Perspective - Fall 2009 |
By Deirdre Lander
THE RECENT CHAOS in the world's financial markets and its spillover into the real economy reduced opportunities for millions of people throughout the world as jobs, household incomes and retirement savings disappeared overnight. A recent study reported that 20% of Hong Kong people feel they will have to work 6+ years longer than they intended before retirement (SCMP June 23 2009). How do companies set priorities in this uncertain, volatile and extraordinary environment? As Asia begins its recovery, how do leaders identify, develop and measure strategies for managing human capital risk?
This time last year the stock markets were in free fall. On TV we watched transfixed as stocks plummeted by the hour. On top of that, swine flu emerged and brought back haunting memories of SARS. Our world was looking very fragile and out of control.
Stephen Roach, the Chairman of Morgan Stanley Asia was one of a handful of economists who had long predicted that an economy built on debt and asset-price bubbles would one day collapse - and that day had arrived. At the same time, similar predictions came from another source - the creative artists of our world such as writers and film makers. Their keen observations of the corporate world held up a mirror to this 'hyperturbo-charged capitalism'. New York writer Colin Harrison coined this term in his 2008 thriller about global capitalism - The Finder. The book describes 'soldiers of capital' in business suits, armed with blackberries, i-pods and mobile phones doing daily battle in the financial houses of New York; it talks of the "violence of capitalism".
Barack Obama in his Presidential inauguration speech (Jan 09) commented that the weakened state of the US economy was ".... a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices".
In addition 2009 saw the global escalation of public outrage at highly paid bankers' extraordinary bonuses and at the same time their lack of accountability for the financial systems' woes.
A year further on, are we returning to business as usual, or is there a new 'normal'? Are there green shoots, or pink slips? Like the classic visual illusion (see Figure 1), the world's economics gurus are all looking at the same data, yet the economic picture they see changes from ugly to beautiful and back in the blink of an eye.
On one hand, Albert Edwards, Chief Global Strategist, Societe Generale warns that "...the markets are relying on a combination of hype, lies and wishful thinking" (SCMP June 22 2009). In the same vein, the Financial Times of September 26th quotes that "... the upturn may be unsustainable - an incipient bubble based on cheap credit backed by government money".
On the other hand, in June the World Bank announced its belief that the world was set to return to growth in the second half year, although they expected that recovery would be subdued. The International Monetary Fund also stated that it believed that global economic recovery started in August 2009. Closer to home in Hong Kong, in June the Taskforce on Economic Challenges was set to unwind.
This article aims to provide current labour market and salary trends data to enhance the economic picture and provide greater clarity for key human resources decision making in 2009-10. The data is robust, however just as the visual illusion is a challenge to interpret, so too are the labor and salary trends data this year.
Hong Kong suffered a harsh blow as the financial tsunami swept across the globe in September 2008. The Hong Kong government reacted immediately, setting up the 'Taskforce on Economic Challenges' to assess the impact of the global financial crisis on Hong Kong and to cushion the economy, offered financial stimulus packages worth HK$87.6 billion, representing 5.2% of GDP. China reached out a supportive hand and its own stimulus policies were also seen to be beneficial for Hong Kong.
From a very uplifting 6.4% Gross Domestic Product (GDP) growth rate in 2007, the rate began to slide into the negative in the second half of 2008, By the first quarter of 2009 it had shrunk to negative 7.8% growth, the largest contraction since the 1998 Asian financial crisis. By August however, the forecast for 2009 had improved to negative 4% growth.
The Consumer Price Index (CPI) which had escalated rapidly to an 11 year high of 5.3% by August 2008, continued to dive in late 2008 and the first half of 2009 to hover around 0.5% at the end of quarter three. The fallout of the global financial crisis in the labor market was dramatic. Over the last 12 months, unemployment rose from a decade low of 3.3% to a high of 5.4% (see Figure 2).
In January - February 2009, Watson Wyatt's Total Reward Survey (TRS) member companies reported their intentions to reduce costs by focusing on hiring freezes, reduction of business travel, and operational efficiencies. Within weeks, the continued free fall of the global and local economies overrode these intentions with harsher realities - redundancies, reduced working weeks, pay adjustment deferrals, pay freezes and reduced bonuses.
As the financial turmoil spilled over to the real economy, so distress in the labor market emerged first in the banking sector followed by other sectors such as manufacturing, trading and logistics/transportation. By December 2008, retrenchment rates had reached 2.9% of employees amongst Watson Watson's member companies (Watson Wyatt's Pay Trend Survey March 2009)
The sectors with the highest redundancy rates were manufacturing, trading and general insurance and in all three, more jobs were being lost at the senior management level.
The 'turnover rate' refers to the average level of voluntary turnover (i.e. resignations) amongst staff in Hong Kong companies between July 2008 and June 2009). As reported in Watson Wyatt's Total Reward (TRS) and Banking Surveys, the 2008 all-industry average turnover rate had reached a dramatic 21%, the highest in ten years. In 2009, the figure had dropped to 14%, a level last experienced in 2005 by Hong Kong companies.
The engineering consulting sector, which suffered a staggering voluntary resignation rate of 39% in 2008, moderated significantly to 16% in 2009, with global employment opportunities shriveling as the economic downturn tightened its grip on regions such as the Middle East. The life insurance and consumer products industries maintained their positions as high turnover industry sectors, both showing a 19% annual average in 2009, however down from their ratings of 28% and 27% respectively in 2008. At 18% annual turnover, the telecommunications sector was not far behind this year, as in previous years. At the other end of the scale not surprisingly, retail banking, logistics/transportation, trading and manufacturing all showed lower than average staff turnover rates (see Figure 3).
According to Watson Wyatt's Total Reward and Banking Surveys, the average salary increase paid to staff in 2009 plummeted to 1.75% of basic pay. Increases varied by sector from a low of 0.64% in logistics/transportation and telecommunications to a high of 3.55% in pharma/health care. As Figure 4 illustrates, very sector other than pharma/health slashed salary increases from the prior year, which averaged 5.03% across all-industries. This figure of 1.75% represented a return to the levels of salary increase not seen since 2004-5 period, when Hong Kong was recovering from the SARS-related business downturn.
The pharma/health care sector maintained a salary increase rate similar to 2007 and 2008, as the sector continued to expand its markets and grow sales volumes despite the downturn. Retail banking's salary increase rate, which was the highest of all industry sectors at 5.7% in 2008, predictably tumbled below the all-industry average to 1.21% in 2009, in the wake of the financial markets' crash.
Hidden within these average figures is the fact that over one-third of Hong Kong companies froze salaries in 2009 (including two thirds of the banks), while a small number of companies reduced salaries.
Short term variable (incentive) pay plans generally reward the achievement of business and individual performance of the previous year. Given the timing of the financial crisis in late 2008, it would not be unexpected to find some companies unscathed in 2008, paying attractive bonuses. However, such was the fear in the market that some companies such as these decided to conserve their cash in anticipation of worse yet to come. Bonus delivery varied widely from company to company in 2009, based not only cash conservation, but also on real decline in business performance. It also reflected management agreement to divert cash to the protection of reward levels for front line and general employees on lower wages. A few companies gave token bonuses such as HK$12 perhaps to keep faith with bonus program eligibility, many companies suspended bonuses especially at senior levels, and yet others awarded generous bonuses.
For top management the lower quartile payment was 12.5% of basic pay, the median was 25% and the top quartile was 44% of basic pay this year. Sector differences were very marked with some of the most significant year on year reductions in bonus awards being in banking, insurance, logistics/transportation, manufacturing and high tech industries. The all-industry average variable bonus decreased at all job levels from general staff (9% lower) to top management (17% lower).
Watson Wyatt's 2009 Surveys report (effective July 2009) that the forecast 2010 all-industry salary increase rate average is 2.4%, a positive improvement on the actual 2009 all-industry salary average increase rate of 1.75%. This is led by pharma/healthcare sector's forecast of 4.1%, with logistics/transportation bringing up the rear with a forecast of 1% salary increase rate next year. An October pulse survey of 96 companies again produced a similar forecast of 2.5%, further evidence of economic stabilization (see Figure 5), although around 50% of companies are yet to commit to a figure.
The global economy appears to have reached a fragile stability and there is a widespread expectation that emerging Asian economies will recover earlier and better than the world's mature economies. The statement that "...Asia and China are the center of gravity of the world and of our business" by Michael Geoghegan HSBC Group Chief Executive, on announcing his move from London to Hong Kong, lends credence to that view (Financial Times September 26th).
Since jobs growth follows economic growth, this will drive talent
management to the forefront of human resources challenges throughout the
region once more. The voices claiming economic recovery are still very
timid, but companies that are preparing now will be well positioned to take
advantage of the economic rebound and resume Asia's aggressive 'war for
talent' in the immediate future.
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Deirdre Lander, Head of Watson Wyatt's Human Capital Group in Hong Kong deirdre.lander@watsonwyatt.com |
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