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back to index backASIAtalk October,  2005


The economics of compensation in Asia

mercerHR.com presents its readers with a series of articles based on Mercer's new book, Mastering Business in Asia – Human Resource Management. The article below is from Chapter 8: The Economics of Compensation in Asia.


This chapter provides an overview of compensation dynamics within Asia. It draws a link between the economic characteristics of the region and compensation practices to provide a framework for understanding the different emphasis of such practices in different markets within the Asian region.

The starting point to understanding compensation analysis within the Asian region is to have a complete grasp of the diverse cross-country patterns of wealth. The most basic interpretation of the data is that countries with higher per capita gross domestic production (GDP) tend to have higher compensation levels. But that is only one level of interpretation. The task becomes more complex as the compensation specialist incorporates the economic and labor dynamics of the different countries across the Asian region into the equation.

Given that the economic maturities of the various Asian countries within the region provide a reliable backdrop against where industries tend to flock, HR can provide appropriate compensation strategies and policies based on analysis of information that incorporates key economic indicators in the model. The bottom line? Be prepared for the extreme shifts in labor market demand in Asia.

The Interaction Between GDP and Compensation

GDP per capita is an economic measure that serves as a proxy for wealth. In Asia, the best talent from developing countries in the region has always been lured to those that are more advanced by the opportunity for increased wealth. The GDP labor magnet has allowed wealthier countries to rapidly enhance their talent pools and ensure that the supply of labor is balanced to take advantage of the available market opportunities.

What does understanding GDP as a magnet for labor allow us to infer about compensation practices in the region? First, at the most basic level, we would expect to see a strong relationship between GDP levels and actual compensation levels in the different markets across the region. In the wealthier countries, we would expect higher compensation levels than in the less wealthy.

This trend exists, but the correlation with GDP per capita is not perfect.

* Hong Kong is the most expensive labor market in Asia – Hong Kong's salary levels are higher than Japan's and it is the most expensive labor market within the region.

* Some countries in the region have a very high proportion of their pay mix focused on guaranteed allowances, typically because they are more tax-effective elements of compensation. This is particularly true for Japan and India. The takeaway here is that for cross-country compensation comparison purposes, guaranteed cash is a more reliable measure than base salary.

* Compensation levels in China appear higher than we would expect from a comparison of GDP per capita. In recent years, China has stood head and shoulders above all other economies as the market with the greatest GDP growth momentum. This momentum has led to a significant imbalance in the supply and demand of labor with the experience required to take advantage of the growth and investment opportunities. We see compensation levels spiraling accordingly.

Market Premiums: Sales Functions

For multinational companies, Asia represents more than just a market in which they can seek to outsource production to lower cost centers. As Asia's wealth grows rapidly, companies are presented with a rapidly expanding consumer market that they can target for sources of new global revenues.

The demographic shifts in Asia will rarely be found in any other region in the world. For businesses of all kinds, this growth in household wealth provides significant revenue opportunities, becoming increasingly attractive as growth opportunities in the more matured markets in other regions become far and few between.

The opportunities are not known to only a few companies. This is why we see incredible levels of investment in markets like China and, increasingly, in India. We expect these business conditions to quickly lead to the occurrence of a labor price bubble or spiral. Sales skills and the sales force would likely command a premium as companies take advantage of revenue growth opportunities.

The emphasis and priority for companies acquiring sales capability in the region is clearly reflected in higher pay levels. Sales jobs command market premiums of between 1.1 to 1.5 times non-sales jobs across the region.

Premiums for sales jobs are higher in less developed/higher opportunity markets (for example, Thailand, the Philippines, China, and India) versus more developed markets. Also, sales roles without managerial responsibilities command a higher premium compared to those with managerial responsibilities.

For the compensation and benefits practitioner, the takeaway here is that the economic dynamics and market opportunities in Asia interact to create significant market premiums that may initially appear extreme, but are predictable and logical. These premiums may be generalized across markets and countries, and/or they can be reflected among specific occupational groups.

The challenge for the compensation and benefit practitioner is to identify the market pressures and premiums before the competition to take advantage of the supply and cost conditions that exist prior to the emergence of a labor price spiral.

Conclusion

The diverse nature of the Asian region means that there is a matching diversity in pay practices and compensation levels. A key challenge is to grasp and understand the drivers of this diversity and to use this information as a strategic advantage in managing compensation and benefit programs.

A fundamental driver for pay dynamics in the region is the absolute level of wealth in an economy and the growth momentum in wealth generation. Year-on-year salary increase levels also vary significantly across the region. It is possible to group countries by the historical increase level, which will serve as a useful heuristic for testing recommendations for salary adjustments in different countries.

While many place a strong emphasis on GDP and inflation statistics as the basis for determining salary budgets, the relationship between these variables and actual salary changes is not high. However, it is possible to build detailed econometric models that bring science, objectivity, and predictability into this process.

For compensation and benefit practitioners in Asia to maximize their effectiveness, it is important that they focus not only on HRM variables in managing pay, but that they also remain sensitive to the changes in business conditions, competitor strategy, and the demographics across the region.


Source: Mercer HR Consulting
- GAI


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