ORC Sightlines

November 2007

Changes for Long-term Incentives and Car Benefits in Europe

Long-term incentive schemes for executives are undergoing some changes in the U.K. and wider European markets, according to Helen Mussen, senior consultant with New Bridge Street Consultants LLP, who addressed members of the ORC Global Reward Meeting Group (GRMG) at its recent meeting in London. As the use of share options declines and the cost of incentive payments goes up because of accounting changes that require all types of equity awards to be charged against the company’s income, more companies are scaling back executive rewards and pinning them to performance.

The most commonly used performance measures are earnings per share (EPS), total shareholder return (TRS), and share price. EPS generally provides a good line of sight between management performance and reward and is relatively easy to understand. There is also the advantage that, if awards based on EPS do not vest, the company does not have to subtract the cost of the awards from its bottom line.

In the UK, where organizations are typically assessed in comparison to a peer group of selected companies, the most common performance measure is relative total shareholder return, which remains a robust measure irrespective of general economic conditions. Basing rewards on TSR has the advantage of linking executives’ interests with those of shareholders. Also, using relative TSR minimizes the influence of macro-economic factors and general market sentiment, since all companies in the comparator group will be similarly affected by those forces.

Company cars are another important element of total compensation in Europe, especially Western Europe, where most companies offer car benefits to their middle management population and above as well as to their sales force and field engineers. (One exception is Norway, where about half of companies provide a company car.)

ORC global compensation consultant Arnaud Cordebar noted that many companies are building more flexibility into their car policies. In the UK, for example, the majority of companies offer employees eligible for a car the option of taking a cash alternative. Some employees find the cash benefit has tax advantages; others prefer the hassle-free driving and prestige associated with a company car. Employee Car Ownership Plans (ECOP), which allow employees to purchase their own cars through an employer-sponsored scheme, are beginning to replace traditional company car arrangements in some companies. Generally, the ECOP gives the company control over the specifications of cars available and the level of maintenance included in the agreement.

For more information on European and global remuneration issues or on the Global Rewards Meeting Group, contact Paul Coleman in ORC’s London office, +44-(0)207-591-5600.

Employment Testing: The New Hot Button Issue for Federal Agencies

Federal agencies are vigorously tackling improper use of employment testing, making it all the more important that employers be aware of the advantages and risks of their selection tools. Experts addressing members of the Workforce Opportunity Network at the group’s meeting in Dallas last month warned that the Department of Labor, the Equal Employment Opportunity Commission (EEOC), and private attorneys are pursuing employers suspected of discriminatory testing practices with class action lawsuits and the prospect of multimillion-dollar settlements.

Fred Azua, director for the Labor Department’s Office of Federal Contract Compliance Programs (OFCCP) Southwest and Mountain Region, and Connie Ackerman, Office of the Solicitor, stressed that the employer is responsible for any testing done by third parties on its behalf. The OFCCP recently settled a case with a company based on the screening done by the State of Texas using a test that had an adverse impact on minorities. Azua made clear that his agency was going to be very aggressive when it determined that a test being used by the company had an adverse impact based on race or gender, regardless of who actually administers the test.

Dr. Kathleen Lundquist of APT Inc. explained that the term “test” in this context encompasses not just paper-and-pencil exercises but also interviews, work simulation exercises, psychological assessments, reference checks, and performance evaluations. Like other tests, these selection tools require validation if they have an adverse impact based on race or gender. Tests are fair and defensible if they are standardized, consistent, and shown to be valid predictors of the ability to fulfill the requirements of the job.

The keys to ensuring defensible tests are training for people who design and administer the tests, ongoing monitoring of test results to determine impact on women and minorities, an appeals process for those denied employment on the basis of the test, and communication with employees and managers so everyone understands what the test measures and how results will be used. She indicated that employers generally prevail in testing-related cases when job analyses are conducted, the testing procedures have face validity, and the company has documented a search for less restrictive alternatives to an adverse test.

As agencies such as OFCCP and EEOC concentrate their efforts on uncovering systemic discrimination and the size of settlements rises, the legal climate around testing is heating up. With a recent private testing lawsuit against FedEx Corporation settled for $54 million, companies on the front edge of the issue are spending “huge amounts” of time to guard against similar outcomes, according to David Fortney, a principal with the law firm of FortneyScott. One important safeguard Fortney suggested is for employers to ensure in their contracts with testing experts that the experts will defend the validity of the test if it is challenged and that the employers will not be charged for the cost of such a defense.

For more information on the EEO implications of employment testing, or to learn more about ORC’s equality, diversity, and inclusion networks, contact Nita Beecher, +1-314-726-1740 or Liz MacGillivray, +1-212-852-0406

Cost, Competition, and Living Conditions Complicate Expatriate Management in Asia

In a recent issue of Benefits & Compensation International, Philip A. Stanley, ORC’s managing director for the Asia-Pacific region, and Kimberly Vierra, a senior consultant in ORC’s Singapore office, discussed remuneration and other concerns for companies with expatriates in various Asian countries.

Seconding employees to China can be an expensive proposition, but for a variety of reasons, including the competition for managerial and technical talent in the country, expatriates remain an important element in most companies’ Chinese staffing strategies. Not surprisingly, many companies are seeking opportunities to reduce the associated costs. Some are thinking about eliminating hardship payments to employees seconded to first-tier cities such as Beijing and Shanghai, especially when the expatriate’s home location is Taiwan, Singapore, or Hong Kong. However, caution Stanley and Vierra, while such a move would cut the company’s cost, the employee might well perceive it as unfair, especially if he or she works side by side with expatriates from other places who are receiving hardship allowances, since many hardship factors affect all expatriates equally regardless of their home country or native language.

Another cost-saving move under consideration in some companies is localization—that is, remunerating expatriate employees according to the policies and practices applied to the company’s Chinese employees. The problem here is that the competition for talent is so fierce that a company that attempts to localize expats is likely to lose them to another firm offering better pay and perks. Chinese pay scales, while rising rapidly, are still below those of most developed countries, and non-nationals are not permitted to participate in state-run medical or pension programs.

And there are other concerns beyond how expatriates are compensated: For example, in a number of Asian countries, pollution is a major issue. Housing costs are rising in some locations, and expatriates can have difficulty finding space for their children in appropriate schools. At the same time, the profile of employees being assigned to the region is changing. More of them are women and more are coming from within the region and from less developed countries. Given the strategic importance of Asia for many companies and the complexity of managing expatriate assignments in the region, Stanley and Vierra advise employers to think through their policies and procedures in light of these issues.

For more on conditions in the Asia-Pacific regions and how companies are responding, read the full article in ORC’s online Reading Room, or contact Phil Stanley or Kimberly Vierra at 65-6438-0004.


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