Key Differences between Western Executive Compensation Plans and Chinese Executive Compensation Plans

March 26, 2010 by oscadmin
Filed under: Human Resources 




One big issue to consider when designing an executive plan in China is the relative scarcity of executive compensation market data. While the data pool is growing exponentially each year, the volume of data in China is much smaller than other locations in the world where executive compensation is common. As such, it is a good practice in China to collect some of your own data from competitors and/or other companies that you believe are comparable in some ways to yours. This should give you more confidence that you are doing what is common in the market than that you would get from a third party’s market data alone. If you choose to rely also on foreign company databases, you should be aware of the following significant differences between China and elsewhere:




?�� �Eligibility for participation in an equity plan in China tends to be reserved only for the highest executives, as compared to firms in the U.S., Australia and Europe that allow eligibility for ownership at lower levels. Actually, even in China, multi-national firms tend to go deeper into the firm than local firms when determining eligibility.
?�� �The mix of performance measures in China is also slightly different from elsewhere. For example, in the West, the performance measures for executive plans tend to be primarily related to the company or the division. In China, the mix includes a large percentage of individual performance. So, while the company/individual mix in the West might be from 100:0 to 80:20, in China, it is more like 60:40.
?�� �Grant sizes in China tend to be approximately 60% those of the U.S.
?�� �Around the world, there are large differences in payout schemes for executives in different industries. While some industry differences exist in China, they are not very significant.
?�� �The frequency of grants is less in China than elsewhere. Again, using the U.S. as an example, the most common approach is a payout every year based on three-year goals. This is called a “rolling” plan. In China, the most common approach is to pay out every two years with new goals developed at that time. This is called a “cliff” plan.

Generally, Chinese human resources professionals can learn about executive compensation by studying the plan elements of other countries. If you are part of a multinational, then you may be advised to use a similar plan in China to what is done in your home office. But be cognizant of the cultural issues mentioned earlier in the chapter. What is done in the U.S. or in Europe may simply not make sense in China and you may need to start from scratch. The primary differences between Chinese executive compensation plans and those elsewhere are not in the plan elements but in the details of those elements.




Thus, the leader should look very closely at eligibility, grant size, grant frequency, and the mix of performance measures to ensure that the plan is comparable to that which makes the most sense in China. Again, let me mention for the third time, when looking into executive compensation in China, it is wise to include a third party so as to have objectivity and technical expertise when designing the plan. Most human resources professionals in China are not experienced in the special nuances of executive compensation. While all of the major human resources consulting firms have expertise in executive compensation, the level of expertise varies significantly from office to office and from time to time. Good executive compensation consultants are unique and very much in demand in China, so it is prudent to do your due diligence instead of just hiring someone based on the consulting firm’s reputation.

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