The economic meltdown has brought employee compensation in sharp focus. Salary expectations have softened as fears of joblessness mount across countries. Directors and senior management are grappling with the implications for their business and human capital strategy. Most of them have already revisited their executive pay programmes. Equity grants and severance packages are getting a fresh look-in.Sky-high Wall Street bonuses have been called obscene. Top management remuneration has come under the government’s lens the world over. With sharp spikes in recent unemployment numbers, such salary packages could foment social unrest. As a result of this, even when the world economy is back on track, the future regulation of executive remuneration programmes will look very different from now, Wei Zheng, who leads Mercer’s Executive Remuneration Business in Asia, tells Byravee Iyer. Edited excerpts:
Of late, we’ve seen political leaders in the US chiding Wall Street honchos over fat bonuses. Should remuneration become a political issue?
These are unprecedented times and it’s only natural that we’ll see a lot of emotions surfacing. Given that, the issue is indeed getting politicised. The point is valid because we cannot pay for failure. This has been a problem for some years now but has only been highlighted this year, particularly for financial institutions because they are at the core of this downturn. That said, you need to have good people to take the organisation through these difficult times and you need to have the best people available to take you towards the upswing.
In the context of the downturn, we see many companies cutting bonuses, salaries and so on. In your experience, what is the right way to go about it?
The environment is very uncertain, so we need to step back and re-examine the key talent we need to retain. That talent can go anywhere it wants. Also, we need to focus on greater differentiation. There are two ways to address this: One, have a blanket approach and cut everyone’s salary; and two, take a more selective route. Mercer did a survey and we found that companies take a much more selective approach wherein they identify which part of their talent they need to retain and perhaps even raise their salaries. But those who are not performing should either be asked to leave or take a pay cut. I believe that one should not take a blanket approach. You have to evaluate and make a selective decision with regard to re-examining your pay programme.
In such trying times, how can companies ensure that their reward programmes motivate their employees?
For starters, they should make sure the rewards are aligned with a significant focus on performance. Further, there should be a specific performance that you want. Also, communication is very important — people have to know what is expected of them and what they can expect. There is a strong linkage between the two.
Can you highlight some of the salary trends in the slowdown?
We have already seen that many companies have decided to take actions to either freeze their pay or reduce their pay-increase percentages. Some have decided that they are going to postpone their pay increase until later this year when the economic situation stabilises. However, some companies have taken a “wait and see” approach on salary increase until their 2009 budget is finalised. A new Mercer survey (conducted in the US last month) showed that one in four companies has decided to freeze its salaries. Some companies have decided to take the more drastic action of pay cuts. For example, a few days ago, nine state-owned companies in Shanghai, China, announced that they will cut the pay of their most senior executives from 20 to 40 per cent this year.
What kind of impact has the current economic situation had on variable compensation and stock options?
The economic situation has a significant impact on the variable compensation paid by companies. Since variable compensation is linked to company performance, many companies will see their 2008 annual incentive payouts to be down substantially. However, the situation varies with every company. Sixty-four per cent of companies surveyed by Mercer in the US expect their 2008 annual incentive payouts below target level. Seventy per cent of the companies are planning to implement, or are considering, at least one change, such as a performance measure, to their annual incentive programmes for 2009.
As for stock option plans, many companies see their stock options under water due to the depressed stock markets. For example, according to a Mercer survey, 90 per cent of companies have at least one tranche of their stock options under water.
What are your predictions for 2009, particularly in India?
Directionally, the pay increase this year will be significantly smaller than last year. For certain countries, the reduction will be much more than others. More importantly, companies have to look at the pay-decision process and see whether or not the performance measure is accurate, particularly with variable pay. In India, pay increases are much higher in double digits. Again, this time around the pay increase will be significantly down, which means for MBAs, pay expectations will need to be adjusted.
With a recovery nowhere in sight, what advice would you like to offer companies?
I would think that companies in this particular environment should take a holistic view to examine their overall rewards approach on both monetary and non-monetary payments. I would see more stringent disclosure processes in Asia. I also expect the government to play a more significant role, in order to make companies expose more detailed information. As for a turnaround, companies will come out of this at a different pace. China and India will come out earlier and lead towards the next upside. The starting point of that might be somewhere in the second or third quarter of this year.
I’d also like to say that even though the environment is very tough, opportunities do exist. Companies need to actually sit down and decide what their talent needs are. For the last several years, companies have only been focusing on growth and have been unable to find the right balance. This is a good opportunity to re-examine their reward system and talent needs.
