HK executives prefer cash bonus over stocks
What gets you out of bed in the morning? If you are an executive or director in Hong Kong, it could be your short-term incentive (STI) compensation plan.
The proportion of the 2010 rise in executive compensation made up by STIs - annual bonuses and the like - was one of the most notable features of Ernst & Young's 2011 China and Hong Kong executive compensation report.
The study analyses the rewards paid to executive and independent or non-executive directors from both mainland A-share companies and the top 200 listed firms in Hong Kong.
According to the report, the median cash compensation of local executives rose by 19 per cent last year. Their mainland counterparts got 12 per cent more.
Jason Mi, China human capital partner at Ernst & Young, says that, with STI plans normally tied to company performance, these figures were boosted by the recent economic growth spurt.
"The cash element of the regular increase [in Hong Kong] was no more than 5 per cent at CEO and CFO level," he says. "However, the [STI] increase was as high as 33 to 46 per cent."
Mi adds that greater rewards are needed to attract talent in the tight labour market, and some sectors are faring better than others.
"The mining industry had the highest increase - more than 24 per cent in annual total cash compensation," says Vivian Li, Ernst & Young's China performance and reward executive director. "The second highest increase was in the IT industry - more than 20 per cent."
Wholesale and retail executives, meanwhile, received the smallest pay rise. "Although their performance was also very good in the past year, they received a rise of just over 2 per cent," says Li, attributing this to a surfeit of talent in the sector.
She explains that companies in Hong Kong, compared with those in other developed markets, are more inclined to use STIs rather than long-term incentive (LTI) plans. "Only 67 per cent of companies in Hong Kong have LTI plans and only 29 per cent of these made a grant in 2010."
Mi says this could be due to tradition. "LTIs are really a stock option, share-related compensation concept that US and European companies began using 20 years ago when a lot of internet firms were starting up. In Hong Kong, cash is king. Also, in the US and Europe, you may get a better tax deal with LTIs."
Li and Mi both believe that the local market will eventually link executive compensation to employer's performance and risk. "If companies want to align executives' and shareholders' interests, then LTI should play a more important role in executive compensation," says Li.