Are multinational firms undercutting their growth potential in emerging markets because of their incentive systems? While average growth rates across global emerging markets are healthy (14% expected in 2011 from a recent Frontier Strategy Group survey), there does exist a fundamental misalignment between strategy and leadership in these markets. The misalignment is this: the average tenure of an emerging markets leader (typically a regional head of Asia, Latin America or EMEA) is about 3 years – but the average investment in these markets has a payback period much longer-term than that.
Payback periods vary, of course, by industry. But it is not uncommon to hear consumer goods companies, for example, talk about building a brand in a new developing market for several years before they build out their channel. Or for B2B companies to painstakingly build partnerships over the course of several years to set a foundation that will enable them to succeed in certain markets. Yet the vast majority of emerging markets executives (over 80%) are incentivized on short-term financial metrics. A classic case of the folly of rewarding A while hoping for B. Every executive worth his or her salt will do their damnedest to hit the financial targets laid out for them – with the inevitable consequence of compromising the long-term vision that success in emerging markets requires.
The answer clearly lies in tying incentives not just to financial outcomes but also to strategy execution. Companies must walk a fine line here. Clearly, senior executives are used to being told what to get done, not what to do. So the incentives must still be related to achieving outcomes – just not necessarily financial outcomes, which are the most lagging of all success indicators. Recent Frontier Strategy Group research on performance management has uncovered a small but growing trend of companies rewarding executives on strategy execution milestones and other non-financial metrics such as leadership behaviors.
For more detail, please write to me with questions or comments. In a future post – why the corporate budgeting process is the bane of the emerging markets executive’s existence.
Anil, thanks for the interesting observations. Great to learn that some companies are looking beyond the numbers to reward other forms of performance measures. Other factors that may contribute to companies rethinking their incentive strategies include:
1)Given the severe economic recession (especially in developed countries), that has led to high levels of unemployment and underemployment, most companies’ no longer see the need to motive top talent or other executives with high incentives in order to persuade them to go and work in emerging markets. The existence of surplus qualified labor means that many employers are able to get more out of their staff without “bribing” them, including extended tenures oversees with no worries of losing them.
2) Increased globalization has led to more people getting acquainted with others (via education, tourism, work, online,)from other cultures, so it is getting easier for executives to relocate to emerging markets without fear or prejudice of the “unknown”.
3) Improved standards of living in emerging markets. Technology, improvement in infrastructure, a rising middle class that is well educated and traveled, etc have all contributed in minimizing lifestyles differences. So a worldly executive from the West or any other developed part of the world should not be intimidated by the thought of living far away from home for an extended period of time, with little or no incentive.
4) Additionally, emerging markets are the future of global economic growth so any executive who gets a chance to be posted to these countries should view this great opportunity as a springboard for him/her to re-invent/continue their careers in growth markets as the West is already circulated with talent so opportunities are limited.