Historic shift in executive remuneration worldwide
Mercer (13 July, 2011)

Global growth, regional hotspots and executive talent shortages are leading to a dramatic change – by region – in pay for performance and executive remuneration program design and governance. Today, substantial growth in emerging markets is altering the way business leaders view the world’s diverse markets. As economic hotspots arise in Asia, the Middle East and other emerging economies – and surpass entrenched leading economies – long-held assumptions about growth, executive talent supply and executive remuneration have changed.

Rapid growth, leadership shortages and inflation in countries such as China and India have created record increases in executive pay. This is leading to a worldwide changing of the guard, from West to East/Middle East. For some time, western-developed economies have posted the highest average compensation, but we’re now seeing a dramatic shift as supply and demand push compensation higher elsewhere.

Last year, average executive salaries in Asia surpassed those in Europe, and they are on track to surpass those in the US, perhaps in 2013. In the Middle East, executive salaries have already caught up with those in Europe. In addition to pay, we’re seeing increased attention on performance, as slowing economies try to get the most out of their diminishing remuneration budgets and fast-growing markets try to hold on to their top talent. In some regions, the worldwide economic crisis has led to governmental action to establish new rules and regulations that promise to further transform the executive remuneration landscape. And finally, large organizations almost everywhere are placing new emphasis on long-term incentives (LTIs) and leadership development.

Following are regional snapshots of current trends in executive remuneration and future expectations by Mercer executive remuneration consultants around the world. These thought leaders have closely studied the landscape and have spent countless hours with industry and company leaders discussing trends and charting paths to success.

Asia Pacific

The Asia Pacific region is seeing a rapid rise in executive pay with average executive salaries increasing by 7% annually. Driving these increases is the shortage of executive talent with the ability to innovate, think globally, take risks and move quickly. In this environment, companies are trying to ensure that they keep a sufficient component of pay as variable and flexible so that they only pay for measurable performance, and so that total remuneration levels are sustainable over time.

Australia – If proposed amendments to the Corporations Act intended to curb executive pay are implemented in July 2011, all listed companies will need to follow new rules for developing and getting board approval of remuneration proposals. Companies will need to demonstrate the link between pay and performance and adequately describe performance requirements and targets in their annual disclosure reports to satisfy shareholders.

China – China’s economy is back to double-digit growth, while experienced executive talent remains in short supply, causing executive cash compensation to rise. In response, companies are beginning to take a more holistic approach to executive compensation, focusing on multiple incentive vehicles with multiple time horizons that are more flexible and enable them to deal more effectively with changing market conditions.

India – The top trend in 2011 is likely to be the resurgence of equity-based pay at mid-management levels among smaller organizations that have not yet run into dilution pressures. There will also be greater pay governance at senior levels due to rapid pay increases in prior years, and increasing instances of inadequate delivery by the senior team. Companies are identifying key workforce segments critical to business performance and planning equity programs that include critical levels and talent.

Japan – Unlike some other countries, executive compensation in Japan has remained stable. With compensation levels lower than in the

US and Western Europe, there is a smaller proportion of variable compensation, and fewer listed companies providing LTI plans such as stock options or executive retirement plans. These differences from pay trends in the US and Europe are creating attraction and equity problems as Japanese multinationals try to create compensation governance schemes that address the needs of both Japanese executives and locally hired executives located outside Japan.

South East Asia

All ASEAN companies are currently facing fast growth and a shortage of executive talent. To cope with the challenge, more and more companies in Singapore are implementing performance-based plans, which have almost become the norm in the country. In Malaysia, there is a shift away from stock option plans to performance-based plans and share-based plans for retention. In Thailand, there is greater recognition of the need for long-term plans for executives to drive retention, team behavior and performance.

Europe and the Middle East
Rapid growth in the Middle East and steady, but slower, growth in Europe has brought these two regions to a position of leveling in terms of trends in executive remuneration. Studies of the financial sector in both regions have shown that the two are undergoing similar cutbacks in the use of short-term incentives (STI), offset by base pay increases and a much greater use of deferred compensation LTIs. In response to public concern, there have also been widespread reviews of, and reductions in, generous severance pay packages. In 2011, as part of their normal annual salary review, the vast majority of organizations will increase executive salaries – with an average rise of 2.5%.

France – In France, there is a new emphasis on defined benefit pension schemes and LTIs. There has also been a significant increase in employee/employer social insurance contributions, which have adversely affected total compensation. As a result, many large companies are conducting a complete redesign of their LTI programs and policies.

Germany – Changes to the Stock Corporation Act (Aktiengesetz) have led to more intensive scrutiny of management board compensation. In 2009, the act was amended in relation to a shareholders’ rights directive, executive remuneration appropriateness and other aspects. Germany is also seeing a review of incentive plans, with a focus on STI deferral plans or performance-oriented LTI plans, such as performance share unit.

Gulf Cooperation Council – Executive remuneration practices across the Gulf are rapidly catching up with the rest of the world. Regional trends for 2011 include the introduction of deferred bonus plans, ensuring that annual incentive programs are linked more closely with specific corporate and division/business unit performance measures and the introduction of LTI plans without increasing incentive pool costs overall. Mercer surveys are forecasting base salary increases in 2011 ranging from 6% to 7.5% – for many companies, this will be the first pay increase in two years.

Iberia – More companies are linking rewards with strategy and risk. They see LTIs as an important element in executive remuneration packages, with an annual economic target of 40% of base salary. The most common packages are three- to five-year bonus schemes based on the strategic business plan or value of the company. These changes are due to the increased competition for talent, changes to tax rules, virtually flat salary increases and no STI pay because of limited results.

Italy – In Italy, pure retention plans and “golden parachutes” for top executives are on the decline due to increased public scrutiny of all executive compensation elements for listed companies. In addition, companies are implementing increased peer group comparison for executive remuneration and performance results and measurements, increased deferred compensation for variable pay for executives, and a focus on introducing clawback provisions for STI payments.

The Netherlands – Mindful of the difficult economic situation of the past few years, many companies are moving forward cautiously and introducing incentives to foster performance in the coming years. Because of the difficulty of setting targets in a volatile business environment, companies are experiencing flatter bonus payout curves and are introducing voluntary management bonus investment plans with matching shares subject to performance conditions.

Nordics – There are two major executive remuneration trends in the Nordics. The first is ensuring that senior executives have exposure to share price developments over a longer period by adopting a vesting period, deferring annual bonuses or introducing a general shareholding requirement for senior management. The second is increased manager discretion and individual differentiation by using a balanced scorecard approach that incorporates both financial and non-financial measures for performance evaluation.

United Kingdom – As a result of the banking crisis and recession, organizations are under intense pressure from regulators, the media, the public and shareholders. The UK executive compensation landscape in 2011 is being dominated by governmental pressure on financial services companies to demonstrate a stronger link between pay, performance and organizational risk – specifically, to strengthen corporate governance and address the use of STIs at the expense of long-term sustainability. In 2011, we are seeing upward pressure on executive base pay and bonuses, where justified by performance.

North and South America

Shareholders, corporate governance advocates, legislators and regulators are demanding increased transparency in executive compensation programs and stronger alignment of pay and performance. The coming years may bring a blurring of traditional STIs and LTIs. Many companies are considering multiyear “annual incentive” plans, with holdbacks and future performance multipliers, and are tinkering with the notion of shortening the LTI performance period. Companies may eventually blend the two distinct incentives into one award, thereby allowing management teams to focus on one set of metrics and then divide the award payout into a current payout and deferred payouts. These deferred payouts will ensure that executives maintain a long-term focus and will allow for an easier clawback of awards if malfeasance is discovered at a later date.

Brazil – More than 100 companies have completed initial public offerings (IPOs), moving from businesses run by their founders to complex, international corporations requiring executive teams with different skill sets. These firms are aggressively recruiting talent from subsidiaries of US and European multinationals, as well as from Brazilian multinationals. Most companies that have completed an IPO have implemented a stock option plan. Since those companies did not offer long-term compensation prior to the IPO, these trends have increased the level of compensation, as well as the typical pay mix, in the Brazilian market.

Canada – Pay for performance has become the top issue in executive remuneration, particularly with respect to LTIs. This is forcing companies to define what “pay” means to them – whether pay opportunity, realized pay, or both. Companies must test their historical pay and performance alignment and ensure that programs are designed to reflect their linkage in the future.

United States – Companies are trying to balance multiple priorities: aligning programs with revised business strategies, ensuring that payouts are commensurate with performance, setting realistic goals in a world where forecasting remains challenging, and being responsive to shareholders. The legislative and regulatory environment, coupled with increased scrutiny from shareholder activists, has caused many companies to rethink their executive compensation programs. Meanwhile, companies are becoming increasingly concerned about their ability to retain their management teams and other critical talent as the economy improves.