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MARCH 17, 2000 VOL. 26 NO. 10

A S I A W E E K  S A L A R Y  S U R V E Y  2 0 0 0
In The Company Of Millionaires
They are no panacea, but stock options could solve the problem of stagnant salaries in Asia

By YASMIN GHAHREMANI


Yamazaki Akitoshi would have been a mid-career Japanese salaryman by now if he had stuck with his first job at giant Sumitomo. With an MBA from Columbia University in the U.S., he was on his way to a lifetime of social respectability, job security and slow but steady salary increases. By age 60 he might have earned close to $2 million for his 38 years of faithful service. That was the old economy. Today, the 36-year-old Yamazaki holds assets that are worth many times that amount, at least on paper. He has his employer of two years to thank.

Since the Tokyo-based Goodwill Group went public last year, its stock price has rocketed. In its pre-IPO days, the company's stock was once priced for employees at $463 per share; the price today on the open market is $51,000 per share. That would be remarkable enough, but it doesn't count a 20-for-1 stock split. Yamazaki's holdings are now worth $14 million. "I never expected the price to go up this fast," he says casually.

Stories like Yamazaki's have become increasingly familiar over the last nine months as Internet start-ups in Asia have emerged from nowhere to strike stock-market gold like their fledgling U.S. coounterparts have done in the last few years. But Goodwill is different. It is not about to add "dotcom" to its name and has never considered attaching an "i" or an "e" as a prefix. It has nothing to do with e-commerce. The main reason its stock has been successful is because of the bright prospects of its nursing care subsidiary in rapidly aging Japan. Even more impressive: Yamazaki, who directs new business strategies, is merely the tip of a millionaire iceberg at Goodwill. All 200 of the company's pre-IPO employees either received options or had a chance to buy stock at ground-zero prices. One 27-year-old secretary at the company, who asked not to be identified, bought a single share of stock before the IPO and is now a millionaire - worth 25 times her annual salary. "My father was very shocked to hear it," she chuckles.

No wonder. As Asia emerges from the recession that forced so many companies to reduce or freeze salaries, both employees and employers are looking for ways to get ahead. The possibility that share options can energize workers while providing bosses with a low-cost incentive to encourage hard work and to focus on shareholder value makes them especially attractive. "It's an exciting development and it's not going away," says Hans Kothius, a principal consultant for the Hong Kong office of Watson Wyatt, the world's biggest human resources adviser. This may be the future of your pay package.

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In contrast, the salaries of many workers in Asia are growing by only a small amount. Asiaweek's annual guide to salaries for 27 jobs in 12 regional economies and the U.S. shows that wages in Asia, taken as a whole, have changed very little from last year. The numbers are based on data from recent surveys of corporate compensation done by Watson Wyatt as well as Asiaweek's own research on government and professional jobs. "Base salaries probably won't increase [very much] for a while," says Kothius. "They were already kind of high."

Many managers agree, which is another reason stock options are getting so much attention. The trend is already well underway in the United States where as many as 10 million American workers - 60% are non-managers - receive stock options. And while it is still early days for the phenomenon in Asia, interest is growing fast, especially in Japan, Singapore and Hong Kong. Japan, which until 1997 did not even allow options, now has 342 public companies with systems that reward at least top management with such awards. In the Lion City, Singapore Airlines said last month it will introduce a share-option plan for staff "at all levels." The company was following in the footsteps of Singapore Press Holdings, publisher of the island-state's primary English-language newspaper, The Straits Times, which created its own company-wide plan late last year. And in Hong Kong, compensation experts expect a spate of such schemes to emerge this year in the wake of successful systems at several dotcom companies and even at HKT, the staid telecommunications giant that is slated to merge with Pacific Century CyberWorks.

These companies are exceptions. Most share-option plans in Asia have been either imported by Western firms or embraced by technology start-ups that need to use their stock as currency to attract and pay talent. Even that could be technically illegal in China, where the rules on stock options for employees tend to be rather gray. In the past, it has been against the law for locals to own foreign-denominated stock. American telecommunications equipment maker Lucent Technologies, like other multi-nationals operating on the mainland, got around this restriction by setting up a scheme using phantom options (see glossary page 47) - grants that act like options but aren't. No actual shares change hands, but cash awards are given to employees based on the U.S. share price.

 
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Cultural impediments have also hampered widespread adoption of options by private companies. Handing over even bits of ownership to employees is a prospect that makes many old-style Asian business owners squeamish. You know the ones - they probably founded the business themselves or inherited it from the founder. Ceding control to employees seems almost, well, disrespectful. Asian business owners "don't see employees as partners in the business," says Norman Chan, an investment adviser with Allen Perkins in Hong Kong. "They don't understand that if the company makes $1 million and they own the whole thing, that isn't as good as if they give away 50% to employees and the company increases its earnings to $4 million."

Many employees may not understand the ownership idea either. Just wait. When Lucent spun off from parent AT&T and introduced its Founders' Grant program in 1996, every one of its 100,000 employees worldwide received 100 share options free. They vested in three years for employees who stayed with the company. "When I received the stock options, I was not exactly sure how I would benefit," says Saithong Sengdee, a production line operator at Lucent's integrated circuit plant in Thailand. Other Lucent workers felt the same way. But early last year, the company's regional human resources department cranked up communications efforts about the options, which by then could buy 400 shares per person because of two stock splits. "Then people started to realize this is a lot of money," says Thomas Mak, Lucent's director of compensation and benefits for Asia-Pacific. "So people are almost on a daily basis looking at our website to see what the stock price is." By the time the vesting period ended, the stock was trading at $30 above the exercise price. Saithong cashed in 300 of her 400 shares and went home with a chunk of cash worth about seven years' salary. (So, that's how it works!)

HKT employees, who were initially displeased with options given two years ago to compensate for the loss of their annual 13th-month bonus, have also learned to appreciate such benefits. Since the company's first options grant in December 1998, the value of HKT shares has risen 66% - and with it, workers' spirits. "There's a marked change in peoples' moods. They're a lot happier," says Fan Kwok-fai, executive secretary of the Hong Kong Telecom Employees Union. But they also understand the potential downside - if the stock price falls, they've got nothing but a piece of paper. With the PCCW buy-out at hand, they are pushing management to move up the date at which they can exercise the options, currently set at December 2002. "They don't want to wait until the technology bubble bursts," says Fan. The March 7 stock sell-off in the U.S., in which the Dow Jones Industrial Average fell by its fourth-biggest points total ever, serves as a reminder that stock options are not guaranteed. As a standard disclaimer used in the United States says: The price of shares can fall as well as rise.

But put aside volatility for a moment. For stock options to be beneficial to all sides, the company must have a clear idea of what it is trying to achieve and communicate that to workers. Lucent's Founders' Grant, for instance, was intended to make the employees feel like owners at a time when the company was starting fresh. "Share options give employees a sense of belonging, which salaries, no matter how high or how much they are sweetened with bonuses, cannot give," says William Bridges, a Singapore-based consultant and author of the best-selling book Job Shift. "If you look at history, we were all once landowners and we all somehow in the last few centuries became either tenant farmers or tenants and, after the Industrial Revolution, wage earners. The information revolution is taking us back to our roots, where through share options we are again all becoming owners of our own companies and in a way, masters of our own destinies." Dumkerng Tharanmai, a senior process engineer at Lucent's Thai plant, puts in more succinctly: "We are owners of the company, so we work harder."

Lucent also has a separate performance-based plan, which rewards select employees with discretionary amounts of options. High-level executives are much more likely to receive options under the plan, but the fact that even workers at the bottom of the totem pole have a chance is revolutionary in Asia. Such a top-to-bottom scheme can make sense, however, if Asian shareholders begin demanding the sort of unswerving attention to their best interests as is common in the U.S. "Organizations want to change the way they reward people," says David Gueundjian of Hewitt Associates, a human resources consultancy. "They want people to be more long-term focused and more focused on what really creates value - not just any kind of results."

Hong Kong's HSBC, whose parent is based in London, offers variable options to all employees, linked to their individual annual reviews as well as the performance of the local unit. "The value of the amount allocated will reflect your performance and the performance of the subsidiary you're in," says spokesman Gareth Hewett.

This all sounds good. But there are several potential problems with stock options that could restrict, or at least delay, their wide adoption. Some experts caution that Asian stock markets outside Japan are not mature enough to make options a valuable incentive. Ideally, if a company becomes more efficient or more profitable, the market should reward it with a higher share price. And that's the sort of market reaction that stock-holding employees are counting on. But Chan, the Hong Kong investment adviser, complains that in Hong Kong few investors base their buying decisions on the quality of the company. Chan estimates that fewer than one-fifth of Hong Kong investors have ever held an investment other than property for more than three years. "Everyone is just speculating," he says.

How To Succeed At Giving And Receiving (Stock Options)

Corporate Dos and Don'ts of Awarding Options
- DO make sure there is front-line management communication about any performance-based components of the option plan. "We tend to focus too much on the pay side and not enough on what you have to do to generate the results that mean you'll make money," says Hewett Associates' David Gueundjian.
- DON'T just give employees a booklet on the plan and forget about it. Says Andrew Atter of benefits consultancy Hay Group: "Employees won't know what they have. It won't make them think differently." Work to keep company performance in the forefront of employee consciousness. Think stock-price screen savers.
- DO remember that as a retention strategy, compensation is not everything. When employees rate what's important to them on the job, the paycheck often ranks only third or fourth behind quality-of-work issues. Be attentive to work environment, relationships within the company, and opportunities for learning and advancement.
- DON'T rush into creating a plan because it's the trendy thing to do. What do you want to achieve? Who should participate? And how will you respond if your company's stock price drops?

Employee Dos and Don'ts of Handling Options
- DO look at the company's stock history to estimate how much your options might be worth when they mature. If the company is so new it doesn't have a stock history, look for comparable companies.
- DON'T jump jobs for a sexy options package without carefully considering what you can gain at both current and future positions over at least a medium stay of three-to-five years. "Short-term thinking could jeopardize your long-term career," says Kevin McCormick of Morgan & Banks. Websites like www.stock-option.com can help you compare the option schemes of two companies.
- DO consider negotiating a staggered vesting schedule for options rather than a riskier all-at-once plan. Cashing in a steady stream of stock options helps reduce the risk that price fluctuations over time will cost you profits.
- DON'T hold the options as a long-term investment at the expense of other equities in your portfolio. "In most cases, holding the company's stock will mean the individual has too much money tied up with the same company he is working for," says investment adviser Norman Chan. And that's not smart.

Speculative fever, of course, is what has made not just the founders but even relative late-comers to many high-tech start-ups rich. Stock options are probably the key recruitment and retention vehicle for Internet companies scrambling for scarce talent. The start-ups couldn't get prospective employees to so much as return phone calls without them. This poses a dilemma for traditional firms that are keen to jump on the Internet bandwagon. Take Hong Kong's property giants, many of whom have recently started Internet plays, for instance. To lure the right talent, they must offer options. But options to buy what - the hot new subsidiary's stock or the staid old parent company's? The former could make the young techies richer than the old-line senior management at the parent. But the latter won't fly with many recruits.

"Some companies have tried to offer stock options in the parent company and they got turned down by [prospective Net employees]," says Freddy Chua, executive director of the property investment and development company Rodamco Asia Management. And none of this goes down well with parent-company rank and file, who probably have no options of any kind. "People are saying, 'what about us? Aren't we all part of the same company?'" says Kevin McCormick, regional manager of human resources at the recruitment firm Morgan and Banks. At the moment, that question has the property tycoons scratching their heads. It may be that they will have to offer a combination of both types of options to employees at both parent and subsidiary companies.

Stock ownership plans must usually be approved by shareholders - most of whom are happy to have managers' interests more closely linked to theirs. But there is some dilution of share value when big chunks of the company are sold or given to staff. That's why the Hong Kong stock market, for one, forbids listed companies from selling or giving more than 10% of their stock to employees. Not that this stopped Tom.com, the much-hyped Internet portal of tycoon Li Ka-shing. It listed on Hong Kong's Growth Enterprise Market early this month with a special waiver from the market to award 50% of its shares to employees. It argued it needed this flexibility if it hoped to attract top talent.

The waiver for Tom.com can be seen in two ways. One, it is a special privilege for a company belonging to the single-most dominant individual in Hong Kong's economy. But it also could be plausibly argued that the government is attempting to get out of the way of a business that needs freedom to operate. The Japanese government, which had banned stock options outright, is now hailing their use. Stock-crazed South Korea is revising regulations to make it easier for options to be granted, though tax laws still require that they be held for at least three years. The Singapore government is doing what it does best: using its bully-pulpit to encourage local companies to recruit top-quality international talent using stock options.

If companies clarify why they are giving options, employees stop treating stock markets like roulette wheels, and governments level the playing field for all companies, watch for a significant change in compensation. In South Korea, Samsung and Hyundai may follow the example of smaller companies and amend corporate bylaws this year so they can begin issuing options. Gueundjian of Hewitt says the interest in Hong Kong is high: "We invite 100-150 people [to compensation seminars] and typically we get 50 people. But the ones we run on incentives draw nearly 100 people."

Given such interest, he reckons it may take only three or four years before 60%-70% of the major corporations in Hong Kong offer stock options or other long-term incentive pay plans to most or all of their workforces. Recruiters see similar interest from the employee side. "I think by September, if the trend continues out here, the first question on my mind when I talk to a client will be, 'what is the stock-option plan,'" says Harold Mandel of Bennett Associates, an executive recruitment firm in Hong Kong. "Because I know I won't be able to get a candidate unless I have something to say about that." It's a question Hong Kong Telecom Union members are asking now. "After we're merged with PCCW, people will be actively seeking stock options - unlike our passive response before," says the union's Fan. Two years ago, union members protested against options. Today, he says, 0"we'll fight to have as many options as possible." The future, it seems, is now.

With reporting by Murakami Mutsuko/Tokyo, Julian Gearing/Thailand, Assif Shameen/Singapore, Laxmi Nakarmi/Seoul and Dan Woodley/Hong Kong

Illustrations by Emilio Rivera III


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