-term incentive programmes, and increased prevalence of restricted shares and long-term performance plans.
Hans Kothuis, partner and executive rewards practice leader for Asia and Middle East at Mercer, says that when it comes to executive compensation, companies in Asia are increasingly moving away from the traditional practices of pay-versus-financial performance and are taking into account other considerations.
“Companies are looking beyond the here and now. They are aiming to implement a better balance,” Kothuis says. He adds that effective executive compensation systems are needed to support an overall strategy, including cost savings, corporate culture, reputation, and attracting, keeping and motivating leaders.
Across the majority of industry sectors, Kothuis has noted a move towards incentives that encourage and reward longer-term performance. He says this indicates a desire to reward executives not just for improving a company’s current operations through margin improvement or efficiency, but also for creating value through innovation, diversification and new business models.
According to the Mercer survey, heads of Asian organisations receive total remuneration that is made up of, on average, 58 per cent base pay, 28 per cent short-term incentives and 14 per cent long-term incentives. At the secondary C-suite level, this changes to 65 per cent base pay, 25 per cent short-term incentives and 10 per cent long-term incentives.
In comparison, the total remuneration for heads of Western companies based in Asia is made up of 57 per cent base salary, 22 per cent short-term incentives and 21 per cent long-term incentives. For second-tier executives, this changes to 67 per cent base salary, 18 per cent short-term incentives and 14 per cent long-term incentives.
“Asian firms tend to provide slightly less in the form of long-term incentives when compared with Western firms, but they are just as incentive-oriented,” Kothuis says.
He adds that, of the companies in Asia offering long-term incentive plans, about half provide more than one type of plan. Over the last four years, the number of companies offering more than one type of incentive has risen from 15 to 26 per cent. However, within these plans, the prevalence of stock options has diminished significantly, while the use of cash and time-contingent restricted share programmes continues to increase. “It is a case of looking at performance and seeing how this balances through multiple lenses,” Kothuis says.
Richard Boden, a Hong Kong-based principal within Heidrick & Struggles’ financial services practice, believes executive remuneration packages can be generally segmented into three areas: banking, non-banking financial institutions and other less heavily regulated industries.
“The banking industry is where we have seen the biggest changes in the way executive remuneration is structured, which is mainly a result of governmental and regulatory pressure,” Boden says. Notably, he points out, the deferred portion of a remuneration package has risen and extends over longer periods, while a mixture of cash and stocks is also now more part of deferred remuneration – a move away from the more traditional pure-stock structures.
Boden is concerned that raising base salaries in the banking industry is counterproductive as it increases fixed costs and has a negative impact on banks’ ability to reduce costs in a crisis. Larger deferred payments that extended over a longer time period, however, have an impact on hiring activities. He says potential employers can be put off by the cost of compensating incoming candidates for the deferred bonuses they are leaving behind when they switch firms.
In Hong Kong and the more mature financial markets in Asia, Boden says deferrals at Asian banks tend to account for less of the total salary package and are structured over shorter periods.
He adds that Asian banks generally have their own executive payment schemes, which include bonuses and stock options. Across the broader range of Asian financial institutions, executive remuneration packages have remained largely unchanged. However, looking to the future, he expects the mechanisms of executive remuneration packages to become more performance-based, with incentives geared more towards retention.
“Increasingly, bonuses are being calculated on past performance but used as a retention tool for the coming three to five years,” Boden says.