China, Hong Kong Exec Compensation Continues Rise; Incentives Remain Low

Total cash compensation of Mainland China CEOs in A share companies increased by 5% (median) in 2009 during the financial crisis and by 12% (median) in 2010, according to Ernst & Young’s 2011 Mainland China and Hong Kong Executive Compensation Report. 

 

According to the report, there were significant increases in executive total cash compensation levels in both A share and Hong Kong listed companies in 2010. Compared to other developed Asia Pacific markets, variable  compensation, especially LTI, remained low in total compensation across all executive positions  of listed companies both in Mainland China and Hong Kong.

 

In the Hong Kong market, total cash compensation of listed companies’ CEOs increased by 19% (median) in 2010. 

 

In terms of compensation levels,  Hong Kong based listed companies paid much higher median total cash compensation to CEOs (RMB 12.7 million) than Mainland based listed companies (RMB 2 million) and A share companies (RMB 0.9 million) with similar market capitalization. The ratio is about 6 times and 14 times respectively. 

 

In terms of sectors, there were significant differences among sectors in both Mainland China and Hong Kong markets.

 

The finance sector had the highest median total cash compensation levels across all executive positions with RMB 2.16 million for CEOs in Mainland China. In Hong Kong, the real estate sector paid the highest median total cash compensation to CEOs (RMB 7.3 million).

 

Compared to other developed markets, Long-Term Incentive (LTI) was not commonly used in either market.  This was particularly true in Mainland China.

 

According to the Report, only 9% of A share companies had LTI plans and only 21% of these paid LTI awards in 2010. Generally, the average proportion of LTI in total compensation was less than 1% for executives of A share companies.

 

In Hong Kong, 67% of companies had at least one LTI plan in place; of these, only 29% granted LTI awards during 2010. The average proportion of LTI in total compensation was less than 10%, which was higher than that of the A share market, but lower than other developed markets.

 

 

With increasing market competition and the changing regulatory environment, companies are facing great challenges in executive compensation practices.

 

“Competition in the labor market is likely to continue to put upward pressure on total compensation packages, particularly for new hires of executives, as attraction and retention of executive talent becomes even more critical to corporate performance," says Vivian Li, China Performance and Reward Executive Director of Ernst & Young.

 

"In environments where executive compensation has risen but the rise does not reflect a similar lift in the company's performance, we need to address how to construct sound executive compensation systems which should be linked to increases in the company's value and also need to be aligned with shareholders' interests."

 

Jessica Wang, China Performance and Reward Associate Director of Ernst & Young adds companies need to incorporate greater rationality and flexibility in their compensation frameworks to retain talent. 

 

"They should also consider utilizing LTI plans to align senior management to shareholders’ interests.  Compared to global trends, the usage of LTIs in China needs to be further developed,” says Wang.

 

Jason Mi, China Human Capital Partner of Ernst & Young adds: “Executive compensation is a key component of corporate governance.  Well-designed executive compensation programs could improve corporate governance.  Companies have to consider the following factors when establishing compensation packages – controlling risks, enhancing the correlation between compensation levels and performance, financial and tax implications.“

 

 

Other key findings from Ernst & Young’s 2011 Mainland China and Hong Kong Executive Compensation Report:

 

* Generally, the median of executive compensation increased with company capitalization or with company revenue in the A share market. But this pattern was not the same in the Hong Kong market. 

 

The Report revealed that regardless of net profit growth rates (even when it was negative growth), the average compensation of the top three executives in many A share companies increased significantly.  This indicates that the connection between executive compensation and corporate performance still needs to be improved.

 

* Directors’ fees remained stable in A share companies.  Approximately 50% of independent directors’ annual fees were in the range of RMB 40K-65K, while the median of independent directors’ annual fees within the 200 largest Hong Kong companies was around RMB 210K.

 

* In both markets, especially the A share market, the disclosure of executive compensation was relatively limited. This indicates that corporate governance practices need to be improved.

 

 

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