Executive Pay in Asia Has Surpassed Western Europe

Executive salaries in Asia have already passed European levels and are predicted by Mercer to pass the U.S. within three years. However, the company also said that inflationary drivers behind remuneration in Asia risk creating a bubble, fraying the link between pay and performance and distorting company salary structures.

“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 US by 2013,” said Gregg Passin, Partner in Mercer’s Human Capital business in New York and leader of Mercer’s US 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.”

According to Seth Rosen, Partner in Mercer’s Human Capital business in Los Angeles, 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. 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.”

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 towards deferrals, long-term incentives (LTIs) and improved leadership development. Mercer’s research highlights the changes in the financial services sector since it tends to lead other industry sectors. Broadly, organizations are attempting to balance risk and sustainability in their remuneration plans.

The intense pressure in countries such as the UK, Spain, Portugal, and Germany from regulators, the media, the public, and shareholders are resulting in executive remuneration 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, remuneration plans are focused on retaining them. 

More broadly, however, 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% in 2011 according to Mercer data. With this increase often being under the rate of inflation, the buying power of executives, like more employees, is being eroded. 

In the U.S. and Canada there is also 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,” said Passin. “As a result, more emphasis is being placed on rigorous pay-for-performance benchmarks, longer term equity holding requirements, claw-backs and deferred bonuses in the financial sector.”

Rosen added, “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% in the U.S. and Canada.

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

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

In China, as mobility between local and multinational companies has increased, so the pay gap has narrowed. Companies in China are adopting many western European practices ensuring that executive compensation is measured. In India, strong growth of around 9% has increased staff mobility and pay. This has not been matched by increased performance of delivery, however, so greater scrutiny by boards and compensation committees on fair use of remuneration benchmarks, increased use of performance criteria and more clawback provisions, is likely.

Gulf Cooperation Council 

Executive remuneration 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% to 7.5%, which for many companies this will be the first pay increase in two years.