Executive Labour markets – the emerging markets story


Many people will have been surprised by recent research that showed that executive pay in some areas of emerging markets are at or above the level of mature markets such as the USA and UK.  A study by the global management consultancy Hay Group shows, for example, that in 2011 the average total cash level for senior management was $154,847 in the USA compared with just over $150,000 in South Africa and $204,421 in the UAE.  While appreciating that emerging markets are not a homogenous group of countries; there is a clear trend of rapidly rising executive pay.  The drivers for these increases have been identified as high growth, high inflation and high demand.

This high growth in cost is accompanied by very high levels of geopolitical uncertainty that both adds upward pressure on packages but also means that careful consideration needs to be given to the nature and quantum of investments in a number of emerging market areas.  In more mature markets there are often unspoken assumptions about robust legal systems and continuing political legitimacy (although that is starting to be questionable).  Those are assumptions that need to be examined in the light of current events in a number of emerging market territories.    

It’s a humpty dumpty world

The changes in levels of reward in emerging markets turn traditional assumptions on pay on their heads.  We are seeing increasingly that higher pay is required in some emerging market countries than say the USA or France.  In addition to base pay many EM countries have a structure of large cash allowances for housing, cars, education and so on leading to a very rich cash package before LTIPS, options and the like are taken in to account.

In a phrase, the executive markets in emerging markets are hot.  This is similar to the conditions seen in the mature markets a few years ago.  As an example, senior executives moving jobs in China are likely to generate a salary premium of more than 30%.

New thinking is required.  It is no longer enough to treat EM remuneration as a subsidiary consideration to the parent market.  EM labour markets have their own dynamic which is much faster moving and fluid than we have seen in the west for many years.

The fuel on the executive race track

Most commentators such as Hay Group and CT Partners agree that there are three factors fuelling the explosion in remuneration:

  • High demand for executives in high growth countries and sectors
  • High inflation in some emerging markets together with stronger currencies
  • High growth in both sectors and countries in emerging markets

There is a high demand for senior executives in a number of emerging markets.  Asia Pac is a key example where for some time now demand has considerably outstripped supply.  Given that economic growth rates continue to look very healthy (and certainly when compared with very weak growth in a number of western economies). It is likely that pay levels will outstrip mature markets if that has not already happened.

Inflation adds to the fuel.  EmergingMarkets.org quote pay inflation in Venezuela at 29% and in Argentina at 24.5%.  Brazil and Mexico are likely to rises in excess of 5% – and that is just to stand still – not taking account of the high demand for experienced senior management in these areas. 

Concentrate on tactics rather than strategy

The fast moving and fluid nature of a number of emerging market labour segments means that it may not be possible to have a prescriptive approach.  Nimbleness is the order of the day; reacting slowly or inappropriately will simply mean losing talent to competitors, be they local start-ups seeking a piece of the pie or established national or international players.

CT Partners have suggested that it may be appropriate to treat some EM markets as start-ups and structure remuneration accordingly.  This will mean some innovative thinking.  Larger equity grants (perhaps using local equity market listings) or higher gearing than we are seeing in mature markets.  Yes, this will create internal equity issues – but, to mix a metaphor, if you want flesh in the game you are going to have to gamble the pot.

Differentiated approach

My view is that to compete in the hot markets a highly differentiated approach is required.  The focus must be on individual country and sector labour markets both in terms of the quantum of reward and in terms of the total reward framework reflecting the innovations and retention products of that particular market.

Retention is very important and, given “transfer” premium costs, much more economic than recruitment.  I return once again to the concept of treating some emerging market countries as “start-up” territories.  This may mean offering equity or equity like vehicles with a mixture of time and performance vesting; weighted towards time vesting with steep steps at each annual anniversary.


A cost benefit analysis should show that the potential revenue from emerging markets, with their relatively rapid growth in GDP and the expansion of a consumer orientated middle class should provide the revenue to fund the higher levels of executive remuneration that emerging markets are now demanding.  However, there is a fly in the ointment – the risks.


As Doctor Robert Davis the leading global strategy advisor notes, “We are on the edge of a major revolution in how the world is organised.”  This applies very much to the world of emerging markets.  The Arab spring, it may be argued, it just the start of fundamental change in the region. (Pun intended)  Also of note is the continuing rise of nationalism in certain EM countries that will also lead to a new understanding of geopolitics not just in Asia but across the globe.     Dr Davis goes on to note some major geopolitical risks:

• Social cohesion in Europe
• Rising nationalism in Asia
• Conflict (1), not in military terms, but in terms of the emergence of economic imperialism
• Conflict (2), in military terms, as the hypothesis that the world is becoming a safer place needs to be tested. The South China Sea and Iran head up the list
• the impact of NATO’s scheduled withdrawal from Afghanistan
• Emerging indications of a rejection of consumerism
• Unfolding events in the Middle East particularly pathways to or away from democracy, the robustness of current geographic borders and the emergence of theocracy.

Executive labour markets are going to be impacted strongly by these issues so we have to contend not only with high demand but high uncertainty.  This means HR and reward in particular are going to have to develop a competency in the analysis of geopolitical structures, risks and themes if we are to protect our organizations from unexpected shocks and Black Swans.  This will mean a different approach to termination clauses as well as considerations within EM packages of security and evacuation – as recent events in Mali have demonstrated.  This uncertainty and current events can only lead to further upwards pressures on packages as well as the factors identified above.


The rapidly increasing costs of employing senior executives in emerging markets are a vital consideration when undertaking business in these areas.  It is important to be both nimble and innovative to stand a chance of competing.  Competitive advantage is possible but difficult.  The changes in these labour markets must lead to a challenge on existing assumptions of what is “fair” and appropriate in a rapid changing and fluid environment.  Taking account of what is happening in each country and sector; both in terms of quantum and design is essential; albeit leading to the possibility of highly contextualised and fragmented approaches rather than a centrally driven strategy.

The other side of the coin for executive employment in emerging markets is the very high level of risk and uncertainty.  The interaction and correlation between the factors noted by Dr Davis above are likely to bring many downside surprises over the next twelve months.  This reinforces the need for nimbleness as well as having appropriate exit strategies (both in a physical and organisational sense) as well as robust business continuity arrangements.

One could use the simile of the old Wild West frontier; there are many risks and dangers but the potential for high rewards means that not being in this game is, in itself, a major business risk.  You pays your money (mostly to senior executives) and you takes your choice.

There is a supporting info graphic for this blog at http://prezi.com/_iiuwhlufol1/executive-labour-markets-the-emerging-market-story/


Visualisation of reward risks – the appetite for risk




The profile of reward and the risks it runs can hardly be higher.  Just in the last few days we have seen media headlines about alleged million pound plus salary overpayments in an NHS trust to further issues around votes on remuneration reports, for example the report in the Telegraph of Imperial Tobacco facing investor revolt over its bonus revamp.

These risks include operational reward risks (an often overlooked area) such as making sure that payrolls are run accurately with appropriate tax accounting and payments through to communications between remuneration committees and the shareholder advocacy groups such as, in the UK, the ABI or in the US ISS.

Risk is part of business operations.  What is important, if not essential, is to measure and manage those risks in a systematic framework.    This allows us reward professionals to discuss risk issues confidently with the business, our colleagues in external and internal audit as well as the regulators.  A systematic process allows us to define and agree our risk appetite with our organisations and reduces (although will never abolish) surprises from our reward activity.  I am a great believer in two philosophic approaches.  One is that we always underestimate the frequency and impact of random events.  The recent best seller “Thinking fast and slow” by Kahbneman is a fascinating book on these issues. Likewise, we will always be subject to “black swans” the disruptive large scale random event that no one was expecting.

An overall approach to reward risk

Rosario Longo has published a very good blog “Risk and Reward Risk Management” which gives an excellent overview and structure for looking at reward management risk.   He identifies the key stages and stakeholders in the analysis of risk – mostly from an operational reward risk perspective but the approach is also applicable to the wider questions of strategy, executive remuneration and so on.

His approach on risk measurement and evaluation is very similar to an approach I developed that allows the use of a relatively simple Microsoft Excel spread sheet to generate a visualisation of risk scores in an organisation.  Rosario makes the excellent point that risk scores and measurements are not absolute numbers but an expression of relativity in relation to the known reward risks that organisations may face.

The visualisation approach

It must be recognised that my approach is essentially a sub-set of the type of systematic approach that Rosario has suggested.  Much of the data feeding in to my spread sheet will have been collected by the methods and collaborations suggested by him.  I would add that much of the generation of indicators in my approach are a result of the implicit knowledge of the person drawing up the risks and metrics.  An experienced reward professional will know where the key choke points in reward operations lie and what issues tend to occur during bonus planning and reward processes.

First step: the listing of reward risks

There are a number of approaches to listing the risks in reward.  I like to use a systematic approach by looking at the individual reward processes and then considering the risks attached to each process.  When I last carried out a process like this I came out with a list of over 300 risks.  Here are some examples of reward risks:

Lack of   understanding by senior management of the reward process

Issues   with Regulators over reward

Levels   of base salary insufficient to recruit

US   Benefit structure not appropriate for culture

Vendor   costs not being controlled

Communications   with employees insufficient

Remco has insufficient market data

Table 1 Examples of reward risks

It would be good practice to collaborate on the list with stakeholders such as Remco, HR business partners, the Finance and Audit departments etc to get their views on what they see as reward risks.

The list of reward risks is not static; it will change with time and such issues as changes in legislation, tax, reporting requirements, code changes and so on. A quarterly review of the list would be a good starting point. 

Some organisations run risk databases; such as Operational Risk departments – or may even have access to external risk databases.  All of these are good sources of intelligence on risk in reward.

Once we have a list of risks we more on to the next stage of probability.

Second step: listing probabilities

This is the most difficult stage of the process.  In the vast majority of cases we look to our (and other) organisational history to see what has “gone wrong” or “needs improvement” in the past.  In addition we must also scan events to look for issues that have occurred in other organisations, either in our sector or elsewhere.  Again, access to an external risk databases is a good way of keeping up with risk issues.  Advisors can also be a good source of advice around incipient risks.

At the end of the day risk is largely down to individual judgement.  Unless you have risks with a high frequency which allows mathematical modelling such as Monte Carlo simulations then you have to make an informed judgement call on the probability of risk based on history.  However, as investment advisors are keen to point out, past performance is no predictor for future results”.  Also any risk listing will be specific to the organisation to which it relates – it is all about context.

My model uses a risk weighting of 1 to 10.  Where a rating of one is highly improbable and ten is certain.    Once again, the rating is not static.  Risk probabilities change over time, so the probabilities must be reviewed frequently to ensure we are capturing as many of the issues as possible with their shifting probabilities. 

I am sure that statisticians or actuaries would have much more sophisticated approaches to this process; but I have designed the approach so that HR and reward professionals have a basic framework to start their risk mapping, if you have access to more sophisticated approaches then do use them.

It is important, from a methodological standpoint, not to read false accuracy in to the risk probability approach.  At the end of the process we are looking at the relative levels of risk in our organisation to give some focus as to where we should concentrate resources; not a forecasting tool.

 Third step: listing impact

This is perhaps easier than listing probabilities.  Again we use a simple 1-10 scale where one indicates no impact to ten – the end of life as we know it.  What we are looking at here is what impact would the risk have on our organisation?  For example, would incorrect tax payments on employee remuneration lead to reputational and financial damage?  Would not paying our R&D staff insufficiently result in them leaving with long term damage to our research effort?   Again, we are looking at an estimate of impact, ranging from some minor inconvenience to putting the existence of the organisation at risk.  As an example of this we have seen some companies run in to very serious financial problems in the UK as they had not fully considered the risks they were taking with their final salary pension schemes and the funding requirements nearly bankrupted them.

Another story around impact and probability.  When working in the City I was advised to carry an emergency gas mask.  I questioned the advice.  It was pointed out to me that the probability of a terrorist gas attack in the City was small (although perhaps higher now than in the past), the probability of being on an over ground or underground train catching fire and filling with smoke was considerably higher – but still low.  However, the impact of either of these events was a ten.  So while I hope I never have to use the mask, it only takes one occurrence of the above and me to have the mask to save my life.  We do tend to underestimate low probability, high impact events; as a former scout leader, “be prepared” it a good motto for reward risk as well as scouting.

At this stage we have a list of risks, a listing of probability against each risk and a score for the potential impact of the risk.

Forth step: Risk correlation multiplier

My initial model of risk in reward did not contain a risk correlation multiplier.  However, I have come to the conclusion that difficult as it is, consideration has to be given to this issue.  What is a risk correlation multiplier?  Simply put, if a risk occurs how likely is it that the risk will cause an increase in another risk factor.  Taking a simple example of payroll.  The risk is that we are not paying our employees correctly.  There is a correlation (and I am not strictly talking of statistical correlation here) between not paying employees correctly and not paying the correct statutory deductions in the relevant country.  What I have done is added a correlation multiplier to the score for the risk of not paying employees correctly to reflect it will increase risk in other areas.  If you pay employees in different countries, perhaps on split contracts, the issue of where payment is made, where, and how much tax is due and the implications of getting it wrong, impact on a number of other risks and pose a real operational threat.

Once again we are in the world of estimates.  The more statistically aware will see I am multiplying estimates by estimates by estimates; giving a number which arguably has no real meaning.  However, as noted above we are not looking for an arithmetical answer but relativities of risk in our organisation to allow us to focus resources in the most effective way possible.

We are nearly at the end of the process…

Fifth step: Generate the risk score

This is simply the product of the probability, impact and risk correlation multiplier.  The risk score is a single number that allows us to rank our scores and see where the highest risks in our environment appear to exist.  

Final step: mapping the risk

As figure one above shows, it is possible to produce a useful graphic that shows where are key risks are concentrated.  This is really beneficial when talking to stakeholders, who may not need the detail of the process, but allows them to focus in on the key risk factors. 

Clearly if you have 300 risks, mapping them like this will not work.  In that case it is easy to return to our original process map of reward and use this approach to map risk against each process with an overall map showing a cumulative risk for each process in our reward product stable.  Once again individual circumstances and trial and error will lead us to a process that is optimal for us and our organisation.

Managing the risks

Once we have the information on the likely risks in our reward environment we need to consider how to manage them.  In my model I use a column called “mitigation”.  That is what we can do to reduce the risk.  It may be, for example, that we review the risk with an external advisor or with our Finance department to see how the risk can be reduced.  Linked to this is the next column which I have called “Controls”.  So, for example, if we are concerned about inappropriate payments being made from payroll we can have four eyes, or even six eyes sign off on non-regular payments.  Or, perhaps mandate a random sampling and checking of the payroll.  Again, our colleagues in external and internal audit can be of great help in designing controls on our key risk areas. 

Having appropriate key performance indicators is one approach to managing risk matrix issues.  We need to know and measure before we can attempt to control.   It is not possible to attach KPI’s to every reward process; but there are many that we can.  For example, we can look at attrition statistics, together with leaver interviews to deduct if pay levels are an issue and track this over time.  Payroll and pension payment errors are easy to use for KPI’s.

Many years ago when I worked for Ford Motor Company, everyone in the business, over a certain level or employed in certain key areas were required to undertake a course in statistical process control (SPC).  I suspect this may be a little old fashioned these days; but I found it a very useful way to look at error occurrences and decide if they were random issues or there was an underlying systematic problem that needed to be addressed.  KPI’s and SPC taken together are very powerful tools for spotting issues before they become (or as they become) problems.  Every organisation will have their way of managing risk, but having an organised systematic approach, from the very simple to the very sophisticated is a very good way to start on the risk management journey.

For me, the final part of the risk management mapping is identifying the risk owner.  Who has responsibility for the process in which there are risks?  This helps focus our attention on the whom as well as the what of stakeholder risk management.

Risk appetite

One of the other important outputs from risk mapping is to agree with management the risk appetite of an organisation.  What risks within the matrix are acceptable and which are unacceptable.  Risk is part of business and the costs of mistakes are again part of the cost of business.  The question arises as to how much cost (including indirect cost such as reputational damage) is an organisation prepared to “allow”?  What risks are completely unacceptable and need to be completely removed if that is possible or a willingness to spend more or less on mitigation of risk.  This is an area where a risk mapping in reward can add real value to a business.


The mapping of risk in reward is a key process.  It gives some comfort to management, auditors and regulators that we are aware of the risks of our activities and the steps we have taken to measure, control and mitigate as appropriate. 

The two frameworks, from Rosario Longo and my spread sheet based approach provide a very useful toolkit for a systematic approach to risk in reward and at least forms the basis for a comprehensive risk structure.

Risk mapping adds value to our activities and processes for the business as it both prevents unnecessary costs and contributes in a very positive way to the governance of our organisation.


Book Review: “Directors’ Remuneration Handbook” by Cliff Weight

Directors’ pay is a highly complex area with a multitude of rules, regulations and codes of practice; and that is only in the UK.  “Directors’ Remuneration Handbook” is an outstanding reference book and guide to this area.  It deals in concise terms with issues such as reward theory and practice, strategy, design and the host of issues including stakeholders,  pay paradoxes, topical discussions, relevant codes and statutory regulations around the subject.

It is a weighty book with 52 chapters and the same number of tables. The book index runs to nearly thirty pages.  While it is aimed very much at the UK market it has some very useful commentary on US and other jurisdiction’s’ practice.  Cliff Weight is very aware of his target audience of reward specialists, Non-Executive directors, company secretaries, academics and those with a detailed interest in this topical subject.  He moves from the general to detailed technical discussion, such as issues around using Monte Carlo simulations for share option pricing, in an easy to follow way, without being dry and dusty.

The chapter layout is clear and logical allowing readers to dip in and out of the topics that are of interest.  The executive summary at the beginning of the book is, in my view, a “must read” for anyone who wants to get an understanding of the paradoxes and issues within the world of executive pay.  It discusses, among other things, the Principal Agent problem in a very clear way, the issues caused by the differences in time horizons between CEO’s who have a median service of four years; and the vastly different perspectives of long-term shareholders and other key considerations.  The summary also includes seven suggested remuneration strategies depending on where the company is in its lifecycle.

There is a fascinating discussion on the difficulty of measuring short term company performance for executives – particularly when looking at share price movement.  Weight points out the difficulty of using TSR as a pay performance measure over the short-term.  He also touches on tax issues; an important consideration given all the tinkering with the tax system we have seen over the last few years.  He wisely points out that we should not allow director’s pay strategy to be driven by tax considerations.

The bulk of the book focuses on all the issues that impact Director’s remuneration including some useful checklists.  He also discusses in detail the different shareholder approaches to pay and my own personal area of concern, the influence of shareholder advocacy groups.  One of the strong themes in the book is the importance of good communication with and between stakeholders, including management, REMCO, advisors, shareholder advocates, regulators and so on.

The book also contains a wealth of data on the UK directors’ remuneration landscape.  There are many helpful tables in the book; although some are a little unclear – at least without a magnifying glass – but this should not detract from this book being a key reference work and probably the definitive volume on the subject.

This is not a cheap book retailing at over seventy pounds.  However, as a private buyer and compensation and benefits specialist I thought it was worth every penny, my copy is already well-thumbed and notated.

I would highly recommend this book to anyone who has a professional or serious interest in the subject of Directors’ remuneration.

The book is published by Bloomsbury Professional and is available from Amazon (for example) at £70.74.  ISBN 978-1-84766-888-2.

2013 – a crowd pleasing year?

In December “A box of Birds” by Charles Fernyhough was published.  I was particularly interested as I was one of about three hundred people who had “crowd funded” the publication of this book.  Fernyhough got his book published and I got a signed first edition.  I was speculating if this new economic model could be extended to Reward?  Executive remuneration is supposed to be crowd decided by shareholders via the Remuneration Committee.  It is a model that does not currently seem to work as well as it could; although this has far more to do with the increasing number of stakeholders, such as shareholder advocacy groups and politicians who all feel they should be part of the crowd sourced decision making.  It may be a way forward, but there will be a lot of pain before the model works in a way that is less combative and better at producing “good” outcomes.

The growth of social media, social networks and crowd sourcing are all going to impact on reward, often in an indirect way.  Not being part of strong, extensive, international social networks will leave us marginalised bit players in 2013.  Reward professionals need to be leading the way as opinion formers in our sphere and the best way to do that is through the propagation of good practice through social media conduits.  Combinations of existing and new technology are going to take us by surprise in 2013; we must work hard to be in the vanguard of change rather than following up in the rear echelon.

Many of the other issues facing us in 2013 are spawned by the poor economy both in the UK and worldwide.    The platoons of economists tend to skirmish over the fate of inflation in 2013; but if I was a betting man I would be look for odds on an outbreak of inflation.  This gives special challenges to reward, given low growth and even lower budgets how can we marshal our pay resources to give the biggest bang for our buck? This is at a time when real living standards have been in retreat for the better part of five years, if not longer.  Non-cash rewards and recognition activity continue to grow in importance in such a milieu.  However, addressing the core issue of falling living standards is more than just an economic question; failure risks further collateral damage to our social cohesion.

In 2013 the differences between rich and poor will again be greater and more visible.  We have already seen the outward manifestation of the damage to social capital by way of riots on our streets, greatly reduced political legitimacy by way of very low turnouts, for example in the election for police commissioners and greater apathy if not hostility towards politicians; seeing Osborn being booed at the Olympics is a demonstration of the depth of ill feeling.    I still remember studying sociology in the 1980’s – Emilie Durkheim talked of anomie, a social condition characterized by instability, the breakdown of social norms, institutional disorganization, and a divorce between socially valid goals and available means for achieving them.  We in Reward must look to reflect societal concerns as we scan the battlefield for threats if we are to add value to the current debates.

Issues around high pay and executive reward will continue to drive our and the business media agenda this year.  We are seeing attempts to make reward as much about how results are achieved as what those results are.  However, arguably not only is it too little too late (at least for investment banking pay) but it does not address the issue of “fairness” in pay; be it from the viewpoint of the shareholder, who provides the capital, or the employee who provides the effort.  Least of all it does not address the media sniping and politics of envy.  Increased transparency will be a loud demand on executive pay in 2013; although as US reporting has shown more does not mean better.  Executive pay is too complex and subject to too many variables to be reduced to one or two easy numbers.  (Vince Cable, please take note).  One of my New Year wishes is that we could find a way to define what really is meant by “fair” pay.

Another challenge facing us due to the economy is that of the apparent changes in employment structures.  I, like many others, am seeking a full-time permanent role.  But, organisations responses to the current depressed labour market are, understandably, to regroup by using more temporary and contract roles.  Pay levels in the market have been depressed.  With, on average, seventeen people in the UK chasing every vacancy, new roles are being advertised with lower levels of starting pay.  Bath University has produced some excellent work on organisational engagement and I find it interesting to ponder how companies encourage engagement while downsizing their permanent employees   and employing far more casual labour in the fight for cost advantage.  The Bath study showed a strong correlation between commitment levels and long term organisational economic success.  This competitive advantage is in retreat when faced with the economics of 2013

I do hope that 2013 will be better than I expect, many of the issues discussed above can be seen as opportunities and challenges where innovative practice and creative solutions in UK and global reward will allow us to bring light to the darkness of incipient anomie.  I wish all of you a happy and prosperous 2013.