Despite the financial turmoil that has rocked world markets for nearly two years, companies seem generally satisfied with existing incentive programs for executives outside North America. "We aren't changing ours at this point," comments Karen Rose, CFO of Clorox Co., headquartered in Oakland, California. Incentive programs covering a handful of Clorox managers abroad still mirror the mix of cash bonus and stock options at home. "It's not the first time we've run into this kind of trouble," Rose observes.
Except for some fine-tuning, most U.S. companies weathered the global turmoil much as Clorox did, by leaving incentives intact. "We might adjust individual compensation within the parameters of the plan," says Dennis Wilson, CFO of Beckman Coulter Inc., a Fullerton, California, company that manufactures and sells scientific instrumentation equipment, "but we do not change the plan."
Beckman's incentive program covers more than 250 executives and managers based outside the United States. Their variable compensation may constitute from 20 percent to 30 percent of their annual paychecks. In rough times, the variable compensation may suffer. "That's part and parcel of [the deal]," says Wilson. "[The executives] win big when they win, but they also have a chance to lose." That said, adds Wilson, as much as half of their incentive pay rests on the company's consolidated performance, meaning no one will be left out entirely if the overall company has a better year.
International-incentive arrangements tend to mirror each company's domestic blueprint. Members of Beckman Coulter's non-U.S. contingent, for example, receive variable pay in the same proportions as their counterparts here, subject to local and regional performance.
This kind of arrangement discourages ad hoc adjustments in the face of tumultuous markets. Employers that tamper with incentives for non-U.S. managers invite a clamor for changes in other regions or at home, should these economies stumble. "Most companies with area-specific plans have their hands full just keeping them straight," says benefits consultant Nadir Minocher of the Compensation Resource Group, in Boston. "Changes create tremendous strain on human resources." Nor should they be needed, says Minocher. "Plans have to be designed to weather quite a few storms."
Sealed Air Corp. manufactures protective, food, and specialty packaging materials and systems bubble-wrap packaging in more than 45 countries, but it does not alter its incentive programs from one locale to another. In the United States and elsewhere, there are no qualified stock options, only contingent stock awards that confer stock on worthy managers for $1 a share. The awards are generally vested after three years.
Although Sealed Air stock plummeted in 1998 to around $30 a share from a high of $70 before recovering about half the decline, reducing incentives never became an issue. "It's not as if we took a formal view of it," says Daniel Van Riper, CFO of the Saddle Brook, New Jersey, company. "There was no sense that we should change our program."
Much the same goes for overseas incentives at Towson, Maryland-based Black & Decker Inc., the power-tools manufacturer. "Structurally, nothing has changed in variable compensation," says CFO Tom Schoewe. Incentive costs are lower, however, by virtue of reductions in the number of top executives located in hard-hit regions.
Far from disrupting an incentive program, local currency erosion creates a very valuable benefit for select local top managers employed in Latin America by Helmerich & Payne Inc., a large oil-and-gas drilling, explorations, and production company with operations in Latin America. "Where money devalues pretty much each year," says CFO Doug Fears, "paying dollars to top managers is a wonderful incentive." A fair salary with a modest annual increase is business as usual for Helmerich & Payne, but it's a whopping incentive for executives in countries where currencies are on the decline.
"If you can retain a really good bilingual manager, you're way ahead," says Fears. "In those countries where money devalues pretty much each year, paying dollars to top managers is a wonderful incentive."
Better Here Than There
Motorola Inc. still offers its international employees the incentives it rolled out last year. The Schaumburg, Illinois-based maker of communications gear used to have a bonus plan based on worldwide return on assets, but paid it only to U.S.-based employees. The company discovered that "arguably, the results were being achieved outside the U.S. more than inside," says David Goodall, former director of compensation with Motorola. To address this gap, Motorola launched a bonus plan for all employees overseas "in stages," four or five years ago, and formalized the effort with its Stakeholders Plan, which had its first payout in 1998.
All worldwide employees in the same business stream, such as semiconductors, receive the same percentage of bonus on their base salary. The plan pays out half in company stock and half in cash in the local currency. Lately, Motorola has monitored the impact of dramatic currency fluctuations. Instead of tampering with incentives where inflation was ravaging income, it adjusted base salaries in one situation, and in another, it created special allowances.
High-tech companies are leading the trend to more-variable pay globally, says Neil Coleman, a vice president at Organization Resources Counselors, a New York-based consulting firm that conducts proprietary surveys in international incentives.
At Cisco Systems Inc., which has offices in 54 countries, employees may have 20 percent, or 60 percent, variable pay, depending on their level within the company.
Overseas, this may be a dramatic departure from tradition. Norm Snell, Cisco's director of compensation and benefits, says: "In the U.K., the bonus opportunity for higher-level executives typically may be 10 percent to 15 percent. If you look at our more-senior management team, their opportunity may be 40 percent, 50 percent, or 60 percent." At Cisco, he adds, every employee is eligible for stock options, a policy that is unusual among major industrial firms.
Cisco may have had it easier than some other corporations. It began variable pay abroad at the time of the company's inception in the mid-1980s; it has not had to overhaul or adapt another system. Also, the company has been growing at 30 percent a year, Snell says, and this surely fuels enthusiasm and smoothes over difficulties. Still, there is fine-tuning to do. In India, the company is introducing a plan in which 50 percent of base salary will be delivered through a housing, meal, or auto allowance. "Because of tax laws, this provision gives them much better take-home pay in the end," explains Snell.
The principal challenges that international-incentive schemes face predate the "Asian Flu." On one hand, employers want to foster a high-performance culture and to treat employees in different countries equitably. On the other hand, implementation is a headache.
"We are beginning to hear back from our clients that more incentive-based programs are being set up," says Minocher. "But they are running into a lot of problems, such as effectiveness of pay in countries where tax rates are very high, or where the regulations aren't favorable to stock options."
Ed Lawler, a professor at the University of Southern California at Los Angeles and director of its Center for Effective Organizations, adds: "It's hard to set rigid formulas and fixed standards abroad. The situation is often so dynamic, with all sorts of things happening--currency changes, government-policy changes, and so on--that being objective about variable pay is extremely difficult. Therefore, a lot of companies end up making pretty subjective calls."
Coleman concludes, "U.S. multinationals are struggling with the issue of how to achieve fairness overseas in bonus and long-term pay to executives."
A Tough Sell
Reacting hastily to unforeseen events tends to cause more damage than leaving sound incentives in place, even if the results are not pleasing all around. When companies try to raise the level of variable pay quickly, they can end up overpaying, warns Coleman. Suppose a company has a policy in which a U.S.-based executive's split is 60 percent salary, 30 percent incentive. The company decides abruptly to apply that in Germany, where a 92 percent/7 percent split would be more typical. Says Coleman, "You'd be telling that German division: 'We want you all to cut your pay that is tied to Social Security and retirement and substitute the promise to pay in a good year.' It's a tough sell!"
Cemex, a multinational cement producer based in Monterrey, Mexico, did react to the global turmoil. The two adjustments it made applied to incentive schedules worldwide, however, rather than to a particular region. The first, and most important, adjustment, according to CFO Rodrigo Treviño, added emphasis to free cash flow from operations. Consolidated free cash flow, together with earnings before interest, taxes, debt, and amortization, receive the most weight when determining the size of a bonus pool from which all participants draw.
The second adjustment raised the bar for required rate of return on new investment. The effect on incentives is not as direct, but it can be meaningful. By restricting investments to those with the highest expected returns, Cemex managers should see favorable results in their variable compensation.
Roberta Reynes is a freelance financial writer.