A competitive compensation program is critical to a company's ability to attract and retain employees. Towers Watson Data Services, which compiles and analyzes all aspects of compensation and benefit data in all world regions, helps employers assess how their compensation programs compare to those of competitors.
In this roundtable discussion, five Towers Watson Data Services compensation experts draw on research and their expertise to examine global and regional compensation trends, and prepare employers for what's ahead.
Coull: How are economic conditions affecting reward programs in your respective regions? Let's begin with Europe, the Middle East and Africa (EMEA).
Davis: EMEA continues to grow overall and across the main subregions. Sub-Saharan Africa is set to grow about 4.5% — nearly double the global average.
However, sub-Saharan Africa is a challenging business environment because of its relatively small economies. For example, sub-Saharan Africa's gross domestic product (GDP) as of June 2013 was around US$1.8 trillion, or about half of Germany's economy. These economies also face inflation rates above the global average of 3.5% and small talent pools, and they lack a statutory framework for implementing reward programs.
The next-fastest-growing region is the Middle East and North Africa (MENA). It grew at about 2.6% in 2013. The inflation rates for most economies in this region are at or below the global average, with the exception of Egypt, where inflation is approaching 10%.
Next in terms of growth is Central and Eastern Europe, which grew at a sluggish 1.4%. A major factor contributing to this poor showing is low demand in large markets, such as Poland, as well as important export markets in Western Europe. This is particularly true in Central Europe, while Southeastern Europe — specifically Turkey and Romania — and Russia have grown at a more robust pace. However, the opposite is true regarding inflation.
Finally, Western Europe, with a GDP growth rate of about 0.2% in 2013, is almost at a standstill. But these are very large economies compared to those in the other regions, and they account for roughly 60% of EMEA's total GDP. Some economies, including Ireland, Spain, Italy, Portugal and Greece, are still shrinking. As a result of this comparatively cooler economic climate, inflation is not a problem in Western Europe. The top economic performers in the region are Switzerland, with a GDP growth rate of 1.5%, and the U.K., Sweden and Germany.
Coull: What about economic conditions in North America?
Gay: The North American economy is stabilizing. I'm looking at the economy more from a political and economic standpoint, as opposed to simply assessing the GDP and inflation.
In the U.S., the recent SEC-proposed rules on CEO pay ratios — which compare the median annual total compensation of all employees to that of the CEO — will affect pay communications.
Moreover, increased merger and acquisition activity will affect how large multinationals are thinking about their pay packages globally. Varying employee population profiles, legislative considerations, tax policies and cultural factors will influence global talent mobility. And companies will need to be mindful of local influences on their global pay philosophy.
Coull: How would you describe the economic climate in Latin America?
Alvarez: GDP growth in Latin America declined in 2013 from 2.7% to 2.4%, largely due to setbacks in manufacturing and construction in Mexico.
In 2014, we'll continue to see the highest growth rates in Peru, Chile, Colombia and Paraguay. Brazil is projected to grow at a modest 2.8%, due mainly to monetary tightening, political uncertainty and ongoing structural problems. Overall, this region will grow at 3.5% in 2014. And assuming a continuing upward trend, we could see 4% growth in the coming years.
Primary concerns in the near future include sluggish domestic demand, a less favorable export environment and Brazil's rising interest rates. With the exception of Uruguay, Argentina and Venezuela, inflation in most of the region remains under control and in line with central bank targets.
Coull: What kind of economic conditions are we seeing in Asia Pacific?
Mamalateo: We're looking at positive growth for Asia Pacific, led by our traditional powerhouses: China and India. But we're also seeing evidence of a slowdown in these countries. The region overall is projected to maintain a steady inflation rate. The highest inflation is projected for Indonesia, India and Vietnam, where rates for 2014 will likely range between 7% and 9%.
Employers are adopting a cautiously positive attitude for 2014. We see opportunities as new markets are opening in Cambodia, Laos and Myanmar, where labor costs tend to be lower compared with other economies.
We're also monitoring the economic impact of ongoing political developments, namely China's various border disputes and unrest in Thailand due to the introduction of a political amnesty bill.
Coull: What trends in base pay are we seeing in each region? Let's start with North America.
Gay:The climate in North America is stabilizing. According to our 2013 General Industry Salary Budget Survey Report — U.S., salary increases for 2014 are expected to be in the 2.9% to 3% range and very comparable to 2013 increases. Moreover, fewer companies expect to freeze salaries in 2014.
Given the smaller budget pools, more employers are identifying their high performers and differentiating how they reward them. And those high performers are commanding increases of approximately 4.7%, compared with 2.6% for those with average ratings.
Our 2013 General Industry Salary Budget Survey Report — Canada shows projected salary increases for 2014 of 2.9% to 3% for that country, depending on employee level and industry. Few companies in Canada expect to freeze salaries across the board in 2014.
Coull: What base pay trends are we seeing in Asia Pacific?
Mamalateo: We don't see many pay freezes in Asia Pacific. According to the 2013 Salary Budget Planning Report — Asia Pacific, only 10% of the companies in each of the surveyed countries plan to freeze salaries.
We're seeing salary increases of about 7% across the entire region. This trend is led by Vietnam, with salary increases of around 11.8%, and followed by India at 11%, China at 8.5% and the Philippines at 6.5% to 7%.
Coull: Are we seeing similar base pay trends in EMEA?
Davis: In EMEA, it's quite varied. According to the 2013 Salary Budget Planning Report — EMEA, there's a pattern by subregions. Only 5% or less of the surveyed companies reported a pay freeze in 2013. About 75% to 80% reported that they prioritize top performers by allocating the majority of the available pay budget to them.
In EMEA, there has been a direct relationship between economic growth in each region and the salary increase budgets companies are reporting in the region — which has resulted in significant differences across EMEA.
But a different picture emerges when we factor in inflation. In Western Europe, the average salary budget increase is around 2.7%. In Central and Eastern Europe, it's about 5.9%; in the Middle East and North Africa, it's about 6.7%; and in sub-Saharan Africa's big three markets — Kenya, Nigeria and South Africa — salary budget increases hover around 9%.
When you take those budget increases and net them down for projected inflation in 2014, you get a much more homogenous picture. The various subregions are much more tightly grouped in terms of salary budget increases, with Western Europe at 1.4%, Central and Eastern Europe at 1.8%, MENA at 1.7% and sub-Saharan Africa at 2%. So you really have a difference of only 0.6% on average across all of EMEA. It's been a number of years since we've seen this trend.
Coull: Are you seeing many of the same base pay trends in Latin America as in the other regions?
Alvarez: For the region as a whole, salaries are still rising at a rate higher than inflation. This factor, combined with a low GDP, causes employers to worry about their competitiveness and the sustainability of these high salaries over the long term.
The severity of this problem varies by country. Argentina and Venezuela expect to see salary increases above 20% in 2014. And in Paraguay and Brazil, even though country growth projections are low, employers must provide salary increases that have been mandated via collective bargaining.
In the other countries, we expect to see salary budgets rise between 4% and 5%, which is slightly higher than the GDP and the inflation rate in the region.
The actual variable compensation in the region is around 87% of target. Next year, we're expecting this figure to be around 80% of target. Political issues and structural challenges, primarily in Mexico, Brazil and Argentina, will continue to influence economic expectations.
Coull: What compensation and benefit trends should employers in your respective regions monitor over the next 12 months? Let's start with Asia Pacific.
Mamalateo: We're optimistic about continued positive economic growth being led by China and India, and supported by the emerging economies in Southeast Asia.
We're looking very closely at what will happen in the Western economies, particularly the U.S. and Europe, because a majority of the Asian economies are driven by exports to these regions.
We're seeing more organizations controlling their costs, including their HR budgets. Salary increase budgets will most likely be the same size this year as they were last year. Employers will focus on allocating a larger share of their salary increase budgets to high performers in an effort to engage and retain these employees, and to differentiate themselves from the competition.
Asian employers will continue to differentiate themselves by providing performance-based incentives and moving away from traditional fixed bonuses. Base pay will still be the main driver of attraction and retention. And lastly, the war on talent will continue to intensify as the economies in the region continue to grow.
Coull: Which issues should companies in Latin America watch in the coming year?
Alvarez: We expect salaries to continue to increase faster than the inflation rate. Salary budget increases will remain the same in most countries, with the exception of Venezuela, which faces many economic and political issues.
While many people are graduating from school in this region, the challenge will be to align talent with market requirements in terms of education level and critical skills.
Coull: What trends will you be tracking in EMEA over the next 12 months?
Davis: EMEA is a very heterogeneous region. It's difficult to make singular projections for dozens of countries that don't have a lot in common.
I'd rather look at three socioeconomic key performance indicators (KPIs): 1) those countries that are in the third quartile (Q3) or above for 2014 GDP growth with continued strong talent demand, 2) countries that are above Q3 in terms of consumer price index (CPI), where you would expect to have strong pressure on direct cash compensation and 3) countries where unemployment is low with little talent to spare, or where there are small skilled talent pools and you are more likely to see a sellers' than a buyers' market for talent. The more KPIs apply to a given country, the more challenging its reward and labor environment will be.
In the first group are countries that tick all the boxes: Russia and much of sub-Saharan Africa — particularly Nigeria, Kenya and South Africa — as well as the smaller economies in the region. Here we find ongoing labor challenges and considerable reward pressures.
Markets that tick two of the boxes include Romania, with strong GDP and low unemployment; Turkey, with strong GDP growth and a very high comparative inflation rate; and Tunisia, with its high growth rate and strong CPI. Then we have most of the Persian Gulf states, including Saudi Arabia, the UAE, Qatar and others with strong growth and low unemployment whose localization policies require them to hire scarce local talent. Those policies will likely result in labor pressures.
Other markets tick only one of the boxes. These include Algeria, with high GDP growth, and Egypt, with a high inflation rate and almost flat salary budget increases projected for 2014.
The stronger economies of Western Europe — Switzerland, the U.K., Sweden and Germany — are also in this group. With low unemployment and little space for additional skilled talent, these countries may also face some labor pressures for certain skills.
Coull: What trends do you expect to see in North America in the year ahead?
Gay: In addition to the salary increases of 2.9% to 3% that I mentioned, there will also likely be more sophisticated segmentation in annual incentive plan design, specifically in the area of performance targets. And incentive plans will be more tailored.
With the added scrutiny on pay for performance and other disclosures, target plans will be more calibrated, and bonus payouts will be closer to target levels.
We'll continue to see a shift to performance-based long-term incentives (LTIs) as opposed to time-vested rewards. The use of total shareholder return as a metric will continue to grow.
LTI levels are expected to increase in 2014, given increases in the stock market. The big question will be: How much will LTI increase? We also expect to see more diversification in LTI programs. Almost 70% of U.S. organizations have a diversified portfolio approach, and about half of Canadian companies have a multiplan approach. We expect those percentages to increase in 2014.