 Am I wired? Yes, I'm wired. Okay. Good morning, everyone. I'm Laura Tyson, and I'm going to moderate this panel. And we're going to start and end on time. And we have an extremely important topic, and one with, not without controversy, compensating leaders, a cross-cultural view. We were talking before, actually you can start with cross-cultural differences of 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've agreed to do is have each panelist give a couple of bullet points on the general question we've all been asked to consider. We've all been asked to consider the general question of how do different societies, different countries, different companies reward leadership, and the agenda also says we approach leadership. That means what do you do with leadership when it is not succeeding. So we've 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's the president and CEO of FTI Consulting, a global advisory services company serving corporate clients around the world. We have Madhu Khanan, the managing director and CEO of BSE LTD Inc. That's the Bombay Stock Exchange Group, very responsible for developing the capability of trading in sophisticated financial products in India. We have Rafael Guiltienda, the chairman Asia of Martian MacLennan. You know that firm, I'm sure. Global advisory, risk strategy, human capital. Oki Matsumoto, the chairman and CEO of Monix Group, a technology-based online retail financial services company, a very interesting background coming from a well-known global financial services company to an entrepreneur in Japan. And finally, John Strachow, Senior Partner, Hydric and Struggles. Hydric obviously is involved in search talent, leadership, compensation, all of the time. So I will start, and we'll just start with a couple of opening comments in alphabetical order, so I'll start with Jack. 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's like trying to describe a ice cream sundae without talking about whipped cream or chocolate sauce. Hardly is the issue of executive compensation ever spoken of without the adjectives of outrageous or unfair, and statistics and factoids like the CEO pay is now an average of 343 times worker pay, or that the 25 major companies in the U.S. the CEOs made an average of $16 million while the companies paid no taxes. So it's hard to talk about it on a dispassionate basis. I think if I look at it from the U.S. perspective, one of the major factors is the factor of time. Since 1969, the average holding by a mutual fund institution in a U.S. equity was six years. In 2009, that timeframe was 69 days. CEO tenure has gone from ten years to eight years in 2000 to six years in 2010. Velocity leads to bringing in people from the outside, and when you hire people from the outside, there's a tendency to match the highest that they could have made in their prior performance as opposed to what the reality of the job might be. In our country, it's typical for us to hire a compensation consultant who will then bless the arrangement, which then raises the median pay for all CEOs, 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 whistles of perks, which three out of ten compensation committees take as a lesson on how to improve executive pay, and ten out of ten 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 that go into that are more complicated than they might appear just on the surface. Thank you. So one of the things that Jack mentioned and one of the things we discussed is that different companies, different ownership structures are going to affect this. So you're really talking about publicly traded companies where you have these institutional investors that are moving in and out. It's really changed everything. That's, I think, a very, very important point. Rafael, why don't I turn to you? Thanks, Laura. I'm going to comment primarily on the role and compensation of independent non-executive directors. Besides my role at Marshall McLennan, I've been an independent director at the Chinese Bank for the last eight years and I sit on the compensation committee. I won't 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 the compensation committee that determines the compensation of the senior executive. 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 U.S. dollar level plus stock options. In Europe, you'll have less use of stock options, but you have even higher levels of compensation, more 200,000 euro to 300,000 euro. 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. You have pays of 100,000 Hong Kong dollars, say 15,000 U.S. dollars, at the high level, 300,000 Hong Kong dollars, which is, say, 30,000-40,000 dollars. So what ends up happening is that the large companies that are listed tend to hire either local tycoons or friends, or they become a senior cure for old employees that more or less rubber stamp the board. This is even more exaggerated here in the mainland where compensation is at the 50,000 renminbi, 100,000 renminbi, maybe 150,000 to 100,000 renminbi level. So 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 experienced, committed, independent nonics that will really perform an independent role in assessing management and its performance. Very interesting. I want to tie these two things together 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've moved way beyond this issue of friends. But even then, even then, if you choose a former CEO from another company to be an independent director, this upward 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's complicated. Yes, I agree. Madhu Khanan. Thanks, Laura. You know, I'll sort of restrict my comments mainly on India, which is sort of where I'm spending all my time on. Clearly there's a war for talent going on in India to sort of fuel the growth. One point, Jack, one of the recent numbers I've seen in terms of the CEO compensation, it's roughly between 70 to 100 times that of an average worker. So the difference is not as big as it is in the western world. But because there's a lot of demand and there's a reasonable amount of limited supply coming into the market, you're seeing usual trends like salary growth of around 14%, which is almost twice the average globally, attrition rates are at around 19-20%. And this clearly is sort of a mismatch that's happening in the labor market. Now from a philosophy perspective, if you look at the corporate sector in the country, I would sort of go along with maybe the point you've made. You can't look at the country homogeneously. You've got to look at companies basically based on the sectors they're in. I think the compensation philosophy in the manufacturing space is very different from the services space, which may be very different from, let's say, other spaces. And the second way to differentiate is the ownership structure of the companies. I think the government-owned, the quasi-public entities have got a very different sort of a compensation structure where I think the fixed compensation is reasonably limited and there's a lot of perks. Whereas when you contrast that with, let's say, private companies and you can differentiate between private companies which don't have a foreign investor and those that have a foreign investor or private companies that are actually listed or not listed, and you find compensation philosophy is different across these two categories as well. For those that have either are listed, I think clearly the pressure from the investors is clearly forcing compensations to be disclosed and also to be more in line with the global standards. So I think that's one trend which we need to look at. I think a couple of more sort of factors I'll put out here is having worked in the US for 13 years and going back and taking this job. One thing that transparency is important, but lack of confidentiality is also a big problem at the middle management level. So that becomes an issue and that also explains the attrition problem because today I go and get hired by company X for paying $10,000 because there's so much openness of data. If somebody else pays me $10,500, I will flip at the lower level. And from a regulatory perspective, the government and the regulators are trying very hard to get more transparency and also are trying to put into the caps on how much one can pay and full-time CEO on the board of the company and linking it to the profits of the company. Whether it's right or wrong, it's even linking it. And that has some problems for companies that are in pre-profit mode and that's a different question we can talk about. But this is sort of broadly what's happening in the country but it is a big issue which we as a nation are trying to grapple with. Very interesting, very interesting. Let's turn to a perspective from Japan, Okie, and you've had experience with both a large western multinational firm in financial services and your own firm in Japan. Well, I have never studied or lived in outside of Japan but I joined the U.S. investment bank and became a partner there and then 12 years ago I created my own company which is a Japanese company. Recently I acquired a U.S. listed online broker as a subsidiary. So I've gone through many of those situations. And I have seen, before location, I have seen that the, how do you say, the core characteristics of CEO of the 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 was, how do you say, trusted by the investors or shareholders to manage the company. It's very different. So in Japan when the merger happens the CEO tends to refuse to fire people because they are the big brother of employees. In Japan the CEO is usually selective as the new graduate becomes the manager, manager becomes general manager and who becomes the kind of executive and then become the top executive. So in Japan we try to grow a cat to a tiger. And it never happens. The cat is cat and in the States maybe they try to hire a tiger baby or tiger itself to run the company. And we try to grow a cat to be a tiger. It won't work. But we don't pay a lot for a cat. And I guess the U.S. pays a lot for a tiger. I once calculated in comparison who pays what. In Europe people pay say $500 per kilogram of Ferrari or Aston Martin. 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 for CEO. Which we don't do in Japan. It's a big difference in the... I think all coming from the... How do you say the core role of CEO is very different in Japan and in the States for example. But relate that to the ownership structure a minute because the large Japanese companies that we're talking about are publicly traded companies. So why is it because their investors do not have as much influence in the CEO selection is because their investors are more long term investors and therefore they're not in the situation that we heard about at the beginning which is just turning over the stock and turning over the CEOs. I think it's more formal than that. I think we in Japan should... If Japan want to change that Japan should get more investors' voice involved in CEO selection. I'm on the board of Tokyo Stock Exchange as well. I'm talking to the exchange to try to change the rule because in Japan for the shareholders' meeting the current management create a list of new board members for the voted in the shareholders' meeting. And it's a lengthy list and the shareholders' meeting it's kind of no way that to be rejected. 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. So again, the CEO tend to do the decision good for employees, not for shareholders. John, you are involved in a lot of CEO searches. I would have thought... I'm going to say something about U.S. companies which is I think they do searches for CEOs but often times, I mean the searches are... I guess the question is the key issue is how does a candidate get on that list? Here's a company, it's publicly traded the shareholders have influence it needs a new CEO, it goes to hydrogen struggles tell us more about what you hear from the companies and what might differ from what we've just heard about Japan. I think that in the U.S. they're fairly aggressive if they're not performing they will quietly go out to search and so we'll typically get that call and at that point we'll have to kind of do a very analytical research of the market to be able to come up with the right set of skills. There's models that we use to do that. In terms of my background I'm former president of a company up in Canada and by way of background I've done most of the top leadership positions at the World Economic Forum for Professor Schwab I also work very closely with... John Doar has helped me over the years. I also work very closely with John Doar who's recognized by Forbes that I'm one investor in the world of Google and Amazon and a number of other great companies like Bloom, Laura's on the Board of Silver Spring with Ben Cortlang, Bill Joyce another gentleman that's just like working with Einstein he's the founder of Sun Microsystem. So I think that when you look at compensation and companies and compensation of executives it's broken out in five categories you get the Laura's question. Yes, if you're in a major corporation it's usually broken out into for the executives it's base salary, bonus, long-term incentives and what they try and do is the average pay of a fortune of 500 COs in the $20 million range that's typically what you see. The second category of executive compensation is private equity and that's a pretty pervasive asset class today what you're seeing CEOs get paid when they go into a 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 create an exit. In that asset class what you typically find is an ownership structure of anywhere from 2% to 4% and that's not that high a risk the highest risk asset class in the world is venture capital they're the great company builders like the John Doors or the Bill Joids or other assets like Bain or you go around the list what they typically do is they incent their management team with a 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 it a Series A, Series B, Series C when are they making the change they usually allocate about 20% of the stock particularly for venture capital-backed businesses are heavily weighted towards equity very low cash and it's not unusual to take an executive from $2 million down to $200,000 but they're going to get a big ownership stake the fourth category would be privately owned businesses and that's a major part of the global economy around the world whether you go to India, China Brazil, the United States privately owned businesses are typically compensating their executives primarily in cash they're not in the public markets and they do try and retain them by having cash and long-term incentives but they don't have access to equity and so there's a lot of benefits to being in family businesses that are pretty attractive I think the fifth category that's really quite pervasive in many countries or state owned enterprises particularly in China that's a huge part of the macroeconomic trends in many parts of China it was interesting when I did a search for John Doar to recruit 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 three were all state owned enterprises and so they are very powerful they're significant and they represent a major part of the economy so those are the five categories now what we're 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's a real significant difficulty in recruiting executives into these key positions in this region now what we're seeing in terms of averages and this is what I want to share with you while the average salaries are increasing in this region by 7% they're increasing higher in India and China than they are in Europe and North America the comparable averages in North America and Europe are 2-3% and what you're seeing is there's going to be a crossover where right now Asian executives are getting paid more than European executives and in 2-3 years you will see Asian executives get paid more than American executives so those are the trends that hydrogen struggles are seeing in the market, thank you okay, well we've actually been extremely well at the panel in terms of getting I think a major set of issues out there and we have a lot of time for Q&A we can engage ourselves but 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 and I think please identify yourself, I think that's what we do here yeah good morning, I'm Vincent van Quickenburg, I'm Minister of Economy of Belgium, I'm also a YGL like our friend Kanan two questions, first of all you say the average compensation is 20 million dollars for the top 500 companies US I'm sorry, I'm a free market liberal I'm not a left wing guy what can you do with 20 million euros every year or 20 million dollars don't you think that is exaggerated I mean I'm sorry to say so but I mean this is I mean more and more to my electorate in Belgium or in Europe, I mean these kind of questions come up and five years ago I said that's the free market man that's how it goes and today I think about values so the question is do you think you can defend that thing and second my second question is I'm in favor of bonuses as long as a system of malices exist have you ever met a CEO that has a system of malice that bonus, when you do it well you get more, when it's bad you get down, so I mean that's the stick and the carrot, does it exist somewhere or what do you think about it we haven't talked here about the issue of reproach or and can I just say in the question about level so you just heard that it's quite possible that in the next few years the compensation in Asia will exceed the compensation in the US so the 20 million dollar figure may actually be topped not as an average perhaps but anyway let's get some responses from the panel since you raised the number why don't you start, since you reveal that number I think you should start first off 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've seen executives where I walk in and sit down with the board and the executive has an 8 to 1 ratio for every 8 dollars acquisitions that he made he has 1 dollar left of shareholder value and he's still asking the board for more money so at some point good sense has to be brought to the table I see that the significant wealth creation is in other asset classes and I think that that boards have to get their compensation models aligned with the reality in Europe you don't have the same excesses alright because CEO of SAP is our placement he doesn't get that kind of money much more sensible in Germany much more sensible in the UK it's a problem in the US and I think it's one that doesn't serve the shareholders well sometimes because they're caught up in making short term decisions to optimize their personal economics and I find it egregious so I don't disagree with your point and I think we're onto something, I think boards need to really start to take a hard look at that and really start to look at the differential between the top of the house and what the CEO is getting paid and what the lowest labor is getting paid so I think it has to be it's kind of unconscionable that when you have that level of greed, driving performance, driving behavior and that's what when you look at the macroeconomic trends this financial crisis of 2008 it takes five to seven years for the economy to heal when you have that kind of harm done so I've seen it up close and personal and I think you raised a very good point Laura to go back to the question on the quantum 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 one million dollars so in all of Japan my understanding is that there are only 300 executives that make over a million dollars you're coming over to this country and there is a limitation by the CBRC financial services the banking regulator and also in ministry that out of the say 2000 listed companies in China about 70-80% are state controlled and in there the maximum compensation tends to be about four million renminbi just half a million US you move that to the private sector and then of course it can be a lot more of a mirror of the United States where you know a say a global manufacturer of PCs you know his compensation was about 10 million US so you're getting this diversity and in fact the growth is in the private sector in China rather than in the SOE controlled listed companies which creates this also tension because of the comment you made earlier on John that there is a lure to attract good executives in China from the SOEs into the private sector but they're taking much more risk if you're in an SOE you have much more of a guarantee the malus is less of you if you don't do well maybe you get into a smaller company you get transferred to a lower position so there is less retribution in terms of your approach it's kind of complicated so the approach was implicit I think Jack in your sense the CEOs are turning over more quickly so why is it the case that US these activists US shareholders who are turning these shares over so fast they've let the compensation rise to this 20 million they lay off the CEOs are moving through faster what's the how do you explain the rise in the salary and also laying off getting rid of the CEO which is the main malice adjustment I have to apologize a little bit I was trying to do the calculation to see if I was underpaid per kilogram and then I found out all my fellow CEOs are making 20 million dollars so I'm a little taken aback I'm having a bad day American CEOs American CEOs I had to speak here but you know I think it's interesting we have the new say on pay provisions in the United States admittedly or advisory we've had them in the UK since 2002 and the statistics are very telling of only in 12 out of the first 100 companies to face the results had even as much as a 30% disagreement with what the pay schedules were and in the UK the statistics have fluctuated between 3% and 8% of people who disagree so I don't know that the activist shareholders they're concerned but the typical investor the one that's in there for 69 days or 6 months I don't think they they're not concerned having gone on hundreds literally of investor road shows I'm 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's at the top of their list it's 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's high on their radar in terms of executive pay but I don't know that for a fact it's really high up on the list of the average so the average institutional investor is okay with the 20 million they don't share the concern they get to say whether they are or not but it turns out so far there has not been a huge outcry if the CEO, if she or he has been successful and if she or he isn't the CEO that's the I'd just like to redress one of the questions you had the question was is anybody looking at making less money if you don't perform and more if you do I think there's been a tremendous movement and I think the bad cases make the bad law the famous cases where there's been egregious overpayment in connection with poor or disappointing performance but I think more and more directors on outside compensation outside directors on compensation committees are tying compensation to 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 mid cap companies that's my observation so one of the problems that came up in the period after in the mid 90s late 90s is we did adopt some tax law which encouraged firms to pay for performance that is over a million dollars of compensation we had to have a paper performance provision but the performance was the stock price and what do you think happened there's 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're at the world of what do you tie it to what time period and what's the variable is it stock performance relative to the overall market relative to the overall sector in which you're in so I think we have moved more to performance but we still have a problem of what is the performance we want to measure I think as you see the CDA is the discussion and analysis of compensation and perspectives you'll see that companies are tying it to more and more variables than just the stock price because you go through a period in 2008 and everybody's compensation scheme that's been laid for the next five years is blown apart so I think you're seeing it on relative performance as you mentioned I think you're seeing it on EBITDA whatever the particular measures of that company are that make it a healthier company I think compensation committees are much smarter today than they were in November of 2008 so Gil you do remuneration at SIDIC what are your hearing things about performance you look at you're hearing things about war for talent where the CEO of SIDIC could be competed away how is this all playing into the considerations Thanks Laura I am restricted from commenting too much on SIDIC 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 have been in the financial services sector of our 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 have been taken away that were a problem which were parachutes which means you know you're an executive you basically mess up the bank you get fired but you go away with a lot of money that happened at 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 underperform because you already had your compensation those have been taken out of the system in the last two to three years by and large according to this recent survey by Oliver Wyman in Asia though it's still an issue and Okie was commenting on that that the culture is one of compassion compassion is one of less individualism so the individual compensation is less based on total shareholder returns or total value creation but more on did you more or less do Okie Okie 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 US has a culture of leadership that says I'm 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 MONEX but you are much less the example in Asia than the norm and conversely in the US particularly shareholders are looking at major transformation major shareholder creation if that happens on a risk adjusted basis then the compensation they are prepared to compensate but I think as Jack suggested a lot of these major transformations particularly when the former mergers and acquisitions don't actually work so you bring someone in give them a huge package they are going to transform the country company by doing this so then what happens how do you penalize for bad behavior you know one thing I'll add to my India example which is slightly different and it's more a fact the large institutional shareholders awareness about compensation and all of these executive compensation especially full time executive compensation has to go through a full shareholder resolution as we passed it'd be surprised that we just started off a new company as a part of the group the equivalent of the ISS what ISS does in the US and when we did some work preparing for the launch of this company we were really surprised how many of it the large institution even actually went through and read through these resolutions so the international guys may be the international guys may be operating in their arm but I would sort of the larger guys and even the the big stakeholders are not as actively involved as they are let's say in the US or maybe in Europe of course the political system would have involvement in it but that's one differential on the malfeasance I mean maybe I'll just sort of add one make the conversation a little I think you're focusing a lot on senior management and I think in my personal case as well we also have some challenges in the middle management as well I think in Asia which we were talking before and I agree to what you said the general the first reaction is how can we actually I hate to use the word how can we sort of how can we solve the problem without being confrontational and how can we give a graceful exit how can we make sure the person even for complete non-performance how can we make sure the person can go with his face in that so I was just sort of as you said we had or I will say I've heard stories and even in our case we had an office somewhere in one corner of the country where non-performers were being transferred to you being transferred to one corner of the country which is basically an indication that you're really doing badly and you can now start looking for a job and the inability of I mean I think one big differential in at least in Asia and I used to cover China a little bit in the long western back entities are in a so decisions of non-performance at the middle level is also going to be a challenge as we sort of build scale and as we start competing against the global guys can I make one comment I think there is a kind geo-economical background for the CEO's compensation like in Japan Japan is not really relevant these days but this is a country I know very well It's still a major economic power Japan for example it's a very limited land very limited land and we need to grow rice in a limited land we need to harvest it there's no big upside there's always downside like a storm or a flood tsunami or whatever but upside is limited and what's required for leader is to save the downside in the States it's very rich country and you can go push the frontier and go west and they get the new land and then ooh I got new new view there's a lot of upside so I think a leader is expected to go out to find a new upside in the case of China maybe when China was poor when China was poor it was maybe although it's very has got a vast huge land but maybe similar to Japan but now China has got a very huge number of the people who have got disposal income now it's becoming like like the States so that I think in China the leadership is to expand the business and get rewarded I think there is some that kind of cultural or geographical background that's great, thank you how about here and here we need a microphone please introduce yourself maybe I'll take two questions hi I'm from India and I heard the panel in the morning there was talk about India and China the wages going up by 15-20% now with the 15-20% average compromise every year how do we look at mid management to upper mid management retention because we've spoken about top management quite a bit and I think because India and China the primary basis manufacturing if you're going to have a 15-20% wage increase whether it's top management mid management lower management will effectively be losing our competitiveness so the question then is retention and compensation retention and compensation do you want to add to that and then we'll hi I'm Tom Doctorow from WPP on the cultural element building on this in my experience in China regardless of whether leaders are with state-owned enterprises or even multinationals as a trend leadership tends to be quite defensive and protective necessarily focused on long-term value creation my question is as salaries increase and I'm not talking about the state-owned 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 a linkage in increased salary and a more forward thinking value creation driven senior leadership amongst local candidates so why don't we take the second question first because it's related and then we'll go to the wage question which I think is a very important question but on this question of really it is if you are searching for talent and you're a multinational here and you're subject to all the multinational rules 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 do you do any at hydric sort of finding heads CEOs for for regions here that are part of multinational and does that affect does it change the kind of talent you're looking for we're actually doing that's most of what we do we do mostly multinational searches in China we do virtually nothing with the state on enterprises so the multinational are putting a premium on talent and I think what the notion of value creation this is where a lot of the significant upside is happening with the multinational this is where they're getting their organic growth this is where earlier my comments where there's a scarcity of talent we're having a hard time completing searches to find the talent that the multinational are looking for in this region and it's a cross consumer financial services industrial they really just don't exist and so that's the challenge I think it's evolving but it's still not there to run the multinational that's the challenge we face at Mercer we're doing a lot of work with CESAC on executive compensation for their top leadership and I think you're right that the emphasis is more or less on real value creation on a risk adjusted basis it's 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's clearly a lot of ways to go and that's what I was referring to earlier on that the private companies really are looking for their own self value creation because they're basically run by the key original shareholder that started it up and that we're seeing then the significant difference between compensation in the SOEs and compensation in the private Chinese companies many multiples to go back to the lady that worked with my friend CESAC 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 that compensation and you clearly cannot make that on a 3% annual salary increase and this is an issue that many multinationals face when working in Asia particularly in China which is the parent company back in Frankfurt or London Pittsburgh says we have a flat market annual salary increases are 0 or 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 have very capable bright people from the universities and after they get trained for 3 years you lose them and you go to train your competition so it is important to them bring in a compensation program for people to rise much more quickly in emerging markets particularly those that are hot why not just solve that problem a little bit by reducing the starting gap how can you attribute say offering a premium for the outstanding MBA students to come in at a gap that is more like 15 rather than 20 the issue there is that India is producing what it is 1.5 million it is 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 need it is an issue I have heard from the IT sector there are even the engineers who come out of engineering schools the amount of training they have to go through before they become deployable in a project could be between 6 to 12 months and similarly in the entire BFSI space so what the product coming out of the university system needs significant amount of training and as Rafel says bridging that gap is huge and also there is not much standardization of the student coming out of an engineering school in the country there are huge differences but didn't I as I recall I teach a course on emerging markets and we occasionally look at cases and one of the cases many cases have been written about emphasis and my understanding is that you get hired there at a premium there 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 probably in any market that it acquires talent in it's always paying above the market for the new talent how do you respond to that issue a firm, an entrepreneurial firm in Japan do you look for talent differently I mean you've described the general situation in Japan but when you're looking for your 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 marketplace how do you do that clearly we need more tigers in my company for example not cats we need more transformation you're a company of tigers we hope to be but it's not easy because you're not representative the problem is like a multinational company like Goldman Sachs they pay a premium in the labor market especially for young people young young people they don't they can't think about his or her life for 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 talent in Japan to those industries not manufacturers not more entrepreneurial value, new value creation industries but to investment bank I'm from investment bank originally I don't want to say bad thing about them but they don't really create new values they're basically they can help but they don't produce the values I think I may be wrong but anyway I'm looking at it with some skepticism there's a huge vacuum of talents which I'm very worried about what about this issue 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 rate so there's room for significant wage growth 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 you're working in that somehow they're going to price themselves out of being in a competitive position I do for me that's the problem we are trying to do a transformation in my current role and the primary drivers would have come from outside we've been able to recruit a very reasonably good senior team but now when we start going to the middle management I'm struggling because I've got some good people but the wage is skyrocketing in 2 years and to this point somebody comes in and pays extra 2-3-4% and then they move so I think it's going to be a problem and if you don't have the wherewithal to make the investments like Infosys does or Goldman does then we get squeezed out okay I think we have time for one more question so yeah I'm going to go back there I'm going to I want to ask a question I think you've left a way to put our earphones on so we understand I want to ask a question we noticed recently the U.S. meeting of the three major level agencies recently said that due to China's bank loan and local government concerns they are going to lower the trust of the Chinese government I want to ask a few guests thank you well no I think the question was about the potential possible downgrading at least some of the local government debt in China but I think in order to link that to this discussion we really should talk about and we haven't so it's important you talked about the importance of state-owned enterprises and the importance of different kinds of companies there are a lot of very significant economic development going on in all around China not necessarily in state-owned enterprises but in enterprises that have a very substantial base locally do you see any local differences eastern regions, western regions large smaller cities in terms of compensation developments or clearly the question asked by the gentleman is outside of this topic but I think you have very nicely brought it into the question of compensation if compensation rises above productivity clearly over time that is not sustainable Europe is in that situation because they just had a ratcheting up of compensation the US is a lot more flexible Asia is coming up from below and there are risks that in certain sectors of the world if that happens then the risk that things will be mismanaged and that the performance will over time not really reflect value creation may result in a loss of the quality and that will be recognized by the rating agencies if they do the 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 towards something that is long-term value creation and in that regard the US has been leading has been leading the field in the report by Oliver Wyman basically they found that practically all of the 37 largest financial institutions on a global basis have moved into putting a significant part of compensation into long-term incentives in China out of the 300 companies in the Hussein index which is the combined index of Xinjiang and Shanghai stock exchanges only about 15% of those have established long-term incentives so clearly until that gets in place there is the risk of what the gentleman is asking 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 of venture capital do you see that as an important driver in China or any place else in Asia absolutely so do you see comparable compensation structures developing in that part of the economy look I think that in China and I think also in India the top venture capitalists are very aggressive in these markets and that's where the real wealth creation happens look we did the CEO search to put Eric Schmidt into Google and I looked him up on Forbes and he was worth 6.5 billion dollars 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 they 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'll give the management team a finite amount of capital you hit your milestones you deliver against those goals and from there they give you funding for the next level and so it's a series of funding events they get you if you do a good enough job you get it to the public markets and if you're successful enough in leading that business to get it to the public markets it's a windfall for all the employees you know the high potentials out at Goldman or the high potentials out at Morgan Stanley or an industrial business are going and flocking to businesses like this where they get equity ownership coming in at entry level, mid-level positions but John can you, is that a model that you can use to attract talent in China? it's a very powerful model it is absolutely being done in China and India? it is also being done in India in movies a client or company the fastest growing company in the world period and it's based in India as a matter of fact the government has actually just announced a policy which will set up the first SME exchange in the country a model on the NASDAQ which will give an opportunity for companies in the much earlier stage to also go to the public markets so let me conclude with 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 John's talked about? well I have tried I made some mistakes and I'm trying again but at the end of the day we have to move on that direction otherwise I don't think that we can create good value for the company and for the world stakeholders but in terms of say the acceptance of the venture capital compensation take risks, get rewarded later relative to how you started when you were talking about the standard socio the cultural norms in China is it hard for people who are willing to be in that kind of compensation mode to take on those kinds of jobs? well people need to get accustomed to those systems and the options or whatever sometimes people think some people feel that is ownership of the company and some people feel this is just a bonus so we need to somehow get through those kind of period for those compensation structures well taken in to those people I think Jack do you have anything you want to say on this topic I guess I was going back to the gentleman's question about the ratings I guess when I came to China on Monday the furthest 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 the last couple days has a moment in time where 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 okay well I want to thank our panel we've run out of time this was I think as we tried to make it very objective very analytical very cross cultural thank you very much for a fascinating discussion