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Laura D'Andrea Tyson: Okay, good morning everyone.
I'm Laura Tyson and I am going to moderate this panel and we are going to
start and end on time and we have an extremely important topic and one not
without controversy compensating leaders a cross cultural view.
We were talking before actually you could start with cross cultural differences in
what a leader actually is and then talk about the cross cultural differences in compensation.
We have a very distinguished panel.
Let me just introduce each one of them.
As keeping with tradition here what we have agreed to do is have each panelist
give a couple of bullet points on the general question we have all been asked to consider.
We have all been asked to consider the general question how do different
societies, different countries, different companies reward leadership.
And the agenda also says reproduced leadership that means what do you do with
leadership when it is not succeeding so we have all been thinking about that question
and thinking about it in a cross cultural context. So we have with us on the panel Jack Dunn
who is the President and CEO of FTI
Consulting, a global advisory services company serving corporate clients around
the world.
We have Madhu Kannan, the Managing Director and CEO of BSE LTD, Inc that
capability of trading and sophisticated financial products in India.
We have Rafael Gil-Tienda, the Chairman, Asia, Marsh & McLennan you know that firm
I'm sure global advisory risk strategy
human capital. Oki Matsumoto the Chairman and CEO of
Monex Group Technology based online retail financial services company a very
interesting background coming from a well known global financial services company
too an entrepreneur in Japan and finally John Strackhouse, Senior Partner of
Heidrick & Struggles. Heidrick obviously is involved in search
talent, leadership, compensation all of the time.
So I will start and we will just start with a couple of opening comments in
Alphabetical order so I will start with Jack.
Jack B. Dunn: Thank you very much. In our instructions today we were told to
talk about the issue on a fact based dispassionate and analytical basis.
In the U.S at this time that is like trying to describe an ice cream sundae
without talking about whip cream or chocolate sauce.
Hardly is the issue of executive compensation ever spoken off without the
adjectives of outrageous or unfair and statistics and factories lie the CEO pay
is now average of 343 times work or pay or that the 25 major companies in the U.S the
CEO's made an average of $16 million while company is paid no tax.
So it is hard to talk about it on a dispatch in the basis.
I think if I look at it from a the U.S perspective one of the major factors
is the factor of time in 1969, no excuse me 1969 the average holding by a mutual fund
institution in a U.S equity was 6 years. In 2009 that timeframe was 69 days.
CEO tenure has gone from 10 years to 8 years in 2000 to 6 years in 2010.
Velocity leads to bringing in people from the outside and when you hire people from
the outside and there is a tendency to match the highest that they could have
made in a fire performance as opposed to what the reality of the job might be.
In our country it is typical for us to hire a compensation consultant will then
bless the arrangement which then raises the medium pay for all CEO's so we get
somewhat of a vicious cycle. The icing or the whipped cream is then
some academic does a study that is outraged by all the bells and whistle of
perks which 3 out of 10 compensation committees take as a lesson on how to
improve executive pay and 10 out of 10 executives take as a checklist for what
they should ask for in their next negotiation. So I think a lot of the criticism of
executive pay is well deserved, but I think the issues and the factors to go
into that are more complicated than they might appear just on the surface.
Laura D'Andrea Tyson: Thank you. So one of the things that, that mentioned
and one of the things we discussed is that different companies, different ownership
structures are going to affect this so you are going to be talking about publicly
traded companies where you have these institutional investors if you are moving
in and out. It has really changed everything that
is I think a very, very important point. Rafael, why don't I turn to you?
Rafael Gil-Tienda: Thanks Laura. I'm going to comment primarily on the role
and compensation of independent non-executive director besides my role at
Marsh & McLennan I have been an independent Director at a Chinese bank for
the last 8 years and I said on the compensation committee.
I won't talk about that, but I will talk about that but I will talk about the broad
issue in Asia and the reason why I wanted to focus on independent directors is that
both in the west and increasingly in the east independent directors are the
majority of a compensation committee that determines the compensation of the senior executive.
Okay, so how is that selective? How is that compensated itself?
In the U.S you have very strong non-executives that are compensated very
highly say at the $200,000 level plus stock options in Europe, do you have less
use of stock options but you have even higher level of stock compensation more
ג‚¬200,000 to ג‚¬300,000. You move that to Asia and even Hong Kong
which has been I think an example of superior corporate governance in Asia
independent directors get compensated very little. Okay you have pay of 100,000 Hong Kong
dollars say $15,000 U.S at a high level 300,000 Hong Kong dollars which is 3,
30, 40,000 dollars so what didn't stop happening is that the large companies that
are listed 10 to higher either local tycoons or friends or they become a --
cure for old employees that more or less will -- the board.
This is even more exaggerated here in the mainland where compensation is at the
ֲ¥50,000, ֲ¥100,000 maybe ֲ¥150,000 to ֲ¥100,000 level so what I wanted to maybe
we can come back to this but I wanted to close by saying that in Asia one of the
difficulties is to bring in experience committed independent knowledge that we
really perform an independent role in assessing management a neat performance.
Laura D'Andrea Tyson: So very interesting. I want tie these two things together
and in one respect which is that in the U.S and probably in Europe as well where there
is now quite rigorous transparent selection of independent directors so we
have moved away beyond this issue of friends and theג€” but even then, even then
if you choose a former CEO from another company to be an independent director this
upper sort of spiral of every CEO looking at the standard of pay based on their experience.
So an independent director CEO will say,
"Well in my company when I was CEO this is what I received."
So even then it is complicated. Rafael Gil-Tienda: Yes, I agree.
Laura D'Andrea Tyson: Yes. Madhu Kannan? Madhu Kannan: Thanks Laura.
You know I also -- made comments mainly on India which is of pampering all my --.
Clearly, there is a war for talent going on in India as to sort of fuel growth.
One point Jack, one of the recent numbers I have seen in terms of the CEO
compensation that is roughly between 70 to 100 times that often average workers which
is notג€” the difference is not as big in the investment world, but because of there
is a lot of demand and there is a reason limited supply coming into the market
is in usual trends like you know salary growth upon 14% which is almost twice the
average global attrition rates are on 19 to 20% and it is clearly mismatches
happening in the labor market. Now from a philosophy perspective look at
the compensation of the country. I would say go around with maybe the
point you made. You can't look at the country
homogenously, you are to look at company is basically based on the sectors there
and in the compensation philosophy let's say the manufacturing space is very
different from the social space. We can read it from let's say other
spaces and the second way to differentiate is the ownership structure of the companies.
I think the government only or quasi public and - difference of competence
structure where I think the fixed compensation is at least limited and a lot
of perks and whereas the new contrast that will say private companies and we can
differentiate within private companies which don't have in foreign investor
and those that have foreign investor or private companies that are actually or
private companies that are actually listed and not listed.
And in foreign compensation philosophies is one of these things that these two
categories as well for those that have either are listed I think clearly from the
investors clearly forcing compensations to be disclosed and also to be also more in
line with the global standards so I think that is one thing we needed to look at.
I think a couple of more of factors that I will put out here is which Iג€” you know I
have been working the youth for 13 years and going back and taking this job.
One thing that, you know transparency is important, but lack of confidentialities
also a big problem under the management level. So and that becomes an issue and that also
explains attrition problem because today I go and get hired company x by paying the
$10,000 because there is so much openness of data I come in a space with 10,500 I'm
in the flip at the lower level and from a regulated perspective the government
and the regulators are primary part to get more transparency and also trying to put
instead of gaps let's say on how much one can pay a full time CEO or on a board of
the company and linking it to the profits of company.
Now with later on linking it, yeah and that has problems for companies that are
in pre-profit more and that is a different question that can probably work, but this
is sort of broadly what is happening in the country but there is a big issue which
we as a nation are afraid to grapple with. Laura D'Andrea Tyson: Very,
interesting, very interesting. Let's turn to a perspective from Japan.
Oki, would you and you had experienced with both a large Western multinational
firm in financial services and your own firm in Japan?
Oki Matsumoto: Well, I have never studied or lived in outside of Japan, but I joined
the U.S Investment Bank and then became partner then 3 years ago I created my own
company which is a Japanese company recently I acquired U.S listed online
broker as our subsidiary so I have gone through many of those situations and I
have seen the fortification I have seen that the other state the characteristics
of CEO after this Japanese company and U.S companies are quite different.
In Japan, the CEO is more like a big brother of employees and in the states the
CEO is someone who is how to say it trusted by the investors or shareholders
to manage a company. It is very different.
So in Japan when the merger happens the CEO tends to refuse to hire people because
they are the big brother of employees. In Japan, the CEO is usually selected at
the new graduate becomes a manager, manager becomes general manager and who
will become the kind of executive and then we come to the top executive.
So in Japan, we try to grow a cat to a tiger and it never happens you know the
cat is cat and in the states maybe you know they try to hire a tiger baby or
tiger itself to run the company and then we try to go a cat in to be a tiger it
won't work, but we don't pay a rat for a cat and I guess the U.S case are actual tiger.
I want to calculate the comparison who pays what.
In Europe, people pay say $500 per kilogram of Ferrari or as per month which
Americans don't do. We in Japan we pay $500 per kilogram of
tuna, which Americans don't do. You pay maybe $50,000 per kilogram of for
CEO, which we don't do in Japan. It is a big difference in the I think all
coming from the how do say it the KOA role or CEO is very different in Japan and in
the states for instance. Laura D'Andrea Tyson: But relate that to
the ownership structure a minute because theseג€” the large Japanese companies that
we are talking about are publicly traded companies so why is it because they do not
have so much influence in the CEO selection is because their investors are
more long term investors and therefore they are not in a situation that we heard
about in the beginning which is just turning over the stock and turning over
the CEOs. Oki Matsumoto: I think it is more for
more than that. I think we in Japan should, if Japan want
to change that Japan should get more investors involved in CEO's direction.
Laura D'Andrea Tyson: Okay. Oki Matsumoto: I am on the board of Tokyo
Stock Exchange as well and I'm talking to the exchange to try to change the rule
because you know in Japan for the
shareholder's meeting the current management create a list of new board
members voted in the shareholders meeting and it is a lengthy risk and shareholder's meeting.
It is kind of a normal way that to the objective and once that list of the board
members are approved then they pick CEO among themselves, among those board of
directors and they are basically brothers, right? So again so the CEO tends to do the
decision good for employees not for shareholders. Laura D'Andrea Tyson: Okay,
alright. John you are involved in a lot of CEO searches I would have thoughtג€” I'm going
to say so that U.S companies which is I think you know they do searches for CEO's
but often time I mean the searches are I guess the question is the key issue is how
does a candidate get on that list, okay. Now here is a company.
It is publicly traded to shareholders have influenced, it needs a new CEO.
It goes to Heidrick & Struggles tell us more about what you hear from the
companies and what might differ from what we have just heard about Japan?
John Strackhouse: Well I think that in the U.S are clearly aggressive if they are
not performing you know, they will quietly go out to search and so you know we
typically got that call and at that point we have to kind of do a very analytical
research of the market to be able to come up with the right set of skills and there
is models that we used to do that. In terms of my background and former
president of the company up in Canada and but by way of backgrounds and most of the
top leadership positions at the World Economic Forum for professor Schwab
and also work very closely with employer's helped me over the years.
I also work very closely with John Gore who is recognized by Forbes in a one
investment with Google and Amazon and number of other great companies like Bloom
or is on the board that is over --. Bill Joy is another gentleman that
is just like working with Einstein, he is the founder of Sun Micro system.
So I think that when you look at compensation in companies and compensation
of executives it is broken out in 5 categories. Yet the -- question yes if you are in
a major corporation it is usually broken out into for the executives it is base,
salary, bonus, long term incentives and what they try and do is you know the
average pay of a Fortune 500 CEO's in the $20 million range that is typically what
you see. The second category of executive
compensation is private equity and that is a pretty pervasive asset class today.
What you are seeing CEO's get paid when they go in to private equity backed business.
Now private equity business is defined by established EBITDA they come in, they use
that EBITDA to harvest cash to increase the ownership and then they trade and exit
and that asset class what you typically find is an ownership structure of anywhere
from 2 to 4% and that is not that higher risk. The highest risk asset class in the world
is venture capital and this is where the great company builders like the John
Gore's or the Bill Joy's rather you know assets like Bane or you go around the list.
What they typically do is they send their management team with high percentage of
ownership so typically a CEO will get anywhere from 5 to 8% ownership going in
the door depending on where they are is either series A, series B, series C
and when are they making the change. They usually allocate about 20% of the
stock and I think what you see in compensation models particularly for
venture capital backed businesses are heavily weighted towards equity very low
cash and you know it is not unusual to take an executive from $2 million to
$200,000 but they are going to get a big ownership stake.
The fourth category would be privately owned businesses and that is you know
a major part of a global economy around the world whether you got India,
China, Brazil, United States privately on businesses are typically compensating
their executives primarily in cash. They are not in public markets and they
do try and retain them by having you know cash and long term incentives but they
don't have access to equity. And so there is a lot of benefits to
being in familyג€” is that are pretty attractive. I think the fifth category that is really
quite pervasive in quite many countries are stated on there prices particularly in
China that is a huge part of the macroeconomic trends in many parts of
China which is interesting when I do a search for John Gore to retrieve the top
executive out of China the gentleman was competing against the top, there were 70
companies in China in the wind turbine industry the top 3 were all state-owned
enterprises and so they are very powerful. They are significant and they represent
a major part of the economy so those are the five categories.
Now what we are seeing in terms of trends in Asia Pacific and we define Asia Pacific
as China, India, Indonesia, Vietnam, Philippines and Malaysia the contributing
factors and compensation continue to be strong growth of the Asian Industrial GDP
which is accelerating inflation across the region creating a scarcity of executive
talent and there is a real significant difficulty in recruiting executives into
these key positions in this region. Now what we are seeing in terms of
averages and this is what I want to share with you.
While the average salaries are increasing in its region by 7% they are increasing
higher India and China than they are in Europe or North America.
The comparable averages in North America and Europe are 2 to 3% and what you are
seeing is there is going to be a crossover where you know right now Asian executives
are getting paid more than your key on executives and in 2 to 3 years you will
see Asian executives get paid more than American executives so those are the
trends that Heidrick & Struggles are seeing in the market.
Thank you. Laura D'Andrea Tyson: Okay, well we have
actually done extremely well at the panel in terms of getting I think I a major set
of issues out there and we have a lot of time for Q&A, we can engage ourselves that
I would actually like to turn right to the audience and see if we can engage you in
some of these issues. Are there any?
Yeah, and I think please identify yourself I think that is what we do here.
Vincent Van Quickenborne: Yeah, good morning I am Vincent Van Quickenborne I am
Minister of Economy of Belgium I am also YGL like our friend Kannan.
Two questions, first of all you say the average compensation is $20 million for
the top 500 companies U.S. Laura D'Andrea Tyson: U.S CEO.
Vincent Van Quickenborne: I'm sorry I'm a free market liberal.
I'm not a left wing guy. What can you do with ג‚¬20 million every
year or $20 million, don't you think that is exaggerated I mean.
I'm sorry to say so I mean more and more to my electorate in Belgium or in Europe
these kind of questions come up and 5 years ago I said that is the free market
man, that is how it goes and today I think about values so the question is do you
think it can defend that thing and my second question is I'm in favor of bonuses
as long as a system of maluses exist. Have you ever met a CEO that has a system
of malus/bonus when you could do it well you get more, when it is bad you get down
so I mean that is the stick in the carrot? Don't that exist somewhere or what do you
think about it? Laura D'Andrea Tyson: Yes we haven't
talked to you about the issue of reproach or and can I just say that in the question
about level so you just heard that it is quite possible that in the next few years
the compensation in Asia will exceed the compensation in the U.S so the $20 million
figure may actually be topped not as an average perhaps but anyway what let's get
some responses from the panel since you raise the number why don't you start since
you revealed that number I think you should start.
John Strackhouse: Well first of I'm not sure that I agree with how these guys get
paid and I'm at the market and I see it and I have seen executives where I walk in
and sit down with the board and the executive has an 8 to 1 ratio for every $8
of acquisitions that he made he has $1 left to shareholder value.
They are still asking the board for more money so at some point you know good sense
has to be you know brought to the table. I see that the significant wealth
creation is another asset classes and I think that boards have to you know get
their compensation models aligned with the reality. I mean in Europe we don't the same
excesses, alright because CEO of SAP's are placement, he doesn't get that kind of money.
It is much more sensible in Germany, much more sensible in the UK, much more sensible.
It is a problem in the U.S and I think it is one that you know doesn't serve the
shareholders well sometimes because you know they are caught up in making short
term decisions to optimize their personal economics and I find out egregious so I
don't disagree with your point and I think you know we are on to something.
I think boards need to you know really start to take a hard look at that
and really start to look at the differential between the top the house and what the CEO
is getting paid and what the lowest labor is getting you know getting paid so I
think it has to be, it is kind of unconscionable that we have that level of
greed driving performance, driving behavior and that is what you know when
you look at the macroeconomic trends the exponential price of 2008 it takes 5 to 7
years for you know the economy to heal when you have that kind of harm done so I
have seen it up close and personal and I think you raised a very good point.
Laura D'Andrea Tyson: Yes, good. Rafael Gil-Tienda: Laura I will go back
to the question on the quantum okay. The situation in Asia is really quite
diverse and kind of complicated in addressing your question.
I think in Japan there is a requirement to maintain disclosure above $1 million so
in all of Japan my understanding is that there are only 300 executives that make
over a million dollars, okay. You would coming over to this country
and there is a limitation by the CBRC and financial services the banking regulator
and also in Ministry that out of the say 2000 listed companies in China about 70 to
80% are state controlled and in there in the management of compensation tends to be
about ֲ¥4 million just half a million U.S. You move that to private sector,
the Chinese private sector and then of course it can be a lot more of a mirror of the
United States where you know say a global manufacturer of PC's you know there
is compensation worth about 10 million U.S so you are getting this diversity and in fact
the growth you see in the private sector in China rather than in the SOE control
list of the companies which creates this also tension because of the comment that
you made earlier on John that there is a lure to attract good executive in China
from the years so he is into the private sector, but they are taking much more risk.
If you are in the SOE you have much more of a guarantee of the malus is less of
okay if you don't do well maybe you get into a smaller company, you could transfer
to a lower position so there is less retribution in terms of the reproach.
It is kind of complicated. Laura D'Andrea Tyson: So the reproach was
implicit I think Jack your sense of CEO's are turning over more quickly so why is it
the case that U.S these activists U.S shareholders who are returning their
shares over so fast they have let the compensation rise to this 20 million.
The CEO's are moving through faster, what is the, how do you explain the rise in the
salary and also is it laying off, getting rid of the CEO which is the main malus?
John B. Dunn: I have to apologies a little bit I was trying to do the
calculations to see if I was underpaid per kilogram and then I found out all my
fellow CEO's are making $20 so I'm a little taken aback I'm having a bad day.
Okai Mastumoto: American CEO's, American CEO's.
John B. Dunn: But the you know I think it is interesting we have the new say on pay
provisions in the United States which admittedly revised we had them in the UK
since 2002 and the statistics are very telling of only in 12 hour of the first
100 companies to face the results had even as much as a 30% disagreement with what
the pay schedules were and then the UK, the statistics have fluctuated between 3%
and 8% of people who disagree so I don't know that the activist shareholders they
are concerned what the typical investor the one that is in their for 69 days or 6
months, I don't think they compare. Laura D'Andrea Tyson: They are not concerned.
John B. Dunn: Having gone on hundreds literally of investor road shows
and rarely I am rarely asked what I make. I'm rarely asked is my board overpaid I'm
usually asked what are you going to do this quarter so I don't know that it is at
the top of their list it is certainly for some of the pension funds who in addition
to being good investors also have the political issues of representing labor
unions and things like that, that is high on their radar in terms of executive pay,
but I don't know that for a fact it is really high up on the list of the average
institutional investment. Laura D'Andrea Tyson: So the average
is just for the investors is okay with the 20 million? They don't share the concernג€”
John B. Dunn: Well they get to say if they are or not.
Laura D'Andrea Tyson: But it turns out thatג€”
John B. Dunn: So far there has not been a fewג€”if the CEO if she or he has been successful.
Laura D'Andrea Tyson: Right and if you cheer he isn't the new CEO that is theג€”
John B. Dunn: And I would just like to readdress one of the question we had where
the question was is anybody looking at, making less money if you don't perform
more if you do I think there has been a tremendous movement and I think you know
the bad cases make the bad law, the famous cases where there has been egregious
overpayment in connection with we are disappointed performance but I think more
and more directors on outside compensations to outside directors on
compensation remedies our time compensation to performance and I think
every compensation consultant out there in the name of their business and their
reputation is driving companies more and more to that especially for the smaller
midcap companies that is my observation. Laura D'Andrea Tyson: So one of the
problems that came up in the period after in the mid 90's late 90's because we did
adopt some tax law which encouraged firms to pay for performance that is over
a million dollars of compensation. You have had to have a pay for 4 months provision.
John B. Dunn: Yeah. Laura D'Andrea Tyson: What thatג€” but the
performance was the stock price and what did you think happened there is a lot of
ways you can manipulate the stock price, there is a lot of earnings manipulation
that can be attributed to tying compensation to one variable which is
a share price and not other so now we are at the world of what do you tie it to.
What time period, what is the variable, is it stock performance relative to the
overall market relative to the overall sector in which you are in so I think we
have moved more to performance but we would still have a problem of what is the
performance we want and measure? John B. Dunn: Yeah I think as you see the
CDA's the discussion and analysis of compensations in the perspectives is you
will see that companies are tying to more and more variables than just the stock
price because you go through a period of 2008 and everybody's compensation scheme
has been laid for the next 5 years is blowing apart so I think you are seeing it
on relative performance as you mentioned I think you are seeing it on EBITDA whatever
the particular measures of the that company are that make it a healthier
company I think compensation committees are much smarter today than they were in
November of 2008. Laura D'Andrea Tyson: So Gil you said on
that you do remuneration at CITIC what are theג€” you are hearing things about what
performance you look at. You are hearing things about word for
talent where you know the CEO CITIC can be competed away.
How is this all playing into the considerations you see?
Rafael Gil-Tienda: Yeah thanks Laura. You know I am restricted from commenting
too much purely in CITIC but let me just move it out though into the broad
financial services sector and to go back to the minister's question some of the
most egregious problems had been in the financial services sector with large
financial companies and Oliver Wyman together with the Institute of
International Finance just issued a report that said since 2007 until now at least
two things had been taken away that were a problem which were parachutes, you know
you are an executive, you basically mess up the bank you get fired but you go away
with a lot of money. Okay that happened in the New York Stock
Exchange Earlier on before you Madhu were there obviously and the other one
is guaranteed bonuses or compensation over a period of time which were incentives to
under perform because you already had your compensation. Those had been taken out of the system in
the last 2 to 3 years by in large according to this recent survey by Oliver
Wyman. In Asia though it is still an issue
and Oki was commenting on that, that the culture is one of compassion, is one of
less individualism so the individual compensation is less based on total
shareholder return for total value of creation but more on do you more or less
do okay. Okay where your revenues more or less in
budget, did you make a reasonable return on revenues, did you make a reasonable
return on equity and the compensation then shines less.
The west and particularly the U.S has a culture of leadership that is says I am
going to transform, I'm going to create, I'm going to do something different which
is more or less what you are doing at the --, but it is you are much less the
example in Asia than the norm and conversely in the U.S particularly
shareholders are looking at major confirmation, major shareholder creation
if that happens on a risk adjusted basis then they are prepared to compensate.
Laura D'Andrea Tyson: But I think as Jack suggested a lot of these major
transformations particularly when in their form of mergers and acquisitions don't
actually work so you bring someone in, give them a huge package, they are going
to transform the company by doing this so then what happens, do we have anyג€” how do
you penalize for bad behavior? Madhu Kannan: You know one thing in India
for example sort of state the different, and then sort of small fact the large
institution shareholders awareness about compensation and you know all of these you
know executive compensation especially of full time executive of the compensation
has to go through a full shareholder resolution that has to be passed.
You would be surprised that you know we just start up a new company as a part of
the group and the equal of ISS, what ISS does in the U.S Institutional Shareholder
Services and then we did some - well preparing for - for this company.
You will be really surprised how many of the large institutions even actively went
through and went through resolutions. So the international guides may be the
international guides may be operating and they are but I would sort of you know the
sort of larger dates and even the big stakeholders are not as actively involved
as they are let's say the U.S or maybe Europe but those are qualities would have
a moment in it but that is one differential. On the - side I mean I, maybe I just sort
of add one maybe connotation. I think your focusing a lot on the senior
management ad you know I think in my personal care is one thing that we also
has intelligence and the middle management as well.
I think in Asia which are beginning to drop them before and I agree to what you said.
Now it is the general the first reaction is how good can we actuallyג€” I hate to use
you know how can we sort ofג€” how can we solve the - big confrontation and how can
we give a graceful exit, how can we make sure the person even for complete
nonperformance how can we make sure the person can go with this face impact so I
was just sort of you know we had or you know I have heard stories and then even
the darkest you know we had an offer. We did an offer somewhere in one corner
of the country well nonperformance they have been transferred to you know so youג€”
you know you are being transferred to you know one corner of the country which
is the basic indication that you know look you are really doing badly and you can now
start looking for a job. And the inability of I mean one big
differential in at least in Asia at least and also channel but in the non-western
back entities so decisions of nonperformance of decisions in the middle
level is also going to be a challenge as we sort of build a scale as we start
competing is a global base. Laura D'Andrea Tyson: Okay, yeah okay.
Oki Matsumoto: Can I comment? Laura D'Andrea Tyson: Yeah please.
Oki Matsumoto: I think there is a kind of geo-economical background for the CEO's compensation.
Like in Japan, Japan is not really relevant but this is a country I know very well.
Laura D'Andrea Tyson: It is still a major economic power, okay it still is.
Oki Matsumoto: Good example, okay Japan for example, it is a very limited land
and we need to grow rice in a limited land, we need to harvest it, it has no big upside.
There is always downside like a storm or you know flood or tsunami or whatever,
but upside is limited so what is required for a leader is to save the downside,
okay. In the states it is very rich country and you can go push the frontier and you know
go where get new land and then and get new --- so there is a lot of upside.
So I think a leader is expected to go out to find a new upside and get paid.
I think in case of China maybe when China was poor, when China was poor it was maybe
although it is very, it has got a vast huge land that maybe it is nearer to
Japan, but now China has got many huge number of the people who has got
disposable income. Now it is becoming like the States so
that I think in China the leaders is expected to expand their visions and get rewarded.
I think there is that kind of cultural or geographical background.
Laura D'Andrea Tyson: That is great, that is great.
Thank you, thank you. Yeah, how about here. Yeah.
We need a microphone.
Please introduce yourself, maybe I will take two questions and then we can sort of
take them? Unidentified Female: Hi I'm from India
and I heard the panel in the morning and thee was talk about India and China that
we are just going up by 15 to 20% now with the 15 to 20% average -- every year how do
we look at management to upper mid management retention because you know we
spoken about top management by debate and I think because India and China the
primary basis manufacturing if you are going to have a 15 to 20% wage increase
whether stock management, mid management no management will effectively be losing
a competitiveness so the question then is retention and compensation.
Laura D'Andrea Tyson: Retention and compensation. Would you want to after that and then we
willג€” ? Tom: Hi I'm Tom -- from WPP.
On the cultural element building on this in my experience in China regardless of
whether leaders are with state on enterprises or even multinationals as
a trend leadership trends to be quite defensive and protective not necessarily
focused on long term value creation. My question is as salaries increase
and I'm not talking about the state on enterprises or the local sectors but for
multinational companies that are expected to abide by the same forms of corporate
governance and value creation irrespective of geography.
Have you noticed the linkage in increase salary and a more forward thinking value
creation driven senior leadership amongst local candidates?
Laura D'Andrea Tyson: I see okay so why don't we start withג€” why don't we take
those the second question first because it is related and then we will go to the wage
question which I think it is a very important question but on this question of
are I mean really it is if you are running, if you are searching for talent
and you are multinational here and your subject all the multinational rule of how
does that affect the kind of person you need here and the kind of reward structure
that you offer here. Do you do any at Heidricks'to sort of
finding head CEO's for regions here that are part of multinationals and does not
affect there is a change of kind of talent you are looking for?
John Strackhouse: We are actually doingג€” that is most of what we do, we do mostly
multinational searches in China. We do virtually nothing but the state on
enterprises and so that multinationals are putting a premium on talent and I think
what you know the notion of value creation this is where a lot of the significant
upside is happening with the multinationals is this is where they are
getting their organic growth, but this is earlier my comments where there is
a scarcity of talent we are having a hard time completing searches to find the
talent that the multinationals are looking for in this region and it is across
consumer, financial services industrial. They really just don't exist and so that
is the challenge. I think it is evolving but it is still
not there to run the multinational that is the challenge we face.
Laura D'Andrea Tyson: Yeah Gil. Rafael Gil-Tienda: Yeah at Mercer we are
doing Mercer we are doing a lot of work with -- on executive compensation for
their leadership and I think you are right that the emphasis is less on real realtor
holder value creation on the risk adjusted basis. Laura D'Andrea Tyson: Risk adjusted basis.
Rafael Gil-Tienda: Okay it is just purely on are you going to more or less get the
product out of the door, are you going to get the revenue, are you going to get the
expense so there is clearly a lot ways to go and that is what I was referring to
earlier on that the private companies really are looking for their own sell
value creation because they are basically run by the key original shareholder that
started it up.
Okay and that we are seeing then the significant difference between
compensation and the SOE's and compensation in the private Chinese
companies minimal people to go back to the lady that worked with friend -- okay.
The multiples in executive compensation to say a new entrance from University in Asia
are 20 times so not only are we seeing that senior executive compensation
is rising very quickly in Asia compared with the growth in the west is that if you take
a new entrance you have to have that person go through if that person is going
to eventually be a chief executive 20 times their compensation and you clearly
cannot make that on a 3% annual salary increase and that is an issue that many
multinationals face when working in Asia particularly in China which is the parent
company back in Frankfurt or London or Pittsburgh says okay you know we have
a flat market annual salary increases are zero 1% and so the whole world has to
implement that including emerging markets like India and like China and of course
what happens is these multinationals are very capable bright people from the
Universities and after they get paid for 3 years you lose them and they goג€” you go to
train your competition. Laura D'Andrea Tyson: They go,
right. Rafael Gil-Tienda: So it is important to them bring in the compensation program
people to rise much more quickly in the emerging markets particularly those that
are cut. Laura D'Andrea Tyson: Why not just raise
the I saw that from a little bit by reducing the starting gap how can you
attribute, whatג€” let's say offering a premium for the outstanding MBA students
to come in at a gap that is more like 15 to rather than 20?
Rafael Gil-Tienda: Yeah the issue there is that you know India is producing what
it is 1-1/2 million annual university graduates a year.
China is 3 million so there is an enormous pool from which you then hire
and you don't know the real future performance of an individual until you are sort of 3
years into the run so you know it is an issue.
Madhu Kannan: And I doubt you will refer to the IT sector.
Even the engineers who come out of engineering schools the amount of training
they have to go through before they become deployable you know in a project could
between 6 or 12 months anywhere. I mean that sort of you know and it
is really in the entire -- space, the financial space to what the private coming
out of the universal system needs significant amount of training and that
is what it is. I mean bridging the gap is huge and that
is one of the reasons why you know and also this target that is much
standardizationally of the children coming of an Indian range school you know in the
country and they have this huge differentials. Laura D'Andrea Tyson: But didn't as I
recall we I teach of course an emerging markets ad we you know occasionally look
at cases and one of the cases like many cases have been written about emphasis
and my understanding is that they have you know you get hired there at a premium they
are very aggressive training programs but you still get hired to get that job means
you get a premium relative to the market and then the struggle is to keep them
while you train them but some companies do decide to go in to that market of supply
and still choose to pay a premium price. I think Goldman does that in probably in
any market that it acquires talent in it is always paying above for the market for
the new talent so how do you respond to that issue.
You are a firm an entrepreneurial firm in Japan it, do you look for talent differently.
I mean you have described the general situation in Japan but when you for your
town talent are you looking for more transformational talent, more of your
defensive talent and do you say track more to multinational competition in your field
or more to the domestic market place, how do you do that?
Oki Matsumoto: Well here we need more tigers in my company for example not cats
we need commercialג€” Laura D'Andrea Tyson: So you are
a company of tigers? Oki Matsumoto: Well you know we hope to
be, but it is not easy becauseג€” Laura D'Andrea Tyson: But you are not representative.
Oki Matsumoto: Well the problem is like a multinational company the Goldman Sachs
they pay up premium in the labor market especially for younger people and young
people they don'tג€” they can't think about his or her - coming 20 years they look at
how much they get paid today and then they go to those companies.
There is a huge vacuum of currents in Japan with those industries.
Not manufacturers, not you know entrepreneurial you know new value
creation segments but to investment bank. Where I'm from Investment bank originally
so I am notג€” I don't want to say a bad thing about them but they don't really
create new values right.
They are basically you knowג€” they got help but they don't produce the values I think
I maybe wrong but anywayג€” Laura D'Andrea Tyson: I look at it with
sub skepticism. Oki Matsumoto: No there are huge vacuum
or currents at which I am very worried about. Laura D'Andrea Tyson: What about this
issue of your question was really also about wage pressure and competitiveness.
My reaction as an economist to that was to say well productivity is rising very
fast so wages can rise and of course there is exchange of another variable so there
is room for significant wage growth in a place like China because productivity
growth has been in advance of wage growth for a long time without an erosion of
competitiveness, but do you get any sense, do you worry about this in the countries
that you are working in that somehow you are going to price themselves out of being
in a competitive position.
Madhu Kannan: I do. Laura D'Andrea Tyson: You do?
Madhu Kannan: Yeah. I mean for me that is part of it because
you give training route transformations in the current role and the primary drivers
of people who would come from outside and part of it will be able to record a very
reasonably good senior team by and but now in these - million management I'm
struggling because I have got some good people but the way that this is sky
rocketing in two years and to at this point and somebody comes in and pays the
extra like you know 2, 3, 4% and then the move so I think it is going to be
a problem and if you don't have theג€” to make the investments like in - that sort of
Goldman does then we sort of they get squeezed out.
Laura D'Andrea Tyson: Okay I think we have time for one more question so yeah
I'm going to go back.
Unidentified Male: [Chinese] Laura D'Andrea Tyson: I think you left away.
Put our earphones on so we understand. Unidentified Male: [Chinese]
Laura D'Andrea Tyson: Well no I think that the question was about the potential
hasn't happened possible downgrading of at least some of the local government in
China but I think in order to link that to this discussion we really should talk
about and we haven't so it is important. You talked about the foreign - on state
on enterprise as we talked about the importance of different kinds of companies.
There is a lot of very significant economic development going on in all
around China not necessarily in state on enterprises but in enterprises that have
a very substantial base locally. Do you see any local differences at
eastern regions western regions large smaller cities in terms of compensation developments?
Rafael Gil-Tienda: Yeah, Laura clearly the question asked by the gentleman
is outside of this topic but I think you have very nicely brought it in to the question
of compensation. If compensation rises above productivity
clearly over time that is not sustainable. You know Europe is in that situation okay
because they just had a ratcheting up of compensation. The U.S is a lot more flexible.
Asia is coming up from below and there are risk that in certain sectors that
rises, if that happens then the risk that things will be mismanaged and that the
performance will over time not really reflect but value creation may result in
a loss of the quality and that will be recognized by the rating agencies if they
are doing their job properly. One of the ways that you want to address
that is by moving compensation away from just being cash which is what it is in
Asia mostly today and maybe a bonus or what something that is long term value
creation and in that regard the U.S has been leading the field in the report by
Oliver Wyman basically they found a practically all of the 37 largest
financial institutions on a global basis
have more than to putting a significant part of compensation into long term incentives.
In China, out of the 300 companies in the Hushen Index which is the combined index
of Shenzhen and Shanghai stock exchanges only about 50% of those have established
long term incentives so clearly until that gets in place there is the risk of what
the general managers asked me. Laura D'Andrea Tyson: John could I ask
a question of you on China. You talked about the importance of venture
capital in the United States and also the particular compensation structure
and venture capital do you see that as an important driver in China orany place else
in Asia? John Strackhouse: Absolutely.
Laura D'Andrea Tyson: So do you see comparable compensation structures
developing in that part of the economy? John Strackhouse: Well I think that in
China and I think also India the top venture capitals are very aggressive in
these markets and that is where the real wealth creation happens.
Look we did the search put Eric Schmidt into Google and I looked him up Forbes
News $46.5 million but 20,000 jobs were created. Look I think the majority of job creation
and wealth creation is going to come from that asset class and historically they
come in with low bases and make a lot of sacrifice and if you can use good judgment.
I mean one of the things that venture capital does you know they go through
a model where you have series A, series B, series C, series D so they capitalize the business.
So they will give the management team a fine amount of capital, you hit your
milestones, you deliver against those goals and form there they give you funding
for the next level and so it is a series of funding events that get you if you do
a good enough job you get it to the public markets and if you are successful enough
in meeting that business to get it to the public markets it is a windfall for all
the employees, okay and this is where you know the high potentials are Goldman or
the high potentials out of Morgan Stanley or an industrial business are going
and flocking too businesses like this where they get equity ownership coming in at
entry level midlevel position. Laura D'Andrea Tyson: Is that a model
that is you can use to attract talent in China?
John Strackhouse: It is very powerful model and it is absolutely being done in
China. Laura D'Andrea Tyson: And India?
John Strackhouse: It is also being done India.
In -- company and that is the fastest growing company in the world period end of
story and it is based in India. Madhu Kannan: The government exactly just
got another policy but then the first SME exchange in a country a model of a NASDAQ
but they given the opportunity for countries at a much earlier stage to also
go to public markets. Laura D'Andrea Tyson: To go to the public
markets, right. So let me conclude with you, okay did you
in this transition from Goldman to an entrepreneurial venture did you have
venture funding, did you act like a venture capitalist.
Have you compensated your employees in this more forward wealth creation kind of
way that it was talked about? Oki Matsumoto: Well I have tried and made
some mistakes I am trying again but at the end of the day we have to move on that
direction otherwise I don't think that we can get good value for the company and for
our stakeholders. Laura D'Andrea Tyson: But in terms of say
the acceptance of a venture capital compensation take risk get rewarded later
relative to how you started when you were talking about the standard socioג€” the
cultural norms in China is it hiring people who are willing to be in that kind
of compensation mode to take on those kinds jobs?
Oki Matsumoto: Well people need to get accustomed to the systems and the options
or whatever sometimes people think that is, some people fear these ownership of
the company and some people feared is it just a bonus right so we need to somehow
get through those kind of period for those compensation structures are well taken in
to those of key point. Laura D'Andrea Tyson: Okay,
alright. Jack, do you have anything you want to say on this topic or?
Jack B. Dunn: I guess I was going back to the gentleman's question about the ratings.
I guess when I came to China on Monday the further worry from my mind was the
downgrading of Chinese debt. I think ratings agencies do a wonderful
job of measuring how much debt you have and what the assets are but they don't
necessarily and couldn't measure what you do with the debt and I think China from
hearing Premier speak the last couple of days has a moment in time were wisely
using that capital puts it in a position for many, many years to come so I think
that I'm still a big fan. Laura D'Andrea Tyson: Okay well I want to
thank our panel. We have run out of time.
This was I think as we try to make it very objective, very analytical,
very cross cultural.
Thank you very much for a fascinating discussion.
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