1

Fight or

Flight:

Performance and reward in Malaysia

How can Malaysian companies crack the performance management code
and be a bigger player on the global business stage? >>

Bonus: Boon or bane?

Everyone loves a good bonus but when payouts and salary
increases are not generating expected returns on investment,
what else can companies do to drive performance?

intangible rewards. In fact, Hay Group has found that these

companies also have less of a need to hire expensive talent
because of systematic frameworks and transparent processes that
are in place for grooming, assessing and engaging employees.

Despite varying successes with performance-based reward

practices over the last decade, Malaysian firms are not gaining
ground fast enough in todays highly competitive global markets.
Many remain mired in the twin challenges of escalating
remuneration costs without corresponding improvements in
revenue and shortage of skilled talent.

But clearly, the benefits of effective performance management

extend beyond lower recruitment costs and talent retention
they can ripple across the company through better team
dynamics and greater organizational effectiveness.

In contrast, companies on Fortune magazines Worlds Most

Admired Companies lists are not only paying 5% less for top
talent; they are also achieving stronger ROIs through effective
performance management, efficient use of bonuses, and

There is no doubt that rewarding good performance is the way

forward for todays organizations, but differentiating top talents
from average performers is the first step towards higher returns.
How can Malaysian companies crack the performance
management code and be a bigger force to reckon with in the
global business stage?

2010 Hay Group. All rights reserved

www.haygroup.com/my

Fight or flight

Time for corporate reformasi*

The recent global financial crisis has triggered a number of
economic stimulus packages from the Malaysian government that
help to protect and create jobs for locals. While employers welcome
these incentives, a new syndrome has begun to set in that of
complacency even as the economy recovers.
In the post-recession world,
only one thing is certain:
competition for business will be
fiercer and faster.

Indeed the Malaysian economy has stagnated

in the past decade after it lost its advantage as
a low-cost manufacturing hub to China and
Vietnam. Capital outflows have exceeded
investments in the past three years. Malaysia
can no longer depend on new capital to fuel
growth but have to find new ways of using
existing capital more effectively to increase
productivity.
And yet, in the post-recession world, global
corporations require more value-add from their
workforce in order to stay competitive. Given
a local labor force that is disproportionately
engaged in lower-end or non-executive jobs, it
is time for Malaysian corporations to gear up
for the future and to move up the value chain.
For even in Asias thriving business context,
being efficiency-driven is not enough.
Compared to other markets around Asia, the
relatively low disposable incomes of senior
managers in Malaysia (Figure 1) is another

signal that employees too, must find ways to

add value in order to justify higher take-home
packages. The onus cannot lie solely on
organizations.
When it comes to performance management
strategies, bold strategy reforms are nothing if
not supported by good execution. According
to Hay Groups PayNet (a global compensation
benefits platform) over the last 15 years, bonus
trends and base salary increments for Malaysians across the board from clerical to management executives have been relatively flat,
suggesting the lack of differentiation between
high and low performers (Figure 2).
In the post-recession world, only one thing is
certain: competition for business will be fiercer
and faster. Hence, there is added impetus
for Malaysian companies to re-look their
performance-based reward strategies in order to
drive higher levels of organizational output and
performance.

* In Malaysian language, reformasi means reforms

Figure 1:
2009 ranking of managers
spending power in Asia
(USA=100)

Asia rank

Country

Index

Global rank

Hong Kong

140

11

Thailand

105

26

Singapore

104

27

Korea

97

31

Japan

93

34

China

88

41

Malaysia

64

52

Indonesia

64

53

Vietnam

63

54

10

India

50

56

(Source: Hay Group World Pay Report 2009)

2010 Hay Group. All rights reserved

Median salary increase (%)

Average variable bonus (Month of salary)

10

Median salary increase (%)

9
2.5

8
7

6
5

1.5

4
1

3
2

0.5

1
0

Average variable bonus (month of salary)

Figure 2:
Salary increase and
bonus trends in Malaysia

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(f)
Source: Hay Group PayNet 2010

Paying for performance: Myth or fact?

The idea of reward-linked performance is not
new to companies here. In fact, many
Malaysian organizations offer remuneration
packages that include variable components to
recognise individual merit.

performance. Notwithstanding the fact that

most companies probably have some form of
performance management in place; in reality,
execution is often poor.
The good news: Hay Groups PayNet (a global
online compensation and benefits platform)
confirms that Malaysian companies are on the
right track when it comes to rewarding
performance. Figure 3 captures the upward
trend in average increments for star
performers (with the exception of 2009, which
saw an increase of 8.2% against the projected
9% due to the economic downturn).

However, a majority of these organizations

are not exploiting this tool to the fullest. At
the heart of the matter: Poor performers who
continues to be rewarded with favorable ratings, shifting that illusive performance bell
curve further to the right each year without
a corresponding improvement in company

Figure 3:
Average increment by
performance levels in
Malaysia

Star performers
9.0%

8.0%

Average performers
8.8%

8.4%

7.9%

Poor performers

8.2%

7.0%
6.0%

5.6%

5.1%

5.8%
5.2%

5.0%
4.0%

3.3%

2.8%

3.0%

1.8%

1.6%

2.0%

1.0%
0.0%
2006

2007

2008

2009

Source: Hay Group PayNet 2010

www.haygroup.com/my

Fight or flight

Currently our reward

packages in Malaysia follow a
more socialist model which
is not in tune with our global
practices. Now we are looking
at linking reward to individual
and company performance. Our
biggest challenge is to sell this
new performance-linked model
to our employees who are used
to the previous model.
- Regional head of HR & OD,
Logistics industry, Malaysia

Another measure of any successful performance

pay plan is the differentiation in base salary
increases doled out to low, average and high
performers. As Figure 3 clearly shows that
when it comes to dealing with low performers,
Malaysian companies are on the right track as
salary increases have been steadily falling for
this group.
However, a high performer in Malaysia received
a salary increase that is about 1.5 times higher
than that of an average performer in 2009. Is
this salary increase differentiation high enough
to motivate and retain the high performers?
According to Hay Group WorldatWork
research (2002), the best incentivizing
effect comes from paying the top performers at
least twice the salary increase. In this respect,
Malaysian companies still have a way to go in
well-executed performance-linked pay. So it
is not surprising when high performers, tired
of carrying the average and poor performers
with so little monetary reward, will leave.
With compensation budgets forming anywhere
from 50 to 70% of operating costs in Malaysia,
there is much organizations can do to
restructure and communicate their reward
strategies, and to deliver better ROI on salary
expenses. For organizations that have invested
significant efforts managing costs and
operations during the recession, now is the
time to re-focus on people through both
tangible and intangible elements that
encourage performance.
The kopi-gang culture
There is a possible explanation for the lack of
reward differentiation between high and low
performers. In Malaysia, for example, it is
common for line managers to feel a certain

2010 Hay Group. All rights reserved

obligation to defend or take care of

subordinates. Instead of penalizing poor
performance among staff, managers are more
likely to blame the HR department for
unpopular policies or by saying that they have
been forced to give a poor rating. It is
common too, during annual ranking sessions,
for Head of Departments to inflate their staff
rankings rather than to lose face for being an
ineffective manager.
Indeed, this kopi-gang culture exists in many
Asian work environments one where
supervisors arent prepared to have
confrontational conversations with their staff.
For better or worse, Asian managers are simply
not in the habit of communicating
performance outcomes or discussing
measurement criteria and KPIs with their staff.
Indisputably, it is the organizations that loses in
the long run as their best performers leave. Best
performers who contribute most significantly
to the companies top and bottom lines.
Sadly, when star performers are not properly
managed, it is easy for them to jump ship given
the ease of staff mobility and the abundant
opportunities in higher-paying markets such as
Singapore, Vietnam, Thailand, China and the
Middle East.
The global talent shortage or the upward
spiraling wage trends are not within an
organizations control; but a well-designed and
objective performance management system is.
It can help employers overcome that kopi-gang
culture by providing a concrete framework for
line managers to motivate and reinforce the
right performance behaviors. Strict top-down
enforcement will make performance
management a reality.

Case study: The chemisty of success

The success story of a multi-national chemical company in
Malaysia as told by Head of human resources
We were very fortunate that we had a three-year time frame
to implement a new performance management system.
This allowed us to make changes without confusing, or
even worse demotivating employees.
Get down from the ivory tower
Our first year of implementation involved rigorous
management discussions to identify the objectives for
performance management. One of the first things we did
was benchmarking, which helped to set targets for
differentiating between high and low performers. Hay
Groups team also helped us review our salary increment
matrix so as to align to the new targets.
We did not want our performance strategy to become an
isolated effort from senior management. Throughout
implementation, we maintained a simple communication
strategy with key messages to keep employees apprised of
changes, assuring them that we were not out to penalize
anyone in particular. All managers were expected to be able
to explain the upcoming changes to their teams.
Decode the generation gap
Being sensitive to the expectations of our employees from
Baby Boomers to Generations X and Y helped us to engage them more effectively. For example, for Baby Boomers, empowerment and top management recognition were
paramount, while Generations X and Y viewed accelerated
career development and opportunities for learning new
skills as motivating factors. The lesson for us here: there is
no one-size-fits-all approach when it comes to managing a
cross-generational workforce.

Link reward to performance

By our second year, our employees had begun to
internalize their assessment criteria and it was time to link
performance to reward. We valued transparency: explaining
reasons for rating criteria and coaching employees so they
can see their own potential in earning a bigger bonus.
Knowing that our high performers will only stay with us if
their salary was also externally competitive, we balanced
the equation with market adjustments, once again with Hay
Groups help.
Expedite results
Boosting performance levels in our third year of
implementation, we identified specific training and
development opportunities to expedite the achievement of
individual goals. Appraisal ratings helped Heads of
Department to determine their employees shortcomings
and the level of training they needed.
We reinforced the reward-performance link with internal
and external pay data and business ratios with Hay Groups
assistance.
Introduce healthy tension
Last but not least, we recognized that healthy tension can
be good for organizations. The openness of our
performance criteria meant that there were some disputes.
It was acceptable to management if some employees were
disgruntled at the appraisal system or the new reward
package. By and large, the new performance management
system has helped to energize our people towards higher
goals. We have found that regular communication and a
clear strategy to be paramount.

And while the advantages of having a system

are imminent, the secret, however, lies in the
ability to tailor and implement a strategy that
translates into real benefits for the organization.
Its all in the implementation
Unlike the past, blanket approaches have now
given way to highly tailored performance
management programs that suit specific
organizations and their employees. Besides,
shaping the right behaviors entails
introducing the right mechanisms at the right
time to deliver competitive advantage.

The success of any performance plan lies in its

implementation. The honest truth is,
performance management need not be a
complex process. In fact, the simpler it is, the
easier it becomes to communicate, implement
and gain traction across an organization. And
hence, the greater chance of success. It helps
to have a realistic idea of what can be achieved
within given time frames. To illustrate, heres
how one company approached implementation
from scratch.

www.haygroup.com/my

Fight or flight

Figure 4:
Benchmarking the
insurance industry

2004

Average revenue per employee

(RM '000)

Average total remuneration cost

per employee (RM '000)

1200

56

2005

1400

2006

1600

33%
increase

60

50%
increase

84

(Source: Hay Group PayNet Malaysia)

Benchmarking wisely
Benchmarking outcomes against business
objectives and industry peers can provide
valuable insights for fine-tuning the
performance management process. It helps
determine whether higher salaries or increased
headcounts are justified.

Reward in my company is a
balancing act between paying for
performance and cost
management. Our reward
strategy has to be sustainable and
effective without breaking the
budget, especially as we are in the
very competitive IT&T industry.
- Group HR Manager, IT &
telco company, Malaysia

Take for instance the interesting case of the

Malaysian insurance industry, as reported
by Hay Group. As Figure 4 shows, it was
found the average total remuneration cost per
employee rose 50% between 2004 and 2006,
while average revenue per employee improved
by only 33% over the same period. This means
that the additional employees being added
did not bring in a corresponding increase in
revenue.
Interestingly, the turnover rate for various job
functions in the sector grew at alarming rates
ranging from 30% for HR specialists to 304%
for Actuarial positions. The evidence underscores the talent shortage in the industry and
inevitably, the inflated wages in efforts to retain
staff.
Hence, for an insurance company to have done
well in the period of 2004 to 2006, they would
have to have chalked up better ratios than the
above industry trends. This way, salary increases
and bonuses are more easily justified to
management or global headquarters.

2010 Hay Group. All rights reserved

The flip side is also true: a disproportionate

increase in HR cost against revenue is trouble
waiting to boil over for any organization in the
long run.
Leadership is vital
Regrettably, Malaysian line managers prefer to
leave people management to the HR
department. However, reiterating the
importance of rewarding performance is
something that has to be driven from the top,
starting with the CEO who needs to embrace
the improved standards before seeking buy in
or expecting successful implementation.
Separately, Hay Group has found that certain
leadership styles can contribute to getting more
out of employees. For example, many
Malaysian CEOs demonstrate Directive
leadership a style that demands immediate
compliance. While extremely effective in a
crisis situation to kick-start an urgent turnaround, it can be detrimental when used on
capable and self-motivated employees. The
Directive style certainly has its merits, but a
combination of other leadership styles applied
in the right situations is what CEOs and
managers require in getting the most out of
their employees.
How to pay for performance
Recognizing the challenges organizations face
in linking compensation to performance
contributions, Hay Group offers six
suggestions for better effectiveness in aligning
pay and performance.

Remember the management in

performance management
Organizations spend significant time and
energy figuring out the best rating systems for
employee evaluation. However, in the absence
of a silver bullet, it is important to revisit the
essential components of effective performance
management: clarity of goals, frequency of
dialogue between employee and supervisor, and
differentiated performance and rewards. Effective coaching is the thread that ties these factors
together.
Money talks, so secure funding
Without funding, it is difficult to
differentiate rewards significantly enough to
recognize outstanding performers. In our work
with organizations, we have found a growing
tendency for organizations to provide
additional funding for their top performers.
These provisions need not necessarily be
broadcasted to all employees.
Differentiate rewards, not just
performance ratings
Organizations need to ensure that performance
ratings translate into differentiated rewards.
Many organizations spend an agonizing
amount of effort to ensure that managers
comply with some sort of a distribution
curve for performance ratings. But what value
is this if the highest performer still receives
only marginally more rewards than the average
performer?
Set clear performance-reward link
Job design is a key consideration when setting
pay for performance standards. While

employees must understand what they are

being asked to do to earn their rewards,
organizations must ensure that individual goals
are realistic and connected to what it needs
to do to succeed in the future. We found that
organizations that spend time building a better
line of sight between business results and job
accountabilities tend to achieve higher levels of
organizational clarity and employee
engagement.

Dont pay for the same outcome twice

Organizations should focus their program
design so they dont pay for the same outcome
twice, or even three times over. Merit increases
should be given to stay competitive in the labor
market, which, in turn, should pay people for
performing competently in their job. Incentive
pay should not be confused with profit sharing
based on the organizations overall
performance. Incentive pay should be tied to
the unique combination of individual, team,
and corporate goals or it will likely not
differentiate and reward accordingly.
Communicate and communicate again
Organizations need a game plan for
communications and implementation. In
addition, they should provide managers with
tools and talking points about topics such as
what superior performance looks like, how
performance management and reward systems
link to the business strategy, and how to deal
with tough questions from employees. The line
manager plays an important role in selling the
core message to employees.

www.haygroup.com/my

Fight or flight

Business acumen is a highly

valued competency in my
company, whether you are an
engineer, HR or support staff.
Everyone needs to know how
we make money and working
towards long-term success .
- Group HR Manager, oil & gas
company, Malaysia

Time for action

With the increasingly sophisticated workforce
in Malaysia, there has been a significant shift
from salary-consciousness to quality jobs and
sharper focus on acquiring and grooming the
right talent.
To manage their rising wage bills, employers in
Malaysia and other parts of Asia have become
more cautious and selective in hiring and
retaining talents. In the post-recession
economy, therell be greater emphasis on
cost-control measures and performance-based
incentives and benefits to keep salaries and
bonus payouts in check.

About Hay Group

Hay Group is a global management consulting firm that
works with leaders to transform strategy into reality and to
help people and organizations realize their potential. Visit
www.haygroup.com.

However, a positive change evident in Malaysia

is the dawn of strategic HR management. The
alignment of roles to organization strategy,
structured talent management and leadership
development have begun in many
organizations and we will see significant
improvements in productivity and profitability.
Complementing this is the rise of a new
generation of talented people who value
growth, learning and development besides
monetary incentives.
Our hope is to see Malaysian companies make
the grade and be placed on Fortunes World
Most Admired companies rankings in the near
future. For this to happen, it is not enough to
simply adopt the best business practices, but to
implement these practices consistently on an
on-going basis.

Contact
Alex Lim
Country manager, Reward information services
Hay Group Malaysia
E| alex.lim@haygroup.com

The content in this report is provided solely for informational purposes. This report does not establish any client, advisory, fiduciary or professional relationship between Hay Group and you.
Neither Hay Group nor any other person is, in connection with this report, engaged in rendering accounting, advisory, auditing, consulting, legal, tax or other professional services or advice.
2010 Hay Group. All rights reserved