Varying the package

Although compensation packages vary greatly throughout this
diverse region, there is a general trend towards variable pay plans, says
Charlene Solomon

 

It will come as no surprise that there is a close
relationship between annual base pay increases and the annual rate of
inflation. The new 2001 Global Compensation Planning Report from HR consultancy
William M Mercer is an annual report that examines pay and economic trends in
nearly 60 countries worldwide, providing the information employers need to
develop and manage their compensation programmes globally.

 

Latin America is so diverse in terms of the economic
influences that impact pay that it is impossible to look at the region overall.
For example, Mexico and Brazil have reasonably good economies, with inflation
becoming more stabilised. The stronger economies have GDP growth of 7-8%, and
inflation under 10%. But Argentina, which is one of the weaker economies with
growth at about 2%, has increasing unemployment and high interest rates.

 

In the more troublesome spots – places like Ecuador,
Colombia and Venezuela – there is hope that 2001 and 2002 will improve with the
stabilisation of oil prices. "With such diverse economic situations, it is
impossible to make regional generalisations," says Mark Allen, practice
leader for performance and awards practice in Latin America for William M
Mercer in Stamford, Connecticut. "We’re looking at pay increases in Venezuela
of about 18-20% against inflation of 24%; in Brazil it looks like pay increases
of 5-6% against inflation of 6%, and Mexico will have pay increases of about
14% with inflation of about 8%."

 

Traditionally, pay is marginally ahead of inflation in these
countries, but in countries like Brazil and Argentina, pay is only going to go
up as fast, or not quite as fast, as inflation. Companies are being a little
more conservative in terms of what they provide as fixed increases and fixed
costs. They’re increasingly looking at variable compensation as opposed to
fixed packages. This is especially true in Brazil and Argentina. Brazil has had
a healthy environment for variable pay in the past, but now we’re seeing much
more focus on long-term incentives. Argentina has been largely a base-pay
environment, but because of all the problems they’ve been having, companies are
not looking to increase their fixed costs of doing business. Therefore,
Argentina is starting to demonstrate variable pay plans based on performance,
and these are beginning to supplement or replace pay increases above inflation.

 

"We’re seeing some healthy increases in earnings and
purchasing power in Mexico," says Allen. Variable pay in Mexico has been
part of the pay package for some time. "At the senior levels, variable pay
approaches comparable levels to the US, possibly a little lower, but it has
been a mainstay for a while. However, the economic environment hasn’t been
terrific for the past couple of years. Now, with Vicente Fox, there is more
optimism, and companies are trying to catch up on general pay increases that
they have not been providing as fully as they had been in the past."

 

Looking at senior management positions, variable pay targets
in Brazil are about 25-27%, in Mexico they are 23-25%, in Argentina about 25%,
and even in Peru, Puerto Rico and Colombia the targets are 20% or greater. So
at management level, there has been much greater focus on variable pay.
"Drop down to general management levels," says Allen, "and those
targets drop significantly. The variable pay targets at the management level in
Latin America are starting to approach the global level in terms of variable
pay opportunity. They are less than in the US, but more competitive globally.
But, below that level, the targets drop very quickly to about 10%."

 

A good example is Brazil, with targets below 10% for
managerial level and above 25% for senior management. "Part of it is
cultural. Part of it is economic. Since so many of these countries have
experienced tremendous inflation over the past 10-20 years, the idea of
deferring pay to a later date based on performance is very scary to them. They
have grown up in a world of economic uncertainty and would much prefer to get a
fixed pay increase than a variable pay opportunity."

 

An increasing trend is the focus of attention on long-term
incentives, such as stock options and performance plans. There is an awakening
to long-term incentives related to business performance. The trend is going to
be more and more towards putting the pay package into a variable opportunity.
In the past, it would have been focused on annual pay, but now there is
starting to be more of a mix between annual and long-term incentives.

 

www.wmmercer.com

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