The Agenda – February

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Salary Surveys

  • Hays recently released its salary survey of the Oil and Gas sector. Salaries have fallen by 1.4% due to redundancies and the reduced use of expat workers, according to the report. Workers are prepared to accept reduced salaries in order to keep their jobs, it stated.
  • Mercer has released its Global Financial Services Executive Compensation Snapshot Survey, projecting that 2016 base pay increases would be between 2.0 and 2.7% in Europe and North America, and average 4.3% in Asia and Latin America. Increases in fixed pay would be evened out by reductions in variable pay.

Studies and Surveys into Incentive Plans

“Irrespective of their age, industry or location, more than half of the respondents said that getting better recognition for their work was the most highly motivating factor. Having more challenging work and getting a more senior position were the two second highest motivators, followed by job security, earning more money and lastly, contributing to the public good,” according to the report.

  • In North America, a survey by Willis Towers Watson revealed that companies are not convinced by the effectiveness of their performance pay programs.

Only 20% of North American companies found merit pay increases to be effective at driving higher levels of individual performance, and only 32% found they were effective at differentiating pay based on individual performance. Annual incentives were similarly problematic.

Instead of considering organisation performance when delivering merit pay increases, the survey found most employers used wage increases in the market as the basis for budgeting for pay increases.

“Employers need to break out of an outdated paradigm and rethink their approach to pay,” said Sandra McLellan, North America practice leader, Rewards at Willis Towers Watson. “In many cases, merit pay is a standard adjustment disguised as a pay-for-performance program. All too often, there is either a breakdown in delivery or managers feel compelled to give some type of increase to everyone instead of differentiating performance and rewarding employees accordingly.”

The necessary changes are already occurring, according to Willis Towers Watson, which noted that managers were weighting individual factors more heavily than specified in their program’s design when allotting merit pay increases.

EU Update

  • In December the European Banking Authority released final guidelines for the bonus cap, specifying the criteria for defining remuneration components as fixed or variable pay. They also clarify to which staff the cap will apply and provide guidance on deferral. The guidelines apply from 1 January 2017.
  • In the UK, new rules have been proposed to account for the effect of golden handshakes on clawback. The UK Prudential Regulation Authority was concerned about organisations’ practice of compensating a new employee for forfeited bonuses or awards at their previous employer.

“By moving employers and having their cancelled bonuses ‘bought-out’, individuals are effectively able to insulate themselves against an ex-post risk adjustment of their past awards as risks crystallise or the consequences of poor risk management emerge at their old employer,” the Authority noted.

 It nominated four options to remedy the situation:

    • banning buy-outs;
    • requiring firms to maintain unvested awards when employees leave a firm;
    • applying malus to bought-out awards; and
    • relying on the existing clawback rules.

It found most organisations supported allowing malus and clawback to be applied to bought out awards rather than the other options.

Board and Leadership

  • McKinsey has published the results of its biennial Board survey, noting that Directors are spending more time on their Board work than in previous years. They were spending 33 days a year and ideally would like to spend 38. The Boards spend most of their time on strategy and would like to spend more. In analysing the survey’s findings, McKinsey found three types of Boards: ineffective, complacent and striving. Striving Board members spend 41 days per year on Board duties, while complacent Board members spend 28 and ineffective Board members 32 days. The Board categories differed in the way they approached long term value creation, CEO succession planning and revision of organisation strategy.
  • McKinsey also published a suggested reading list of leadership literature in an effort to help leaders avoid selecting the large number of books available it considered to be unhelpful.
  • PwC research into CEO turnover noted that Australia has many more unplanned CEO successions than is usual globally, costing companies billions in value. However, the average tenure of Australian CEOs has risen to 5 years and Australia’s CEOs are more diverse (both in terms of where they come from and their gender) than global CEOs.

Gender Diversity

  • The Peterson Institute for International Economics conducted a global survey of 21,980 organisations from 91 countries investigating whether having women in corporate leadership positions improves firm performance, finding that it may improve it.

“The impact is greatest for female executive shares, followed by female board shares; the presence of female CEOs has no noticeable effect,” it noted, stating that it is better to have a proportion of the leadership being female than appointing one female lead: moving from no female representation in the leadership team to 30% representation was associated with a 15% increase in net revenue margin.

  • In the US, the Equal Employment Opportunity Commission has proposed that employers with over 100 employees provide pay data to the government in addition to the data currently provided on workforce profiles by race, ethnicity, sex and job category. The new data will be used to identify potential pay discrimination.

Similar rules exist already in Australia, where companies over 100 employees have to provide remuneration data to the Workplace Gender Equality Agency. UK organisations with over 250 employees have to go a step further, calculating the pay gap between male and female employees from April 2017 for disclosure a year later.

  • The World Economic Forum released a report into the global gender gap at the end of last year, detailing global progress to parity over the last ten years.

Closer to Home

  • The taxation discussion leading up to the budget is currently focusing on paring back excessive use of negative gearing concessions.  Labor wants to limit negative gearing to new properties, while the Coalition is considering a 20% cap on concessions.
  • Superannuation concessions are also under the microscope, with considerations including a tax rebate rather than a flat 15% tax rate, a lifetime cap for superannuation balances and changes to transition to retirement provisions.
  • The report into union corruption was tabled at the end of last year, finding “widespread” and “deep-seated” misconduct in unions around Australia. It made a number of recommendations, including reforms to picketing, right of entry, payments to unions and enterprise bargaining. It also recommended closer regulation of unions from federal and state governments and an increase in penalties for officers of organisations who dishonestly breach their duties. The full report can be found here, while Herbert Smith Freehills useful summary is here.

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