Global Executive Pay: Asia Erodes West’s Ability to Attract Talent

European and U.S. pay restrained by financial crisis, weak economy

By Stephen Miller, CEBS Oct 7, 2011

Increased pay restraint in Western Europe and North America, combined with economic growth in emerging markets, is pushing salaries for executives in Asia beyond levels in the West, according to a worldwide analysis of executive pay by HR consultancy Mercer.

Executive salaries in Asia have passed European levels and are predicted to pass U.S. levels by 2013. However, inflationary drivers behind higher pay in Asia could create a bubble, fraying the link between pay and performance and distorting company salary structures, according to Mercer's analysis.

“Historically, executives in Western economies earned the highest pay. Yet last year, average executive salaries in Asia surpassed those in Europe and they will most likely surpass those in the U.S. within three years,” said Gregg Passin, a partner in Mercer’s human capital business in New York and leader of Mercer’s U.S. executive remuneration practice. “Today, pay in Western economies is being restrained by poor economic growth and continued scrutiny in the wake of the financial crisis.”

This trend is spreading across many emerging economies, such as the Middle East, where executive salaries have already caught up with those in Europe. “Asia, however, has become an attractive place to work for many executives and better pay is just one factor attracting many Western executives to the region,” said Seth Rosen, a partner in Mercer’s human capital business in Los Angeles. “Western companies would be wise to review their pay policies to ensure that they can attract the best leaders to remain competitive on the global playing field.”

Western European Trends

The worldwide economic crisis has led to new regional and national rules and regulations that have damped executive pay inflation. Large organizations are turning away from short-term incentives and toward deferrals, long-term incentives and improved leadership development. Broadly, organizations are attempting to balance risk and sustainability in their remuneration plans.

The intense pressure in countries such as the U.K., Spain, Portugal and Germany from regulators, the media, the public and shareholders is resulting in executive pay 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 large organizations are well-qualified for international roles, and, given the opportunities in Asia, pay plans are focused on retaining them.

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 percent in 2011, according to Mercer's data. With this increase often being under the rate of inflation, the buying power of executives, like employees, is being eroded.

North American Trends

Similarly, in the U.S. and Canada there is intense scrutiny of executive pay. Shareholders, corporate governance advocates, legislators and regulators are demanding increased transparency in executive compensation programs and stronger alignment of pay and performance. Management and compensation committees are under pressure to be responsive and accountable to stakeholders.

“The scrutiny of executive pay, especially in the U.S., is intensifying,” Passin said. “As a result, more emphasis is being placed on rigorous pay-for-performance benchmarks, longer-term equity holding requirements, claw-backs and deferred bonuses.”

Added Rosen, “As the economy continues to improve and companies gain greater insight into their short-term results, management may begin blending traditional short-term and long-term incentives into one compensation award, allowing them to focus on one set of metrics.”

Currently, pay inflation is restrained with 2011 salary increases averaging around 3 percent in the U.S. and Canada.

Asian Trends

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

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

In China, as mobility between local and multinational companies has increased, the pay gap has narrowed; Chinese companies are adopting many western European practices for measuring executive compensation. In India, strong growth of around 9 percent has increased staff mobility and pay. This has not been matched by increased performance, however, so greater scrutiny by boards and compensation committees is likely on fair use of pay benchmarks, increased use of performance criteria and more claw-back provisions.

Middle East/Gulf Region Trends

Executive pay 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 percent to 7.5 percent in the region; for many companies, this will be the first pay increase in two years.

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

Related Articles:

Employers Pursue Global Grade Structure, Despite Challenges,SHRM Online Compensation Discipline, September 2011

Global Rise in Salary Increase Budgets Projected in 2012, SHRM Online Compensation Discipline, September 2011

Salary Increases Stay Consistent, with Focus on Variable Pay, SHRM Online Compensation Discipline, September 2011

Clawing Back Compensation, HR Magazine, September 2011

Big Jump in Executive Pay, Proxy Statements Show, SHRM Online Compensation Discipline, May 2011

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