Additional long-term incentives have significantly increased in Greater China to reinforce alignment of interest, ownership and partnership, according to independent management consulting firm, Pretium Partners Asia Limited.
Long-Term Incentive Practices Survey (2016) shows the prevalence of additional long-term incentives has jumped substantially from 29% to 47% in Greater China due to relaxation of regulatory requirements for share based incentives in China and increasing popularity of the partnership model spreading from the Internet companies.
26% of Chinese companies have either introduced new plans in 2015 or are planning to launch or change their plans in 2016.
The survey examined the features of 90 long-term incentive plans in 68 international and Asian financial services firms. This included deferred bonus plans and additional long-term incentive plans in the United States, United Kingdom, Europe, Hong Kong, China, Singapore, Malaysia and Australia.
More companies (68%, previously was 42%) have introduced additional long-term incentive plans on top of their deferred bonus plans. The key considerations for selecting deferred bonus vis-à-vis additional long-term incentives include competitiveness of total compensation, application of performance conditions, regulatory requirements and affordability.
“Deferred bonus is not welcomed by employees due to its impact on cash flow. Key performance indicators are typically only included in additional long-term incentives and are seldom seen in deferred bonus” said May Poon, Managing Partner at Pretium.
Most of the additional long-term incentive plans are in the form of share options (40%) as some companies believed that share price has already, to some extent, reflected performance. “Share price, however, could be highly subject to macro-economic and regulatory influences which in turn diminishing the performance linkage” added Poon.
“Partnership is characterized by emphasis on pay-for-performance, alignment of interest and meaningful ownership, thus performance share and shareholding requirements are more in line to drive behaviours towards these objectives.”
Since most of the additional long-term incentive plans in Europe and the United States are tied to performance vesting, 3-year cliff vesting is the most widely adopted vesting schedule. Back end loaded and longer (5 to 8 years) vesting schedules are also seen to reinforce the long-term focus.
However, it is uncommon for the Chinese firms to include key performance indicators as part of the vesting conditions. “Albeit the exponential growth experienced by the companies in Greater China, the impact of regulatory policies on the market means they are still fumbling in the dark and pose as an additional challenge in target setting over a longer time horizon” Poon added.