According to economic experts, many companies need to think more deeply on the way economic cycles have changed how businesses work in making compensation plans for their top executives.
As shifts are beginning to happen across industries, their economic cycles will become less predictable, leading companies to search for that balance. Aon Hewitt’s senior partner Na Boon Chong stated: “Over the last four to five years, we’ve seen an increase in client demand on having consultants come in not just for a one-off review, but on an annual basis to advise the remuneration committee.”
Additionally, Mr Michael Burke, chief executive of talent & performance at HR management consulting firm Aon Hewitt, said that companies should be fully aware of the economic cycles they will face.
“What we’re seeing firms come to is a balance of fixed pay, short-term bonuses and long-term split between retention and performance. There are different ways to develop and build those plans, but it’s about having that business HR balance,” said Mr Burke.
“For example, in the United States market, where we’ve seen performance-based plans, 85 per cent of those now have multiple measures, whereas several years ago it might have been one. They are becoming slightly more complex, in order to deal with a higher rate of disruption,” he added.
Mr Na pointed to Singapore-listed companies that adopt newer features for top executives as they saw the business landscape changing. “In the past, they used relative TSR and absolute TSR. Now they take this five-year balance scorecard, where the TSR performance is moderated by the scorecard strategic measures to determine the additional incentive, on top of their normal plan.
The basis is to say we need to achieve certain strategic measures – financial and non-financial period – over five years, but also need to look at shareholder return and balance that.”
Mr Burke chipped in with “The US is slightly different from Britain or Asia, generally. It’s about how much is fixed pay, versus short bonus versus a long-term plan that’s merely about retaining key staff and driving maybe shareholder value, or driving specific actions and performance.
Those are starting to converge. The most common model is something like 10 per cent fixed, 20 per cent as a short-term bonus, 35 per cent in retention or performance. ”
Mr Na also had thoughts on this, saying “When you design an incentive plan in the downturn, it’s a certain way, but when the upturn comes, you may be overpaying. Sometimes companies have a plan in place and forget about reviewing it. It’s common to see large-cap firms here with one-third base salary, one-third on the annual bonus, and one third long-term incentives… In the US, long-term incentives can be 60, 70 per cent.”
Mr Burke finished by cautioning that many companies need to “resist the urge when you hear about the new fad and over-rotate to that, but try to think about a balanced plan and tweak it to your business HR needs”.