Criticism of executive reward in rife in many countries. But surveys reveal that pay, bonuses and incentive payouts have already fallen dramatically in the recession. The system is not as broken as some people think. 

Article by John Swabey, Talent & Reward consulting team for Central & Eastern Europe at Towers Watson.

Executive pay practices have hardly been out of the headlines in recent months. In the current economic maelstrom there is much disagreement over the future of the private sector and how it should be managed. An outraged public was shocked at the excesses of the banking system, but is the executive pay model in the West really completely bankrupt?

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In Western Europe the concept of income replacement at retirement which is composed of different pensions layers, already exists for several decades; whereas in Central/Eastern Europe, after the fall of the Berlin wall, governments saw themselves confronted with the move from communism to a liberal economy and started to develop new layered employee benefit schemes. Although all of the European countries do currently have a multi-pillar pension system in place, due to different start points in the development of their respective systems, the Western and Central/Eastern European countries nowadays encounter different challenges in providing an efficient pension system. 

An in-depth analysis by Luc de Wée, International Research Consultant at Towers Watson Data Services, specialised in employee benefits. 

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In Western Europe the concept of income replacement at retirement which is composed of different pensions layers, already exists for several decades; whereas in Central/Eastern Europe, after the fall of the Berlin wall, governments saw themselves confronted with the move from communism to a liberal economy and started to develop new layered employee benefit schemes. Although all of the European countries do currently have a multi-pillar pension system in place, due to different start points in the development of their respective systems, the Western and Central/Eastern European countries nowadays encounter different challenges in providing an efficient pension system. 

An in-depth analysis by Luc de Wée, International Research Consultant at Towers Watson Data Services, specialised in employee benefits. 

Continue Reading »

The starting point for the changes in the Swedish Code (Bolagskoden) is the EU Recommendation 2009/3177/EG and it is expressly stated that the Code must meet EU standards. The changes have, amongst other, an impact on how variable pay is paid out and administered.

Below follows some of the more important changes of the Code;

• Variable remuneration has to be linked to predetermined and measurable performance criteria aimed at promoting the company’s long term value creation;
• Variable remuneration paid in cash is to be subject to predetermined limits regarding the total outcome;
• Programmes that involve acquisition of shares should be designed for promoting personal holding of shares in the company, the vesting period for a share-based incentive scheme is to be no less than 3 years;
• Fixed salary during a period of notice and severance pay are together not to exceed an amount equivalent to two years fixed salary. 

The company needs to devote a section of it’s website to corporate governance matters including a description of the company’s system of variable remuneration to directors and of each outstanding share and share-price related incentive scheme. 

For further information, please contact: 

Tom Klackenberg
+46 8 555 517 74
tom.klackenberg@towerswatson.com

Some 82% of European companies are planning to hire employees to new positions in 2010, according to a new survey by Towers Watson.

Moreover, while most companies are hiring, 49% still expect to make workforce reductions in 2010 – 5% say these will be broad-based and 44% say they will be targeted. This compares with 12% who have made broad-based reductions and 55% who have made targeted reductions since the start of the financial crisis.

The survey, conducted in early January and based on responses from 131 mostly large employers across Europe and 459 employers globally, found that while the picture is slowly improving, Europe lags North America. For example, 92% of US companies indicated they would be hiring in 2010 and only 37% expected workforce reductions.

Not surprisingly, given employment patterns both pre- and post-crisis, 40% of the survey respondents in Europe agree that it’s easier to retain talent now than it was before the financial crisis. However, 48% think that retention will be more difficult a year from now. Respondents also noted a rise in productivity over the past year, with over half (54%) agreeing that employee productivity had risen compared with pre-financial crisis levels, and more still (57%) expecting it will continue to rise by next year. Interestingly, the recession’s impact on employee engagement has also been mixed. While 23% report lower engagement today, 33% believe employee engagement has risen since before the financial crisis. For 2010, far more companies expect engagement to rise (41%) than decline (10%).

The survey confirmed the toll the past year has taken on employees in terms of pay and benefit cuts, and how employees have responded. For instance, 15% of respondents said the percentage of their employees working past their desired retirement age is higher than it was before the financial crisis, and 24% expect it will be even higher a year from now.

Employers are acknowledging their employees’ concerns. Some 34% expect that, in a year from now, they will put more emphasis on ensuring benefits provide a desired level of security for employees. Much larger numbers of respondents, however, expect to increase their focus on controlling and reducing benefit costs (45%) and managing the risk and volatility of those costs (45%). 

The Towers Watson analysis can be found at http://www.towerswatson.com/research/960.
For the full press release please click here .

The controversy regarding the salaries of top management does not seem to be going away. The level of compensation awarded to executives has enflamed public opinion at a time when companies are fighting for their existence and large numbers of staff are being made redundant. Governments have responded to the controversy and the crisis in a variety of manners. In Europe, a short review of measures taken by diverse governments include:

Belgium - The new corporate governance code created in mid-2009 suggests that severance pay for senior executives be capped at one year’s basic and variable compensation. The code is intended to promote best practices, compliance is voluntary.

France - In late 2009, parliament passed legislation on top hat retirement schemes for senior executives and directors. Among other things, the law doubled the levy on employer contributions (from 8% to 16%) to plans where annuities exceed one third of the social security ceiling, raised the tax on internally funded plans from 6% to 12%, and prohibited the creation of new internally funded arrangements from 1 January 2010 (new plans must now be insured externally). 

Germany - The government passed the Act on the Appropriateness of Executive Remuneration to better align executive pay structures with sustainable business objectives in public companies and increase transparency for setting executive pay. Under the Act, variable pay plans should be related to a business’s multi-year performance and limits on pay should be established to guard against outsized payments in the event of extraordinary business results.
The Act also increased the minimum holding-period requirement for stock options from two to four years, expanded the supervisory board’s powers to realign executive pay with business results, including the possibility of reducing compensation in line with results and requires that the entire supervisory board be responsible for establishing executive pay compensation, rather than sub-groups such as remuneration committees.

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To our valued clients:

We are pleased to take this opportunity to welcome you to our new firm at the start of a new year.

As you are no doubt aware, Towers Perrin and Watson Wyatt announced plans to merge in the middle of 2009 and formally combined at the end of the year. While the merger affords us significant opportunities to meet all of our clients’ needs more effectively over time, we anticipate that you have one important question:

How will this merger affect me and the work my organisation is currently doing with either Towers Perrin or Watson Wyatt Data Services?

The short answer is: Not at all.

We will continue to operate our database businesses independently for a period of time. We have made this decision to ensure we maintain the quality and consistency of our products and services and our relationships with you and your organisation. This is our first priority and will guide all of our actions as we integrate the two legacy organisations across all of our business units and geographies.

Over the coming weeks and months, the only change you will see is in the look and feel of the materials you receive from us, and the web sites you routinely use, as we introduce our new brand identity. Watson Wyatt Data Services will now go to market as Towers Watson Data Services. And Towers Perrin’s Compensation Data BankTM and related data services will now go to market under the Towers Watson banner. However, our products, underlying methodologies and client service will not change, nor will your contractual agreements with our legacy organisations.

In closing, we want to reiterate our commitment to your organisation as you join the wider family of our new Global Data Services business at Towers Watson. We know that our success as a combined firm depends on the quality of work we do for you and the success you enjoy as a result. You can count on the same support and dedication you have in the past.

We encourage you to reach out to your current relationship manager to answer any additional questions you may have and discuss what you can anticipate over the next few months as our integration process continues.

Sincerely, 

Towers Watson Data Services EMEA

Private use of employer-provided mobile phones will be subject to taxation, normally as from 1 January 2010. If the employer can clearly prove that they have a system in place which distinguishes between private and business calls, there will be no imposition. However, if the employer does not, employees will have to pay a levy. The Royal Decree evaluates this default levy to €12.50/month (€150/year) as an advantage in kind resulting from the private use of a mobile phone provided by the firm. Currently the Decree only speaks about social security contributions, however it is likely that the tax authorities will follow the same principles. This measure is foreseen to effect as from January 2010 (after the publication in the Official Gazette).

The coming year will be another challenging one for UK pensions professionals. There will be five key trends during 2010:

1) A continued trend towards closure of defined benefits schemes to future accrual.

Watson Wyatt predicted this trend would take off in 2009 and it did. “With a number of large schemes and household names making this change this year, many more are likely to follow in 2010,” according John Ball, head of defined benefits consulting. 

2) Increasing interest in enhanced transfer value (ETV) exercises.

“We are now seeing a number of major companies seriously investigating this, spurred on by the substantial fall in corporate bond yields over the year, which can make such exercises more attractive,” said John Ball. “As we have seen with closure to future accrual, there could be a domino effect once a few household name companies undertake such an exercise.” 

3) Higher contributions from scheme sponsors.

“The second half of this year will be the time when the bigger deficits caused by the financial crisis start making a dent in employers’ cash flows,” said John Ball. “This is a consequence of the time it takes for funding agreements relating to late 2008 and early 2009 valuations to be negotiated and implemented. The question is not whether contributions will rise but how much, how quickly and how uniformly.” 

4) A more interventionist Pensions Regulator.

“We can expect the Regulator to become more interventionist in 2010, not least in respect to sponsor/trustee negotiations around funding plans,” said John Ball. “But quite how much bite will the Regulator have?” 

5) Alternatives to pension savings.

Employers may start looking for alternative routes to help employees’ long-term savings ahead of the proposed restriction of higher-rate tax relief for pensions for those with income over £150,000 (and in some cases over £130,000) in 2011. “This may begin with higher-earners but employer-sponsored non-pensions savings vehicles may then become more widely available for other employees,” said John Ball.

For the first time ever, there will be a negative indexation in Belgium. Belgium has an indexing system which is governed by numerous sector-level collective labour agreements. Various indexing-systems are applicable. In some Joint Committees, the indexation occurs with a fixed period (e.g. quarterly / annual indexation), in others the indexation occurs when a threshold know as the “index pivot” is crossed.

After having been positive in the past, inflation will be negative for 2009, which could mean a decrease in salary as of January 2010, for those employees whose salary is adapted at the beginning of the year. In several sectors, the joint committee has an agreement in place in case of negative indexation. In the others, it is up to the employer to decide whether to apply it to salaries or not. According to SD Worx, around 30 sectors have a negative indexation, but only half will pass this on.

The negative inflation will have other impacts, such as the non-indexation of tax deductibles for pension purposes (3rd pillar), and therefore these amounts will remain unchanged.

Further details on pay, indexation and joint committees can be found in our Employment Terms & Conditions Report for Belgium.