Bonuses and Long-Term Incentives Gain More Widespread Acceptance around the World; Pay-for-Performance Advances in Asia and Latin America.

STAMFORD, Conn. -- Today's successful global companies are increasing their use of performance-based pay and are also moving to customize incentive pay packages by region, according to the Towers Perrin 2005 - 2006 Worldwide Total Remuneration study. The study highlights compensation and benefit practices in 26 key locations around the world.

"Based on the success of performance pay in North America and Europe's developed economies, Asian and Latin American companies are now instituting similar practices that tie employee compensation to business results," said Martine Ferland, principal and head of Towers Perrin's HR Services business Global Consulting Group.

The study also found that multinational companies are deriving advantages by applying a global framework to their pay and benefit programs while adapting actual mix and level to regional standards. This kind of approach can help companies cut costs and bring more consistency to their reward practices worldwide, at the same time remaining competitive by varying performance pay and other types of remuneration by country and region based on regulatory and cultural differences.

"As companies continue to shift the pay mix in favor of performance pay, it implies that an HR strategy should -- at a minimum -- articulate the company's desired pay mix and competitive positioning against the market. It should also state whether target levels will be set locally, regionally or at a global level, and identify how performance will be measured," said Ferland.

Performance-based (variable) pay as a share of total remuneration for chief executive officers (CEOs) worldwide ranged from 14% in India to 62% in the United States. Variable pay as a share of total remuneration for accountants worldwide had a much smaller variation, ranging from 0% in countries like Sweden, Switzerland and Venezuela to about 10% in Mexico and South Africa.

Performance-based pay consists of bonus payouts and long-term incentives (LTIs), which generally come in the form of stock options or some other type of equity compensation. Successful companies employ a methodology that ties bottom-line results to the compensation of nearly every employee. This is most effective when it is part of a total approach to employee remuneration that includes cash, equity and benefits like retirement and health care.

However, many U.S.-based multinationals are moving toward the European-based company approach of developing LTIs that customize award size by geography or group of countries, and this will require them to articulate the company's position on long-term pay and, more broadly, pay for performance. Are executives overseas part of a global cadre and eligible for the same grants worldwide, or are they measured against their local country or regional unit?

"The size and frequency of stock and other long-term incentives are on the rise in most parts of the world, although we are seeing a decline in the use of stock options in some developed economies, particularly the United States, as a result, among other things, of new accounting rules and increased scrutiny by institutional investors looking to protect the dilution of capital," said James Matthews, Towers Perrin principal and consultant in the Global Consulting Group.

Part of the performance pay package, bonuses are being used more widely and to more eligible employees in global companies. "We are seeing annual bonuses, which used to be reserved for the professional-level employee, being used more broadly in lower levels in the organizations, represented in our study by the manufacturing employee," said Matthews. "For the first time, in countries like Canada, France, Korea, Mexico and the United Kingdom, year-end bonuses for this group are the norm and not the exception."

Furthermore, in Asian countries such as Taiwan, Malaysia, China (Shanghai) and Singapore, annual bonuses are in the range of 10% to 15% of salary at the professional level. This is more than the 5% to 10% of salary that is common practice in North America and Europe for this group.

CEOs in the United States continue to enjoy the largest and most comprehensive pay packages, both in terms of base compensation and total remuneration. CEOs in France, Germany, Italy, Switzerland and the United Kingdom also command higher levels of total compensation than their peers in the rest of the world. Top Human Resource executives in these countries also enjoy richer total compensation packages, an indication of the relative strength of the economies in these countries. Reflecting the growing importance of their role in the organization, senior HR executives in Argentina, Australia, Belgium, Brazil, India, Japan, Spain, Taiwan and Venezuela command total compensation packages that are approximately half that of their CEO.

On the company-sponsored benefit side, the report shows how these plans are under pressure as a result of two powerful forces acutely present in the developed economies: increases in the cost of health care and the general aging of the population. Social security programs are under increasing demographic stresses, resulting in steadily deteriorating finances. Since employer-sponsored plans traditionally offset government-provided benefits, the net result is higher costs for the employer. Another result is the rising social tax burden as governments scramble to raise cash to pay for their increasingly costly benefits. This comes in two forms: raises in social program tax rates themselves and increases in the amount of pay subject to those taxes.

Another consequence is the declining retirement income replacement ratio as governments seek to restrain growth in social security outlays. This trend is exacerbated as companies are, at the same time and often for similar cost-pressure reasons, shifting from defined benefit pension plans to defined contribution plans.

A lesser theme is the increasing prevalence of employer-sponsored medical programs, especially for the higher paid, as government-provided medical systems deteriorate in quality.

"Companies must examine what degree of cost sharing between employers and employees should be included in benefit plan designs," said Ferland. "Increasingly, the cost and risk aspects of plan design take the high ground, and the financing, funding, administration and investment of benefit programs are addressed more and more consistently around the world."

About This Study

The Towers Perrin's 2005 - 2006 Worldwide Total Remuneration study highlights various compensation and benefit practices in 26 representative locations around the world. The data represent Towers Perrin's estimates of typical pay for local national employers as of April 1, 2005 in industrial companies with approximately US$500 million in annual sales.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. Through its HR Services business, Towers Perrin provides global human resource consulting that helps organizations effectively manage their investment in people. Areas of focus include employee benefits, compensation, communication, change management, employee research and the delivery of HR services. The firm's other businesses are Reinsurance, which provides reinsurance intermediary services, and Tillinghast, which provides management and actuarial consulting to the financial services industry. Together, these businesses have offices and business partner locations in 25 countries. More information about Towers Perrin HR Services is available at www.towersperrin.com/hrservices.

Editor's Note: Copies of the study are available. Please contact Joe Conway (914/745 - 4175; [e-mail]) in the Press Relations office.