Today’s post comes from Ian Davidson. Ian has an impressive track record in the C&B sphere. His specialty is executive pay, and he has been involved in the financial services industry for a long time. He shares his thoughts on his blog at iandavidson.me and also podcasts – something I am planning to try soon 🙂
In today’s post, Ian shares his views on how to handle Executive Compensation in emerging markets. What is influencing their pay levels ? How do you design your pay approach when you need to balance affordability, organisation needs, and risk ? Read on to find out Ian’s thoughts :
Many people will have been surprised by recent research that showed that executive pay in some areas of emerging markets are at or above the level of mature markets such as the USA and UK. A study by the global management consultancy Hay Group shows, for example, that in 2012 the average total cash level for senior management was $154,847 in the USA compared with just over $150,000 in South Africa and $204,421 in the UAE. While appreciating that emerging markets are not a homogenous group of countries; there is a clear trend of rapidly rising executive pay. The drivers for these increases have been identified as high growth, high inflation and high demand.
This high growth in cost is accompanied by very high levels of geopolitical uncertainty that both adds upward pressure on packages but also means that careful consideration needs to be given to the nature and quantum of investments in a number of emerging market areas. In more mature markets there are often unspoken assumptions about robust legal systems and continuing political legitimacy (although that is now questionable). Those are assumptions that need to be examined in the light of current events in a number of emerging market territories.
The changes in levels of reward in emerging markets turn traditional assumptions on pay on their heads. We are seeing increasingly that higher pay is required in some emerging market countries than say the USA or France. In addition to base pay many EM countries have a structure of large cash allowances for housing, cars, education and so on leading to a very rich cash package before LTIPS, options and the like are taken in to account.
In a phrase, the executive markets in emerging markets are hot. This is similar to the conditions seen in the mature markets a few years ago. As an example, senior executives moving jobs in China are likely to generate a salary premium of more than 30%.
New thinking is required. It is no longer enough for US and European organisations to treat EM remuneration as a subsidiary consideration to the parent market. EM labour markets have their own dynamic which is much faster moving, market efficient and fluid than we have seen in Western Europe or the USA for many years.
The fuel on the executive race track
Most commentators such as Hay Group and CT Partners agree that there are three factors fuelling the explosion in remuneration:
- High demand for executives in high growth countries and sectors
- High inflation in some emerging markets together with stronger currencies
- High growth in both sectors and countries in emerging markets
There is a high demand for senior executives in a number of emerging markets. Asia Pac is a key example where for some time now demand has considerably outstripped supply. Given that economic growth rates continue to look healthy over the longer term (and certainly when compared with very weak growth forecasts in a number of western economies), it is likely that pay levels will outstrip mature markets if that has not already happened.
Inflation adds to the fuel. EmergingMarkets.org quote pay inflation in Venezuela at 29% and in Argentina at 24.5%. Brazil and Mexico are likely to rises in excess of 5% – and that is just to stand still – not taking account of the high demand for experienced senior management in these areas.
Concentrate on tactics rather than strategy
The fast moving and fluid nature of a number of emerging market labour segments means that it may not be possible to have a prescriptive approach from multi-national organisations. Nimbleness is the order of the day; reacting slowly or inappropriately will simply mean losing talent to competitors, be they local start-ups seeking new employees or established national or international players.
CT Partners have suggested that it may be appropriate for multi-national organisations to treat some EM markets as start-ups and structure remuneration accordingly. This will mean some innovative thinking. Larger equity grants (perhaps using local equity market listings) or higher gearing than we are seeing in mature markets. There will be issues of internal equity; but these must be accepted as the price of doing business. Despite recent economic data suggesting a slowdown in emerging market economies, emerging markets are and continue to be a long-term investment with a higher probability of good returns than the current moribund western economies.
My view is that to compete in the hot markets a highly differentiated approach is required. The focus must be on individual country and sector labour markets both in terms of the quantum of reward and in terms of the total reward framework reflecting the innovations and retention products of that particular market.
Retention is very important and, given “transfer” premium costs (that is the extra remuneration paid to someone to move organisations), much more economic than recruitment. I return once again to the concept of treating some emerging market countries as “start-up” territories by US and European organisations. This may mean them offering equity or equity like vehicles with a mixture of time and performance vesting; weighted towards time vesting with steep steps at each annual anniversary.
A cost benefit analysis should show that the potential revenue from emerging markets, with their relatively rapid growth in GDP and the expansion of a consumer orientated middle class should provide the revenue to fund the higher levels of executive remuneration that emerging markets are now demanding. However, there are risks, as shown below
As Doctor Robert Davis the leading global strategy advisor notes, “We are on the edge of a major revolution in how the world is organised.” This applies very much to the world of emerging markets. The Arab spring, it may be argued, it just the start of fundamental change in the region. Also of note is the continuing rise of nationalism in certain EM countries that will also lead to a new understanding of geopolitics not just in Asia but across the globe. Dr Davis goes on to note some major geopolitical risks:
- Social cohesion in Europe
- Rising nationalism in Asia
- Conflict (1), not in military terms, but in terms of the emergence of economic imperialism
- Conflict (2), in military terms, as the hypothesis that the world is becoming a safer place needs to be tested. The South China Sea and Iran head up the list
- The impact of NATO’s scheduled withdrawal from Afghanistan
- Emerging indications of a rejection of consumerism
- Unfolding events in the Middle East particularly pathways to or away from democracy, the robustness of current geographic borders and the emergence of theocracy.
Executive labour markets are going to be impacted strongly by these issues so we have to contend not only with high demand but high uncertainty. This means HR and reward in particular are going to have to develop a competency in the analysis of geopolitical structures, risks and themes if we are to protect our organizations from unexpected shocks and low probability but high impact events. This will mean multi-national organizations need a different approach to termination clauses as well as considerations within expatriate EM packages of security and evacuation – as events in Mali have demonstrated. This uncertainty and current events can only lead to further upwards pressures on packages as well as the factors identified above. A strong and systematic approach to risk in reward is essential to support decision making and ensure that all the risks are considered and managed.
The rapidly increasing costs of employing senior executives in emerging markets are a vital consideration when undertaking business in these areas. It is important to be both nimble and innovative to stand a chance of competing. Local organisations have a large advantage over multi-national organisations in terms of market knowledge. Competitive advantage is possible but difficult. The changes in these labour markets must lead to a challenge on existing assumptions of what is “fair” and appropriate in a rapid changing and fluid environment. Taking account of what is happening in each country and sector; both in terms of quantum and design is essential; albeit leading to the possibility of highly contextualised and fragmented approaches rather than a centrally driven strategy.
The other side of the coin for executive employment in emerging markets is the very high level of risk and uncertainty. The interaction and correlation between the factors noted by Dr Davis above are likely to bring many downside surprises over the next twelve months. This reinforces the need for nimbleness as well as having appropriate exit strategies (both in a physical and organisational sense) as well as robust business continuity arrangements.
One could use the simile of the old Wild West frontier; there are many risks and dangers but the potential for high rewards means that not being in this region is, in itself, a major business risk.
About the Author : Ian Davidson is an MBA qualified, passionate, leading reward manager and an influential commentator on reward issues in the US and UK. He has over 15 years’ experience in senior level reward in UK financial services. His popular reward blog is at http:// iandavidson.me/