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Article | Executive Pay Matters

Designing a more differentiated pay mix for executives in Asia Pacific

Compensation Strategy & Design|Executive Compensation
Beyond Data

September 16, 2019

Three key executive rewards practices are emerging in Asia Pacific as we see organisations take a more thoughtful approach to pay-for-performance.

The past three years have seen a steady increase in executive total pay for the C-Suite in Asia Pacific. A growing number of organisations are adopting a stronger ‘pay-for-performance’ alignment in their executive compensation designs, and this has helped to pave the way for short-term incentives (STI) and long-term incentives (LTI) to become larger components in the pay mix of executives.

STIs and LTIs have grown much faster than Total Guaranteed Compensation over the last three years in most Asia Pacific markets.1 It is a trend that is expected to continue as organisations focus on boosting better corporate performance and improve long-term engagement with executives.

Boards and shareholders in the region are becoming more forward-looking and are making serious investments in executive remuneration, particularly on equity incentives. They see this as a way to encourage executives to have a longer-term vision for the organisation and a stronger sense of ownership, which helps to drive superior performance from top leadership. In many Asia Pacific markets including Singapore, Hong Kong and India, incentives comprise more than half of the total CEO compensation.1

Asia Pacific is catching up with global levels in terms of incorporating incentives into the pay mix, but there is still a lot of room left for improvement in terms of payout. Our 2018 Getting Compensation Right Survey found that incentive payouts are still not generally well aligned to individual performance due to lack of differentiation for top performers.2 For instance,

35%
of employers in Asia Pacific continue to pay incentives even to employees who do not meet expectations.
Furthermore, even when the actual incentive funding levels fall below target, four out of five organisations would cut payouts to top performers by as much as or more than they do for other employees. When funding is above target, 50% of employers in Asia Pacific would increase payouts for their average employees by as much as or more than they do for top performers.

 

Adequate and appropriate pay differentiation is fundamental to an effective pay-for-performance approach. For employees in general, a well-differentiated offer can add deeper value to both compensation and purpose at work. When we consider the same mindset with executives, boards and remuneration committees need to make sure that they link executive rewards to expectations that are justifiable. Executive pay design need to be founded on a framework that adheres to the fundamental objectives and principles of good executive remuneration.3

As organisations become more thoughtful about their pay-for-performance approach with executive compensation, STIs and LTIs will definitely become more prominent and key differentiators in pay program design. Incentives will become integral to what makes for a compelling pay package that will work not only in the interests of shareholders and other external stakeholders, but also fulfil the expectations of executives.

There are three emerging practices we are seeing around differentiated executive rewards. These are seeing early successes at aligning executive pay with business performance.

Three emerging practices for executive rewards in Asia Pacific.

Increasing use of multi-vehicle LTI plans

Today, over half of organisations in Asia Pacific provide LTIs, of which 41% use multiple LTI devices.2 The emerging popularity of multi-vehicle LTIs is reflecting the growing need of boards and Remuneration Committees to meet multiple and sometimes competing business and HR objectives through their incentive plans. Some of these objectives may be retention of executive talent, alignment with shareholder outcomes, support of the objectives of other stakeholders (such as employees or regulators), maintaining a market competitive pay program, encouraging achievement of strategic or non-financial goals, and a clear alignment between executive ‘take home’ rewards and internal company performance.

Gone are the days of heavy reliance on stock options alone. Each year, more and more organisations have added restricted shares and performance shares to their rewards package for executives in order to meet objectives beyond a clear link to stock price. Offering comprehensive and balanced LTI programmes can also help direct executives and key talent to important long-term initiatives, while mitigating pay-related risks. This way, executives will be more inspired to take ownership of the business and successfully execute a long-term strategy.

Rethinking traditional performance measures

High-performing organisations now have a broader definition of ‘performance’. Many organisations in Asia Pacific are beginning to recognise that appraising performance should not be exclusively through profits or shareholder returns. Boards and shareholders are now considering the value of other non-financial results such as customer satisfaction and employee engagement which can support future corporate success. These desires to assess total performance are helping to promote the use of multiple performance measures within annual long-term performance plans.

In addition to customer satisfaction and employee engagement, Remuneration Committees are more willing to tie rewards to the achievement of environmental, social and governance goals, including workforce diversity initiatives, risk culture assessments (especially in financial services firms), strategic objectives and other measures of the company’s long-term viability or ‘sustainability’ – a critical concern for many investors today.

Stronger focus on longer-term success

As just noted, Boards and shareholders are placing more emphasis on future-proofing organisations, given the speed and constancy of change in the business environment – and they are counting on executives to be on the same page. More organisations are designing executive compensation plans which encourage a long-term mindset.

In addition to metrics which attempt to measure the overall health of the organisation, some companies are extending equity award vesting periods and adopting holding periods after vesting. They are adopting malus and clawback policies to ensure an ability to recoup incentives paid on fraudulent or misstated performance. And some companies are looking at share ownership requirements for senior executives.

Looking ahead

While the headlines are typically focused on the numbers associated with executive and CEO pay, it is often missed that Boards and Remuneration Committees are becoming much more sophisticated in their deliberations and decisions, balancing the needs of many more stakeholders and encouraging a more holistic and long-term definition of organisational success. The changes discussed above bode well for the future of Asia Pacific businesses and economies, as companies build a strong base of resources and capabilities in order to succeed in an increasingly fast-moving, complex and difficult economic environment.


Sound and defensible decisions about executive pay require transparent, decision-quality data that boards and shareholders can trust. Willis Towers Watson's powerful combination of data and deep bench of more than 400 executive compensation experts can help compensation committees build pay programs that reflect market trends and attract and retain key talent. We invite you to find out more about our Executive Compensation consulting practice and Executive Compensation Data Offering.

Sources:
12018 Willis Towers Watson Executive Compensation Survey 22018 Willis Towers Watson Getting Compensation Right Survey 3Executive pay in Australia is changing rapidly, but sound fundamentals remain key

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