Hewitt Releases 'Hot Topic Survey on Executive Compensation & Long Term Incentives' that Assesses China & Hong Kong's Response to the Financial Crisis

2009-03-31 18:24 1289

Executive Compensation in China & Hong Kong to fall in 2009, sentiment one of caution in China and pessimism in Hong Kong

HONG KONG, March 31 /PRNewswire-Asia/ -- Hewitt's Hot Topic Survey on Executive Compensation & Long Term Incentives 2008/09 reveals that Asian companies are being cautious to pessimistic in their approach to Executive Compensation. The survey which studied 312 local and multinational organizations across Asia (163 in China and 63 in Hong Kong), further revealed that the fall in executive compensation is due to lower bonuses and reduced valuation of long term incentives. The sentiment is echoed in Hong Kong and China, showing that the impact will be significant even in markets that continue to experience growth and have a comparative talent shortage.

In Hong Kong, 87 percent of the respondents reported ending 2008 with a lower stock price than that at the end of 2007, with as many as 37 percent reporting that the dip was over 50 percent. Average salary increases in 2009 are likely to be in the range of 3 percent, but as many as 25-30 percent of the respondents reported a freeze in base salaries. Says Tzeitel J. Fernandes, Leader of Hewitt's Executive Compensation & Corporate Governance practice in Hong Kong, "In times like this, the projection for base pay increase is a moving target. We expect this number to reduce even further, as organizations assess the full impact of the economic crisis."

Organizational performance for 2008 has also be severely affected, with 82 percent of the companies reporting that bonuses payouts for Hong Kong will be lower than target, and as many as a quarter saying that the dip will be more than 50 percent. More importantly, companies reported redesigning their incentive plans to cope with the revised business projections. "Many companies in Hong Kong are adopting a 'wait and watch' policy, and looking to firm up their business plans before re-looking at their incentive plan design," says Fernandes.

Most respondents are looking at severely reduced Long Term Incentives (LTI) grants, as depressed stock prices reduce valuations and shareholders are unwilling to incur higher dilution. Similarly, organizations are choosing to let existing options and LTI run their course, even when they are not likely to pay out. The proportion of companies modifying existing plans by changing vesting conditions or re-pricing options is insignificant.

While the value of grants in 2009 will reduce, there is also a definite trend towards increasing the proportion of Full Value LTI to offer employees some downside protection. Stock options will, however, continue to be the most popular LTI vehicle.

The trend for China is similar, though some of the numbers do not look as bleak. Like Hong Kong, 86 percent of the respondents reported a dip in stock price in 2008 over 2007, with 38 percent reporting that the decrease would be over 50 percent.

The average Executive base salary increase projected for 2009 will be around 6.3 percent. This number, though higher than the Asia average, does not tell the whole story. Says Bradley Ni, Practice Leader Executive Compensation & Corporate Governance, China, "Organizations which have been badly impacted by the financial crisis, like the manufacturing sector, are projecting increases of 0-3 percent, while those that are not as badly impacted, like the pharmaceutical and renewable energy industries, have lowered their increases to the 5-8 percent mark. We're also hearing of salary freezes (about 17-20 percent of the respondents reported a freeze in base salaries), something that has rarely happened in China."

Variable pay in China is also likely to dip, though less so than in the rest of Asia. While just over two-thirds of the respondents reported paying variable pay below target, around 15 percent said that the drop would be 50 percent or more. One in ten said that no bonuses would be paid to executives. 40 percent of the respondents indicated that they expect to use a discretionary bonus in 2009, and some of the respondents required that executives take a portion of their annual incentive in deferred or restricted shares.

As many as a quarter of the companies are significantly revising their incentive plans. Says Ni, "Most incentive plans in China had been designed to support a strategy of significant growth and expansion. These have been revised as companies cut back on investments in turbulent times, and so the incentive plan needs to be redesigned as well."

Though LTI is not as prevalent in China as it is in more developed markets, the value of LTI grants will also dip, as will the coverage within the organization. One interesting trend in China is the preference for cash-based LTI. Says Bradley Ni, "With highly volatile stock markets and a changing regulatory environment, employees find cash-based LTI easier to understand, more predictable and therefore more attractive. Also, stringent rules around foreign exchange make cash LTI the preferred alternative for Foreign Investment Enterprises (FIEs)."

Though a significant portion of existing LTI is under water, companies in China are unlikely to modify their plans or replace the value 'lost' through other cash or non-cash means. This is in line with the broader LTI philosophy of aligning employee gains with shareholder interests.

More and more LTI plans have become performance oriented. For executives, most organizations are building performance conditions into the grant and/or vesting criteria for new as well as 'replacement' plans. More than a third of the companies use performance-based share plans, with performance being measured both in absolute terms as well as relative to a peer group.

In conclusion, the survey showed that executive pay in Asia will show a significant reduction in 2009, with the brunt of the reduction being borne by the short and long term incentives, both in Hong Kong and China. Says Tzeitel J. Fernandes, "While executive remuneration will bounce back as the economy improves, performance conditions are likely to become more stringent. Boards and corporate headquarters will strengthen Governance norms to curb runaway pay and prevent inordinate escalation."

About Hewitt Associates

Hewitt Associates (NYSE: HEW) provides leading organizations around the world with expert human resources consulting and outsourcing solutions to help them anticipate and solve their most complex benefits, talent, and related financial challenges. Hewitt consults with companies to design and implement a wide range of human resources, retirement, investment management, health management, compensation, and talent management strategies. As a leading outsourcing provider, Hewitt administers health care, retirement, payroll, and other HR programs to millions of employees, their families, and retirees. With a history of exceptional client service since 1940, Hewitt has offices in 33 countries and employs approximately 23,000 associates who are helping make the world a better place to work. For more information, please visit .

Source: Hewitt Associates
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