Predictions highlight patchy global business confidence

News Release
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Pay data: 2012 short-term incentive predictions highlight patchy global business confidence

• STI trends indicate declining business confidence in Asia Pac, Latin America and North America; cautious optimism in EEMEA, Australia, New Zealand
• Australian and New Zealand employers anticipate marginal increase in STI 2012 payouts compared to 2011

1st June 2012

Pay data released by Mercer on the use of Short-Term Incentives (STIs) countries has highlighted surprising indications of nascent business confidence in Western and Eastern Europe, Australia, New Zealand and Middle East. The data, taken from 21,000 companies in 62 countries also indicates a weakening in confidence for companies in Asia Pac, Latin America and North America.

The data comes from Mercer’s ‘Short-Term Incentives around the World’ report which draws on annual incentive information from over 7.6 million employees across the globe. For this release, Mercer analysed STI data from Executives / Top Management to gain insights into company confidence that their financial targets will be met.

Mark Quinn, Partner and Reward specialist at Mercer, said: “An STI is remuneration based on annual performance against set criteria and STIs form an important part of the remuneration package for key employees and senior executives. A key criterion for the funding of bonus awards is successful company performance. So, if a company is predicting that it will pay out less to executives in 2012 than it did in 2011 - as our data shows is happening in certain regions – it indicates that companies expect their financial performance to be worse in 2012 than in 2011. The reverse is also true.”

“STI predictions for 2012 are a good reflection of business confidence. Based on our data, there is better confidence in Western and Eastern Europe but evidence of a weakening in confidence in Asia Pacific and the Americas. Business sentiment and economic conditions can change rapidly so we’d anticipating seeing some difference in the actual amounts distributed,” he said.

In Australia and New Zealand specifically, the percentage of executives receiving STIs is increasing, from 56% of executives in 2009 to 67% in 2011. The longer, three-year trend from 2009 to 2012 on STIs as a percentage of base salary across Asia-Pac and Australia/New Zealand is upwards, with awards increasing by 2.3% and 2.6% respectively.

However, the data suggests that in the short-term confidence is dipping. In 2010, companies in Asia-Pac predicted STI payouts for 2011 of 22.2% yet actual payments were higher (23.3%). This reflected the economic confidence of the region. In contrast, predicted payouts in 2012 are expected to be 22.1% suggesting a more cautious outlook. Employers in Australia and New Zealand are an exception here, anticipating a marginal increase in 2012 of 21.9% compared to the 21.6% paid out in 2011, demonstrating a sense of cautious optimism.

Outside the executive suite, the report highlights that companies are looking at adjusting their use of variable pay to help manage the cost of labour which is a major factor for most organisations. While the high unemployment rate has brought down hiring costs, the soaring cost of training and educating new talent restrains employers from “buying talent” rather than “building” their own. The size of potential awards and the eligibility for them are directly related to an employee’s level and role within a company. As with other types of remuneration, STI size and eligibility differ by region and country.

Mr Quinn said: “To stay within tight budgets and effectively motivate their skilled workforce, many companies are shifting more employee compensation from a fixed-pay approach to one that relies more on variable compensation, but with increased linkage on tying the funding of plans to company performance, and more focus on the distribution of awards to those who truly contribute to that business performance.”

“While some industry sectors like Financial Services are reducing their use of STIs in response to regulatory pressures, they remain an essential part of the wider remuneration mix. STIs can be used at all employee levels to focus employee behaviour and performance on metrics that relate to its success. This is affordable from a company’s perspective because awards are typically tied to specific, measurable, agreed-upon financial performance goals – often related to incremental revenue or profits,” he said.

Mercer’s shows the increasing usage of STIs amongst all employee classes, as well as trends in the amounts awarded (see Table 1 below for full list of data across various the regions/countries).

United Kingdom

In the UK, the three-year trend data from 2009 to 2012 shows a small increase (1%) in the number of executives receiving STIs indicating a more positive outlook held by many businesses. The data shows that, in 2012, companies anticipate paying their executives STIs equivalent to 23% of their base salary. This is an increase from the 22% paid out in 2011.

“In 2011, a UK executive with a base salary of £100,000 would have earned an additional 22% - or £22,000 - if they met all their performance and business objectives,” says Mark Quinn. “In 2012, we are seeing companies predict that this executive will now make more – 23% or £23,000. As STI funding is increasingly tied to company performance, this tells us that companies anticipate a better performance in 2012.”

While this is the case in the UK, the picture is different across regions and between individual countries within these regions.

Americas
In 2011, eighty-three percent of executive and top management in North America received some form of STI and average actual payouts averaged 38.9% of base salary, far in excess of any other region. This was higher than the amounts predicted in 2010 (35.3%) which is indicative of the improved economic outlook during this period. For 2012, however, the outlook appears less rosy with companies predicting an average 37.5% payout. Companies in Latin America are also pessimistic, predicting an average 2012 payout of 19.7% a substantial drop from the 27.5% paid out in 2011.

Western Europe
The percentage of executives receiving STIs has remained broadly stable over the past three years hovering around the 75% mark. Companies in Western Europe tend to focus less on STIs as part of the pay mix. Predicted STI payouts for 2012 (19.7%) is broadly static compared with what was paid out in 2011 (19.6%). This small short-term increase suggests no notable increase, or drop, in business confidence, despite the Euro crisis. The longer three year trend is upwards. While actual payouts in 2009 were 17.3%, they were 17.3% in 2010 and 19.6% in 2011.

Eastern Europe, Middle East and Africa (EEMEA)
The trend on the percentages of executives receiving STI awards across 2009- 2012 is broadly static in EEME but the size of awards is gradually increasing from 17.9% in 2009 to 18.9% in 2011. Even though the 2011 payments were less than predicted (19.7%), higher payouts are still predicted in 2012 (19.5%) indicating great confidence that financial targets will be met.

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