For today's multinational organization, securing top talent on a worldwide basis is a key driver for success and having the right pay programs and incentives in place globally has become increasingly challenging.
Previously, we highlighted the difficulty of designing a multinational LTI program and now will explore designing pay for global executives, including:
- The challenges of developing and designing global executive base pay and the impact of acquired rights and allowances,
- Understanding how annual incentive design is differentiated across the globe,
- The prevalence and consistency of cash incentives and performance measures across the globe, and
- What impact currency fluctuation and inflation have on pay design?
Aon’s 2017 Global Pay Practices Survey was conducted to better understand how companies structure their global pay programs and address the challenges above. With over 100 multinational companies participating, we gleaned insights into how companies continually adapt and evolve their executive pay strategies.
Historically, development of base salaries has been highly influenced by local markets in order for companies to remain competitive for talent. However, there are exceptions to this practice. The higher the job level within the organization, the more closely the base salary is tied to, or at least influenced by, base pay levels in the headquarter country. Similarly, long-term incentives are also typically structured to reflect the practices of a company’s home country and then adjusted slightly for executives located outside of that market.
As you move down in job level within the company, the less influence the headquarter country has on setting base salary and the more closely aligned the base pay is to the local market. Figure 1 depicts the approaches to setting base salary across various levels of employees.
Allowances: Going Beyond Base Pay
Special allowances, including subsidies or stipends to pay for health care, transportation or housing, can play a big part in total rewards packages, particularly outside of the U.S. Allowances have traditionally been provided to expatriates, employees in tight labor markets or those with hardship conditions. Today, more and more companies are offering allowances to be competitive and recruit needed talent. In many non-U.S. countries such allowances are for all employees; however, 57% of companies indicated that they leveraged allowances in recruitment and retention of a targeted population of highly-skilled employees. Figure 2 illustrates the prevalence of different types of allowances.
As we see with base salaries and long-term incentive plan design, executives’ short-term incentives are typically tied to the parent company in the headquarter country. Companies generally have given considerable strategic thought to the development of award pools and performance metrics that will have the greatest impact to their business. As such, they want these to be replicated for executives across the globe.
In fact, short-term incentives are strongly connected to the headquarter country even for lower job levels (in contrast to base salary development). While the local market does impact the eligibility levels and participation for annual incentives, the design and target amount is often dictated by the headquarters. A small percentage of global companies say they have a local incentive plan that overlays the corporate plan.
Since base pay is influenced by local design below the executive level, by default the short-term incentive is also aligned with local practice even though the opportunity across the globe is consistent. See Figure 4 for an illustrative example of how the short-term incentive target as a percentage of base salary will yield different total cash opportunities for an employee in the U.S. vs. an employee in the same job role in India.
Cash incentives come in various forms and are used for many purposes across the globe. No matter the currency, cash opportunities provide an immediate reward for employees and have a significant impact on behavior and achievement. Figure 5 describes the prevalence of various forms of cash incentives across a number of regions from our survey.
The Nordic countries have the lowest prevalence of cash incentives due largely to a stable labor market, generous benefits and an employee friendly work environment. The Middle East and Africa are generally small global operations for multinational companies (with the exception of the energy and mining industries) and as such, the use of these incentives is also lower. Not surprisingly, the U.S. leads in the use of cash incentives with the world’s largest economy, a highly-skilled workforce and tightening labor market. India and China continue to increase the use of these incentives as their employment market has also become more competitive.
Almost all companies recognize that currency fluctuation is impacting employee populations across the globe. The issue has become a larger concern as the global economy grows, the U.S. dollar is strengthening to a 10-year high and Brexit has devalued the pound. However, most companies are not addressing the issue on an annual basis. If they do address this issue, the most common remedy is modifications to base salaries since they are most impacted by currency fluctuation. The majority of respondents to our survey (67%) don’t expect to make adjustments in the near future. Many companies believe the pendulum will eventually swing the other way and to continually adjust for fluctuations would be administratively unfeasible. It is only when an organization sees consistent and longer-term devaluation in a country currency that action is considered.
Similar to currency fluctuation, inflation has the a signifcant impact on base salaries. Two-thirds of respondents say they do not expect inflation to impact pay design. However, many respondents highlighted Latin America as a particular concern and are trying to address the issue with quarterly adjustments.
What We Learned
Our survey reflects fundamental pay design concepts: that is, a need to balance corporate headquarters’ control with local market influences. Base pay and incentive opportunities have historically and continue to be heavily influenced by the local market. Among the highest job levels, headquarter pay practices have more of an impact on pay design and award opportunities. Incentive metrics balance both headquarters’ need to align the company with strategic goals while providing flexibility for local initiative practices. As companies continue to expand globally and attempt to integrate pay practices across borders, we expect harmonizing pay and rewards to be a top of mind initiative for compensation professions.