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Important considerations for executive compensation in Asia Pacific

Turn long-term incentives into an effective retention tool for executives

Compensation Strategy & Design|Executive Compensation
Beyond Data|COVID 19 Coronavirus

By Trey Davis | July 24, 2020

As organisations in Asia Pacific strive to restore stability post COVID-19, what actions should be considered when adjusting executive pay incentives?

At the beginning of 2020, over 90% of Asia Pacific organisations were expecting to see positive business results throughout the year. But within a few short months, as COVID-19 hit one region after another, this favourable outlook has rapidly reduced to 56%.1 As businesses dealt with the huge disruptions, temporary closures and economic impact of the pandemic, labour costs became among the topmost considerations for cost management. This has included temporary salary reductions, furloughs, redundancies and hiring freezes. Many organisations also took the step to reduce executive pay, to assure employees and the market that action was being taken to mitigate challenges.

A COVID-19 pulse survey we ran in March on cost containment strategies noted that 17% of global respondents planned to reduce executive pay, by 20% at the median.2 By May, our study on reopening the workplace revealed that 27% had done so, with an additional 9% considering the same action.3 In the Asia Pacific region however, organisations appear to have been more cautious, with only 16% having reduced executive pay. Over one-third are still considering pay reductions for executives, but historically, Asia Pacific organisations have been more conservative in taking radical actions.1 We see three sets of trends that hold clues to actions organisations may take around executive pay, which imply that many remain generally optimistic about being able to rebound within 12 months:

  • Salary increases for executives are only 0.1% lower on average compared with 2019 – the largest decreases are seen in Vietnam (down 0.9% from 2019), China (0.8%), India (0.5%) and Indonesia (0.5%). Most Asia Pacific organisations anticipate a slightly higher salary increase for executives in 2021, on average 0.2% higher than 2020 actual – the highest forecasts are from Vietnam (0.7% increase from 2020), India (0.4%) and South Korea (0.4%).1
Graph displaying the actual salary increases for executives in 2019 and 2020 and expected increases in 2021 across 14 markets in Asia Pacific.
Figure 1. Asia Pacific median executive salary increase (%) by country

Willis Towers Watson 2020 Q1 & Q3 Salary Budget Planning Survey

  • Less than half of organisations (43%) surveyed in April reported that COVID-19 had impacted their annual incentive plans, and only 15% planned to adjust targets at year-end.4 This percentage will likely expand significantly over the next six months as organisations approach their year-end. As many businesses in Australia have a 30 June fiscal year-end, we expect to see early indications of company actions on annual incentive plan pay-outs there shortly.
  • 43%
    reported that COVID-19 impacted their annual incentive plans
    15%
    plan to adjust their annual incentive targets at year-end
  • Over the last two years, the percentages of Actual Total Compensation and Actual Total Direct Compensation in the executive pay-mix have become more prominent in most Asia Pacific markets,5 as companies have increased executives’ pay-out opportunities from annual incentives and long-term incentives (LTIs).

Understandably, executives are under pressure to see their organisation pull through the crisis. Economists and health experts forecast global recovery to take two years at minimum. Above all, organisations need their leaders to take a long-term perspective and proactively shape the future of the organisation.

Above all, organisations need their leaders to take a long-term perspective and proactively shape the future of the organisation.

Boards and Remuneration Committees must emphasise the need for effective executive leadership. First and foremost, executives need to establish short-term and medium-term goals around restoring stability and managing the impact on human capital, and Remuneration Committees need to align pay and incentives with performance metrics along those goals. Secondly, Remuneration Committees need to align LTIs with a future-focused ESG framework supporting long-term business objectives and human capital strategies – including employee reskilling/upskilling, new ways of working and developing plans for organisational resiliency against similar disruptions in the future.

While every organisation will have its own unique challenges and considerations, the following actions for adjusting incentives can help some to establish longer-term stability:6

  • Settle annual incentive plan payouts in stock – stay attuned to COVID-19 market trends and consider stakeholder perspective to determine relevancy of this approach
  • Avoid adjustments to in-cycle LTI plans – institutional investors have expressed a limited appetite for LTI adjustments, noting a need to align LTIs with shareholder outcomes and that negative impacts from one-time events can be balanced out by positive events over the multi-year vesting schedule
  • Shift base salary increases into higher STI or LTI opportunities
  • In the short-term, switch from performance-vesting to time-vesting share options and/or share grants for new awards, if performance goals are too difficult to set – ongoing market volatility could make LTI awards and grants trickier, thus it is important to be guided by an approach that in the long run mitigates payout risk and ensures fairness to executives
  • Ensure alignment between executive pay outcomes and the outcomes for other stakeholders, particularly shareholders and employees

The COVID-19 crisis is a defining leadership moment. Take this as an opportunity to review organisational values and to realign shareholder and stakeholder expectations with executive pay metrics. Focus leadership on the intersection of employee and company wellbeing and restoring stability.


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Sources

1 2020 Q1- Q3 Salary Budget Planning Surveys

2 2020 Cost Containment and Premium Pay Considerations

3 2020 Returning to the Workplace Survey

4 2020 COVID-19 Cost Management and Pay Considerations Survey

5 2018 - 2019 Executive Compensation Survey – Asia Pacific

6 Beyond Data Webcast: Important considerations for executive compensation (18 June 2020)

Contacts

Leader, Executive Compensation, Asia Pacific

Edward Hsu
Leader, Rewards Data and Software – Asia Pacific

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