What a performance

Successful companies around the world are increasing their use of performance-based pay and are also moving to customise incentive packages by region, a new study shows.

The research, by professional services firm Towers Perrin, highlights compensation and benefit practices in 26 key locations around the world. Performance-based pay, as a share of total remuneration for chief executive officers worldwide, ranged from 14% in India to 62% in the US.

“Based on the success of performance pay in North America and Europe’s developed economies, Asian and Latin American companies are now instituting similar practices that tie employee compensation to business results,” says James Matthews, consultant in the firm’s global consulting group.

The study also found that multinational companies are gaining advantages by applying a global framework to their pay and benefit programmes, while adapting to regional standards.

This approach can help companies cut costs and bring more consistency to their reward practices worldwide, the study said.

At the same time it helps firms remain competitive by varying performance pay and other types of remuneration by country and region, based on regulatory and cultural differences.

“As companies continue to shift the pay mix in favour of performance pay, it implies that an HR strategy should – at a minimum – articulate the company’s desired pay mix and competitive positioning against the market,” says Matthews.

“It should also state whether target levels will be set locally, regionally or at a global level, and identify how performance will be measured,” he adds.

Performance-based pay consists of bonus payouts and long-term incentives, which generally come in the form of stock options or some other type of equity compensation.

Successful companies employ a methodology that ties bottom-line results to the compensation of nearly every employee. This is most effective when it is part of a total approach to employee remuneration that includes cash, equity and benefits such as retirement and healthcare, according to the study.

However, many US-based multinationals are moving towards the European approach of developing long-term incentives that customise award size by geography or group of countries.

“The size and frequency of stock and other long-term incentives are on the rise in most parts of the world,” says Matthews. “We are seeing a decline in the use of stock options in some developed economies, particularly the US, as a result of new accounting rules and increased scrutiny by institutional investors looking to protect the dilution of capital.”

Bonuses are being used more widely and to more eligible employees in global companies.

“We are seeing annual bonuses, which used to be reserved for professional-level employees, being used more broadly in lower levels of organisations,” says Matthews.

“For the first time, in countries such as Canada, France, Korea, Mexico and the UK, year-end bonuses for this group are the norm and not the exception.”

CEOs in the US continue to enjoy the largest and most comprehensive pay packages, in terms of base compensation and total remuneration. CEOs in France, Germany, Italy, Switzerland and the UK also command higher levels of total compensation than their peers in the rest of the world.

Top HR executives in these countries also enjoy richer total compensation packages, an indication of the relative strength of the economies in these countries.


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