Asian Pay Hikes May Impact U.S. Employers

Executive pay in Asia will surpass pay in the United States by 2013, according to one study, while another finds that the cost of manufacturing overseas has increased so much that some companies are bringing work back to America.

Wednesday, October 26, 2011
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Hoping to attract talent from a limited pool, Asian companies are now paying higher executive salaries than Western European businesses, and will catch up to U.S. levels by 2013, according to a recent report by Mercer.

In contrast, salaries in the United States have stagnated due to the financial crisis and weak economy. Another factor has been the intense scrutiny of executive pay in America and Canada as shareholders and regulators demand transparency and alignment of pay and performance, according to Mercer.

"In my mind, the democratization of pay around the world is a good thing," says Gregg Passin, a partner in Mercer's human capital business in New York. The Mercer report surveyed consultants familiar with compensation in emerging economies, including India, China, Malaysia and the Middle East.

"Obviously, salary levels in Asia are getting closer and surpassing [those in western countries]," Passin says. "At the executive level ... local nationals, whom we have been educating and have been trained by multinationals, are now in competition. It's not just [within] multinationals, but domestic companies. The pay levels have an effect. These are no longer the low-cost places to do business."

That is having an impact on the manufacturing sector as well.

An analysis by The Boston Consulting Group finds that the United States may experience a manufacturing renaissance within the next five years as the wage gap with China shrinks and some U.S. states become more attractive to companies.

Flexible work rules and various government incentives are making some states -- including Mississippi, South Carolina and Alabama -- increasingly competitive as low-cost sites for manufacturing, according to BCG, which is headquartered in Boston.

Chinese wages are "climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor," says Harold L. Sirkin, a BCG senior partner. As the value of the yuan continues to increase, the gap between U.S. and Chinese wages is narrowing rapidly.

Businesses throughout Asia and the Middle East are riding an inflationary bubble, according to Mercer.

Average executive salaries in key Asian countries have increased by an average of 7 percent, with the notable exception of Japan.

Middle Eastern states, such as Saudi Arabia, Kuwait and the United Arab Emirates, are especially competitive. Companies there are introducing deferred bonus plans and annual incentive programs that are linked with performance measures. The Mercer survey predicts base salaries there will increase by 6 percent to 7.5 percent in 2011.

"In these countries, the inflation rate is two or three times what it is here," says William Sheridan, vice president of international human resource services at the National Foreign Trade Council in New York.

"[Compensation] keeps pace with inflation. Ten years ago, an Indian manager or professional earned one-third what an American would be earning. Demand is high and supply is low. The economy is growing," he says.

While salaries go up in Asia, Passin says, the emphasis on pay in the uncertain U.S. economy "is being placed on rigorous pay-for performance benchmarks, longer-term equity-holding requirements, claw-backs and deferred bonuses in the financial sector."

It's not the economy, but the limited home-grown talent pool that is hampering Asian countries, especially China and India, experts say. 

"The Mercer analysis confirms what we hear about from our corporate members. The growth economies are largely in Asia, where host-country talent often is in short supply and in high demand by [multinational corporations] and local companies/governments," says Sheridan.  

One result is that Asian professionals educated and working in the United States have been returning home.

"The top managers in Asia have gained experience working for U.S. companies there or here," says Sheridan. "And they go back because these [Asian-based] companies are growing at a faster pace and they have those skills back in demand in their own country

"There's a whole flow going back to India. The Indian government is encouraging [it]. ... Previously, 20 or 30 years ago, they had limited opportunities in their countries. India had extremely high income taxes. There was a disincentive in the past," he says.

In the forefront, experts agree, is China.

"China is really driving the pace of compensation in the region overall," says Doug Friske, global leader of executive compensation for Towers Watson in Chicago. "The driver is economic growth. In China, specifically, the government is interested in embracing the public markets, and you see private-equity money" being invested in local businesses. 

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At the same time, China is adopting Western-style long-term incentives, such as equity, to attract top local talent.

While the picture may be rosy for Asian executives, inflated pay levels "will make it more expensive to do business in China in the long term," Friske says. "It's going to be more expensive to hire locals [when] competing with local Chinese companies." 

"With the higher cost of doing business," Sheridan says, "the profit margin drops. ... It's happened before, in Mexico. Ten years ago, a manager [in Mexico] could well make more than an American."

That didn't stop the U.S. from doing business in Mexico, he adds. "You have to monitor expenses."

If those expenses make it unsustainable for U.S. companies to do business in Asia, they'll look for the "next China," perhaps in Eastern Europe, Sheridan suggests. "Outsourcing has [always] moved to lower-cost locations."

Many lower-cost countries, however, lack the supply chain, infrastructure and labor skills to do the work, according to The Boston Consulting Group, which notes that some companies are already bringing work back to the United States.

NCR Corp. brought back production of its ATMs to Georgia in order to decrease the time to market, increase internal collaboration and lower operating costs, according to BCG, while toy manufacturer Wham-O Inc. returned half of its Frisbee and Hula Hoop production from China and Mexico to the United States.

"Workers and unions are more willing to accept concessions to bring jobs back to the U.S.," says Michael Zinser, a BCG partner who leads the firm's manufacturing work in the Americas. "Support from state and local governments can tip the balance."

It's more than just an issue of wages, he says.

"If you're just comparing average wages in China against those in the United States, you're looking at the problem in the wrong way," Zinser says. "Average wages don't reflect the real decisions that companies have to make."

Doug Hohner, another BCG partner who focuses on manufacturing, notes that "In the U.S., we have highly skilled workers in many of our lower-cost states. By contrast, in the lower-cost regions in China, it's actually very hard to find the skilled workers you need to run an effective plant."

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