GCC Executive Pay Closing In On Global Trends: Mercer
Executive remuneration practices and standards across the Gulf are rapidly catching up with global trends, according to new research from the global HR consulting firm Mercer.
The 2011 trends identified by the Mercer review include deferred bonus plans, more rigorous business performance targets and measures, and incentives linked more to profits than in the past.
The GCC experience suggests the time lag of executive remuneration awareness compared to experiences in Europe, North America and other regions is now closing fast.
“Our surveys are forecasting base salary increases in 2011 ranging from 6.0% to 7.5%. This will be the first pay increase for many over the past two years,” he said.
Mr Hannah said the biggest trend in the region was for annual incentive programs to be linked more tightly with specific corporate and division/business unit performance measures together with the introduction of long term incentives.
“It is important in our view that companies validate these payout structures in light of specific performance achievements and long term business objectives” Mr Hannah said.
Furthermore, the global trend of bonus deferrals has also hit the GCC, with a tendency for longer term incentive plans to be introduced without increasing incentive pool costs overall.
The GCC trends match other pan-European survey data from Mercer that shows further cutbacks in the use of short-term incentives (STI) in the pay mix in the financial sector, offset by base pay increases and a much greater use of deferred compensation and long-term incentives (LTI).
The analysis is based on senior executive pay data compiled from 38 leading insurance, banking and financial services organisations across Western Europe.
Among the highlights:
73% of organisations increase salaries for internal risk and audit positions
Proportion of base pay for senior positions rises from 25% in 2008 to 34% in 2010; pay continues move away from short-term incentives
Proportion of long term incentives in CEOs’ total compensation increases from 36% in 2008 to 46% in 2010; annual bonuses drop from 39% in 2008 to 23% in 2010
Mandatory deferral plans, clawback arrangements and bonus pools will evolve in 2011
Mr Hannah said across Europe corporate governance processes have been strengthened and pay structures have evolved since 2008. “The widespread salary freezes and salary cuts for executives have come to an end and most organisations have gone back to regular salary reviews,” he said.
Mercer’s data also indicates that decreasing annual variable compensation levels have been balanced with the introduction of deferrals, turning the bonus system into a more effective means of aligning bonus payouts with the time horizon of risks. The report also notes that there have been widespread reviews of, and reductions in, generous severance pay packages in response to public concern.
The report shows that the median salary increase during 2009 to 2010 across all senior roles in the financial services sector was around 2%, reflecting pay restraints in many sectors of the global economy. However, roles with responsibility for internal control in the financial sector received notably higher pay increases with Chief Risk Officers receiving 5%.
Compared to 2008, the proportion of base salary and LTIs in an employee’s overall 2010 compensation increased, while annual bonuses decreased. This is in direct response to regulator pressure.
“If we consider the broader C-Suite – a corporation’s most senior executives – in 2008 executive positions would have received 25% of their compensation as base pay and 40% in short-term incentives, with the final 35% in the form of LTIs (e.g. equity plans). The picture changed dramatically in 2009, with 60% of the same executives receiving no annual bonus. So the real trend is only evident in the 2010 figures. According to this data, in 2010, the same C-Suite received 34% of their compensation in base pay, 30% in STI and 37% in LTI,” said Mr Hannah.
For CEO positions, this shift in pay mix is particularly evident where the LTI proportion of their pay mix shifted from 36% in 2008 to 46% in 2010 and the weight of CEO’s annual bonuses dropped substantially from 39% in 2008 to 23% in 2010.
Furthermore, an increasing number of organisations are deferring part of their variable compensation - from 45% of companies in 2009 to 67% in 2010. The average period for a deferred bonus is now three years with the mandatory minimum, according to regulatory requirements the majority of organisations have a deferral setup with a clawback structure, which allows an organisation to take back previous performance-based payments on the basis of restated financials or breached agreement.
In 2011, the vast majority of organisations will increase salaries, with an average rise of 2.5% as part of their normal annual salary review. In the past two years, almost all financial services organisations have made changes to their compensation programmes and performance measures. Most commonly, they have introduced a mandatory deferral plan.
Mercer is the leading global provider of consulting, outsourcing and investment services. From its GCC headquarters in Dubai, Mercer teams work with clients across the region to solve their most complex benefit and human capital issues. Mercer is a global leading HR consulting firm, with revenue of US$3.5B. It is the global market share leader in retirement, health & benefits and investment consulting. It is an advisor to nine out of ten Fortune 100 companies. It has been judged the most trusted HR consulting brand in the world. Mercer is a truly global firm serving clients in more than 40 countries and 180 cities worldwide. Mercer has been rated the most prestigious HR consulting firm to work for. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit me.mercer.com