Asian Firms Hopping on the International Bandwagon to Increase Deferral Rate
Pretium study finds retention remains primary to deferral increase in Asia whereas deleveraging incentive drives pay mix changes in Europe
HONG KONG, July 9, 2014 -- Asian firms are jumping on the international bonus deferral bandwagon for retention rather than compliance according to independent management consulting firm, Pretium Partners Asia Limited ("Pretium").
Pretium Long-Term Incentive Practices Study (2014) shows major investment banks, asset management, alternative investment and insurance firms in Asia are stepping up efforts to strengthen long-term incentives for retention due to business expansion. This is in contrast to the theme of deleveraging incentives in the UK and Europe by adjusting pay mix to prevent excessive risk taking.
The study examined the features of more than 80 long-term incentive plans in 50 international and Asian financial services firms. This includes deferred bonus plans and additional long-term incentive plans in the United States, United Kingdom, Europe, China, Singapore, Malaysia and Australia.
After compensation restructuring in the past few years, international firms have gradually settled down with their long-term incentive plans. The only major change was found on pay mix due to the bonus cap requirements under CRD IV, most of the UK and European banks have introduced role based fixed allowance for Code Staff / Identified Staff to deleverage incentives. US banks are relatively less stringent on long-term incentive practices as evidenced by lower deferral rate, fewer LTI schemes and simpler plan design. Insurance firms lag behind in terms of risk based incentive practices. Some of them still lack bonus deferral arrangement and continue to grant share options. Share options have continued to lose its popularity in recent years as there are fewer existing plans and limited fresh grants under these plans. Performance share/unit plan has become the most popular long-term incentive vehicle. “Share options are not seen as performance based incentive vehicle among regulators and shareholders. They are concerned that value can be realized based on macro-economic conditions, rather than company specific performance/financials, particularly over a 10-year timeframe,” said Robert Li, Partner at Pretium.
More firms have begun to build more discretion in the form of malus into incentive design, so that they can make adjustments to awards based on unexpected circumstances. A severe downturn in economic conditions, or problems discovered during an audit, could lead to circumstances where payment of incentives would seem inappropriate. “Implementing clawback will likely be a complicated process, with a number of legal and tax considerations for both the employee and the company. Even though clawback might be difficult to enforce in reality, more firms are considering or have already put such provision in place,” said Robert Li.
The bonus deferral rate and period in Asia have increased but are less stringent when compared to their counterparts in the US or Europe. Among Asian firms, Australian and Singaporean banks are ahead of the game as they have more structured long-term incentive plans and tend to defer bonus in time vested restricted stocks which is similar to international firms. Chinese firms tend to defer bonus in cash and many of them have yet to introduce additional long-term incentive plan. Due to loosening of the regulatory restrictions on share based incentives in China, more Chinese firms are expected to tap the opportunity and start to strengthen their incentive schemes to increase retention. "Incentive changes in international firms are expected to spread to Asian firms. While global regulations are more focused on the largest financial institutions, the enhanced features will be increasingly relevant for firms of all sizes and cutting across borders," said May Poon, Partner at Pretium.
While there is increasing awareness on risk management in long-term incentive (LTI) design, there is growing concern that some incentive schemes have become so complex that their effectiveness in motivating senior executives are under question. "This dilemma is in particular vivid for Asia as most of the businesses continue to expand and the talent war never seems to end,” said May Poon. “On one hand, EU firms operating in Asia are still coping with unequal playing field triggered by the bonus cap; on the other hand Asian firms are stepping up to further increase competitiveness by strengthening long-term incentive schemes for talent acquisition and retention.”
About Pretium Long-Term Incentive Practices Study (2014)
Pretium Long-Term Incentive Practices Study (2014) examines the key incentive features of more than 80 long-term incentive plans in 50 international and Asian investment banking / securities, asset management, insurance and alternative investments firms in the United States, United Kingdom, Europe, China, Singapore, Malaysia and Australia. This includes mandatory deferred bonus plan and additional long-term incentive plans that are granted on top of annual bonus.
About Pretium Partners Asia Limited
Pretium Partners Asia Limited ("Pretium") is an independent management consulting firm that helps accelerate clients' growth and increase profitability through unique spectrum of management consulting services which includes incentive plan review and design, organization transformation, benchmarking, business performance management as well as mergers and acquisitions integration.
Click here to know more.
Pretium study finds retention remains primary to deferral increase in Asia whereas deleveraging incentive drives pay mix changes in Europe
HONG KONG, July 9, 2014 -- Asian firms are jumping on the international bonus deferral bandwagon for retention rather than compliance according to independent management consulting firm, Pretium Partners Asia Limited ("Pretium").
Pretium Long-Term Incentive Practices Study (2014) shows major investment banks, asset management, alternative investment and insurance firms in Asia are stepping up efforts to strengthen long-term incentives for retention due to business expansion. This is in contrast to the theme of deleveraging incentives in the UK and Europe by adjusting pay mix to prevent excessive risk taking.
The study examined the features of more than 80 long-term incentive plans in 50 international and Asian financial services firms. This includes deferred bonus plans and additional long-term incentive plans in the United States, United Kingdom, Europe, China, Singapore, Malaysia and Australia.
After compensation restructuring in the past few years, international firms have gradually settled down with their long-term incentive plans. The only major change was found on pay mix due to the bonus cap requirements under CRD IV, most of the UK and European banks have introduced role based fixed allowance for Code Staff / Identified Staff to deleverage incentives. US banks are relatively less stringent on long-term incentive practices as evidenced by lower deferral rate, fewer LTI schemes and simpler plan design. Insurance firms lag behind in terms of risk based incentive practices. Some of them still lack bonus deferral arrangement and continue to grant share options. Share options have continued to lose its popularity in recent years as there are fewer existing plans and limited fresh grants under these plans. Performance share/unit plan has become the most popular long-term incentive vehicle. “Share options are not seen as performance based incentive vehicle among regulators and shareholders. They are concerned that value can be realized based on macro-economic conditions, rather than company specific performance/financials, particularly over a 10-year timeframe,” said Robert Li, Partner at Pretium.
More firms have begun to build more discretion in the form of malus into incentive design, so that they can make adjustments to awards based on unexpected circumstances. A severe downturn in economic conditions, or problems discovered during an audit, could lead to circumstances where payment of incentives would seem inappropriate. “Implementing clawback will likely be a complicated process, with a number of legal and tax considerations for both the employee and the company. Even though clawback might be difficult to enforce in reality, more firms are considering or have already put such provision in place,” said Robert Li.
The bonus deferral rate and period in Asia have increased but are less stringent when compared to their counterparts in the US or Europe. Among Asian firms, Australian and Singaporean banks are ahead of the game as they have more structured long-term incentive plans and tend to defer bonus in time vested restricted stocks which is similar to international firms. Chinese firms tend to defer bonus in cash and many of them have yet to introduce additional long-term incentive plan. Due to loosening of the regulatory restrictions on share based incentives in China, more Chinese firms are expected to tap the opportunity and start to strengthen their incentive schemes to increase retention. "Incentive changes in international firms are expected to spread to Asian firms. While global regulations are more focused on the largest financial institutions, the enhanced features will be increasingly relevant for firms of all sizes and cutting across borders," said May Poon, Partner at Pretium.
While there is increasing awareness on risk management in long-term incentive (LTI) design, there is growing concern that some incentive schemes have become so complex that their effectiveness in motivating senior executives are under question. "This dilemma is in particular vivid for Asia as most of the businesses continue to expand and the talent war never seems to end,” said May Poon. “On one hand, EU firms operating in Asia are still coping with unequal playing field triggered by the bonus cap; on the other hand Asian firms are stepping up to further increase competitiveness by strengthening long-term incentive schemes for talent acquisition and retention.”
About Pretium Long-Term Incentive Practices Study (2014)
Pretium Long-Term Incentive Practices Study (2014) examines the key incentive features of more than 80 long-term incentive plans in 50 international and Asian investment banking / securities, asset management, insurance and alternative investments firms in the United States, United Kingdom, Europe, China, Singapore, Malaysia and Australia. This includes mandatory deferred bonus plan and additional long-term incentive plans that are granted on top of annual bonus.
About Pretium Partners Asia Limited
Pretium Partners Asia Limited ("Pretium") is an independent management consulting firm that helps accelerate clients' growth and increase profitability through unique spectrum of management consulting services which includes incentive plan review and design, organization transformation, benchmarking, business performance management as well as mergers and acquisitions integration.
Click here to know more.
