Successful multinational organisations realise economies of scale by leveraging consistent frameworks and processes in producing and marketing their goods and services across borders. The same is true of executive remuneration programmes – applying a consistent framework for decision making and using similar processes globally can both enhance business performance and mitigate cross-border risks. The trick, of course, is striking the right balance between global consistency and local differentiation so that programmes are sufficiently competitive to attract and retain the right management talent.

This Perspective discusses the benefits of, and best practices, for developing and executing a global executive remuneration strategy and provides a framework for tailoring the approach to your organisation’s unique needs.

In this issue, answers to:

• What are the benefits (and challenges) of a global executive remuneration strategy?

• What key contextual questions should be considered in establishing the objectives for the strategy?

• How can you strike the right balance between a global and local approach?

• What are the key elements that a global strategy should cover?

The benefits and challenges of a global strategy

Establishing a global executive remuneration strategy is the starting point for developing specific compensation policies and programmes. It ensures alignment with the company values, pay philosophy and the overall business strategy. It also contributes to:

• Streamlining costs – Organisations can take advantage of synergies in design and administration, which may not occur when companywide programmes are simply overlaid on top of local programmes.

• Applying consistency and common principles across all geographies – Balancing local and global objectives is critical to appropriately aligning employees’ interests with the overarching strategy of the company.

• Supporting the development of global leadership – Inclusion of leadership development and talent management programmes facilitates cross-border experience and learning that is critical to future leaders.

• Enhancing employee mobility – A clearly articulated strategy will ease the organisation’s ability to transfer employees across international borders.

• Reducing complexity and improving transparency – By creating guiding principles and parameters with respect to eligibility, design and mix of reward programmes, it should be easier to bring local reward practices, where appropriate, to a common level of internal equity.

Yet developing a global executive remuneration strategy is not an easy task, since consideration must be given to both strategic and tactical matters. For example, the strategy must consider potentially complex local compensation practices in light of local taxes, currencies and regulations while at the same time recognising differences in culture, language and communication preferences. In addition, the priorities of the business, as well as the external economic conditions influencing performance, may differ substantially from one region to the next and must be recognised in the organisation’s approach to performance measurement and incentive programme design.

To further complicate the exercise of creating one global strategy, compensation and benefit elements are not always comparable across borders. For example, in countries such as India, the value of fixed allowances is a component of total guaranteed cash and is typically included in market comparisons. A global strategy needs to address how compensation elements are defined and valued to allow for comparison (see Exhibit 1).

Objectives of the global executive remuneration strategy

The first step in developing a global executive remuneration strategy and establishing a consistent framework for decision making is defining the strategic objectives. In doing so, the compensation committee of the board, together with company leadership and human resource specialists, will need to consider the company’s business strategy, leadership talent requirements and the environments in which the business operates.

Establishing a clear understanding of the objectives of the global executive remuneration strategy will help to define the balance between the global needs of the business and local operating requirements. From there, the company can determine specific policies for such matters as compensation benchmarking, performance measurement and related governance and administrative processes (see Exhibit 2).

Key elements of a global executive remuneration strategy

A global executive remuneration strategy should take a comprehensive approach by incorporating all aspects of the total executive reward offering, including compensation, benefits and careers. In particular, the strategy should address the following issues in order to develop a meaningful framework for decision making.

Eligibility

A global executive remuneration strategy is usually applicable to the top three levels of management, depending on the size of the organisation. Global consistency at these levels is seen as critical to supporting cross-border collaboration, mobility and the sharing of best practices. Policy scope typically includes only those subsidiaries with greater than 50 percent corporate ownership.

Eligibility may also be extended to high-potential middle management employees on a discretionary basis. Where an organisation also wants to implement global employee policies, guiding principles from the executive policy are often cascaded to lower levels, although the general employee remuneration strategy tends to be more segmented and tailored to local conditions.

Benchmarking

An effective strategy defines the reference market for each element of compensation. Common approaches for benchmarking total remuneration include:

The global approach is typically applied to only a limited group of executives or to global or multinational roles that are often staffed by highly mobile executives. Often referred to as global nomads, these executives are usually on successive assignments and may lose their link to a home location. If global consistency is being applied to a broader management group, a global levelling system is required in order to assess who should be eligible for what programmes and at what levels.

A common hybrid approach is to benchmark base salaries against a country-specific or regional marketplace (for example, using an average of key western European countries as a reference) and benchmark incentives against global practices with the same target and maximum opportunities applied to all executives at the same level. (See “One size fits all?”, below, for information on market practices related to global long-term incentive programmes.)

With respect to benchmarking benefits and perquisites, a local approach still dominates as benefits strategy is often driven by local legislation and customary practice. For example, perquisites such as company cars are still prevalent in Europe but less so in the US.

Competitive positioning

In addition to selecting one or more appropriate market benchmarks, a multinational must also determine the desired competitive positioning of the total remuneration package, as well as the desired market competitiveness of each respective element of remuneration provided. Given variations in the strategic role and life cycle of operations across regions, an important question for companies to consider is whether the global compensation strategy should incorporate the same competitive positioning for all locations or instead establish an optimal approach for each market.

For example, certain regional operations may play a more critical role in executing the company’s strategic priorities, such as penetrating an emerging market. In this instance, the firm may be willing to pay above market rates to attract and retain top-notch talent to support business development and garner market share more quickly.

Similarly, a company may want to differentiate its pay mix according to the life cycle stages of its various subsidiaries. For a high-growth start-up subsidiary in India, for example, it may set base salaries below the median but offer incentive opportunities at the 75th percentile of the relevant market to motivate the achievement of aggressive growth targets. On the other hand, for a Dutch subsidiary in a mature business, base salaries might be set at the 60th percentile of the market together with slightly below market incentive opportunities.

However, an emerging trend among multinationals is to take a more conservative approach to managing compensation globally by placing less emphasis on fixed pay. As a result, it is common for global remuneration strategies to position base pay at the market median for all geographies and units regardless of strategic role or life cycle stage and to use variable pay to vary the competitiveness of total compensation when circumstances warrant.

Pay for performance

Performance measurement is the centrepiece of a global remuneration strategy and is the key to its effective implementation. A well-designed performance measurement strategy will specify the measurement approach for key performance criteria, provide a common understanding of the expected levels of performance and link variable compensation to both short- and long-term business strategy.

In multinationals, executives should be measured on a mix of both global and local criteria. If performance measures are tied too closely to global results, there is limited line-of-sight and insufficient relevance to individual country management. On the other hand, if performance measures focus solely on the business unit’s or country’s performance, there is insufficient incentive to leverage synergies across the business to drive overall shareholder value. The relative weightings on global and local criteria (which may include team or individual results) will typically vary by role, reflecting the executive’s span of control and influence.

Best practice suggests using only a few key measures and establishing an appropriate balance between financial and non-financial results. For example, multinationals investing in talent development on a global scale may require that “people” measures constitute a portion of all local management evaluations.

It is also critical that the performance measurement approach reflects regional economic differences, particularly as it relates to goal setting. For example, revenue goals for a sales executive in Russia (which is currently experiencing a 45 percent average annual economic growth rate) should be much more aggressive than related goals in a more mature economy where economic growth is slower and there is likely greater competition.

Not surprisingly, the adoption of a global remuneration strategy often goes hand in hand with implementing more stringent individual performance standards; less tolerance for weak performers and a higher rate of desirable turnover.

Governance

The final key element to a global executive remuneration strategy is a governance framework with established processes and procedures. The governance framework should identify the key decision makers and include a matrix of authority for delegating those decisions. The oversight and administration of the global programmes and policies, however, should be shared by corporate and local human resource functions to ensure compliance with local legislative and other requirements.

A strategic approach yields results

More than ever, global expansion, cost management, process improvement and governance concerns are driving the need for a well thought out global executive remuneration strategy. A clearly articulated strategy provides a framework for decision making that enables a company to leverage existing processes and ensure consistency across regions, while still recognising local priorities and external realities. By abandoning a cookie-cutter approach in favour of a strategy that is tailored to the organisation’s unique requirements and aligned with its overarching business objectives, a company can realise the ultimate goal of optimising performance around the globe.