Shifting Away From “Low Pay, High Bonus” for Sustainability
Pretium study finds Chinese firms are re-balancing compensation mix by shifting bonus to salaries and long-term incentives
Chinese investment banks, asset management firms and alternative investment firms are rethinking the pay philosophy of paying low salaries and high bonus levels. They are planning to increase fixed salaries and introduce long-term incentives instead of paying out huge bonus for sustainability, according to independent management consulting firm, Pretium Partners Asia Limited ("Pretium").
Pretium’s recent Year-end Reward and Performance Trends Study (“Study”) examined actual results and expectations on business performance, salary review budget, bonus payout ratios and movements, headcount changes and human resources priorities. It covered over 30 international and Asian investment banks, asset management and private equities firms as well as insurance companies in Asia with multiple offices spanning across the region.
Fixed salary cost has been under pressure in recent years for international firms in Asia due to rising costs on regulatory compliance especially after role based fixed allowance is introduced to counterbalance the effect of bonus cap imposed by Capital Requirement Directive (CRD) IV. It is expected salaries in Hong Kong will increase by 5.2%, slightly more than their counterparts in Singapore (4.8%). Other developed markets, like Taiwan, Japan and Australia, indicated a 3% to 4% for salary forecast next year according to the Study. Some international banks have jumped on the bandwagon to increase salaries for junior bankers. As a result, Asian firms are also under pressure to narrow the salary gap with international firms to keep up with the talent competition. The spiraling effect of salary increase will certainly have an impact on bonus levels as overall total compensation levels largely remains constant.
Investment banking has the highest (30%) bonus payout ratios as a percentage of profit whereas insurance companies only paid 6% of its profit as bonus. Across the financial services industry, the actual and projected median bonus payout is 4 months of salaries with Investment Banking business getting higher bonus due to increasing revenue from advisory, underwriting and financing businesses. Bonus at Chinese firms is paid at the market upper quartile in part due to strong business performance and in part due to their intrinsic compensation strategy. “The low pay, high bonus philosophy has been the motto for many Chinese firms and it has worked well as reflected from their growth stories and better profit levels when compared to international counterparts. The question is whether this compensation strategy is sustainable?” said May Poon, Partner at Pretium. “The expansion of global footprints among Asian firms and the re-balancing of pay mix in Europe triggered by the bonus cap calls for a rethink on how to balance compensation strategy and mix.”
Firms in Asia are becoming more cautious on bonus as evidenced from their bonus projection. Promising overall firm performance especially among Chinese firms, however, does not result in the same positivity in bonus forecast according to the Study. They tend to be cautiously optimistic and indicate bonus levels remain flat or with a slight increase i.e. 10% or less. “Apart from maintaining prudent bonus levels, many Chinese firms are shifting part of the bonus to become long-term incentives. This is in line with the global regulatory requirements to deleverage incentive compensation to prevent excessive risk taking and to utilize the opportunities from the less restrictive regulatory requirements in China to incentivize senior executives and critical talent,” said May. “In addition to cash or stock based deferred bonus, additional long-term incentives are seen by shareholders and regulators as a better alternative to cash bonus in alignment of interest and prevention of excessive risk taking.”