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Breaking Down Borders Doing business in Australia Ben Walsh, Melbourne Michael Hill, Melbourne Georgina Harley, Sydney

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Today’s speakers

Ben Walsh Partner & Asia Pacific Regional Market Development Leader

Michael Hill Partner, Mergers & Acquisition, Australia and New Zealand

Georgina Harley Principal, Information Product Services, Australia and New Zealand

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Topics of discussion

Setting the scene

Governance: Key employment considerations

Moving critical staff into Australia

Ensuring the success of your expansion

Conclusion and Q&A

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Setting the scene Australia

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Setting the scene - The Australian story

Over the past 5 years inward FDI has increased on average 5.8% p.a.

Democratic and politically stable

Strong economic growth, combined with low inflation, provides a stable economic environment for business….for 6 of the last 8 years Australia’s economy has been found to be the most resilient in the world1

Business friendly regulatory environment with favourable concessions such as GST subsidies

Robust banking sector; among the strongest in the world.

Commodities rich in resources and land

Australia is on the doorstep of one of the fastest growing regions

But, presents challenges regarding labour demand and supply

1. Source: Ibid

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Strong and stable economic growth Annual gross domestic product

Annual GDP Trend

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Based on Australian Bureau of Statistics data

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Introduction of $1k “Baby Bonus” Increased to $4k

Governance: key employment considerations

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Summary of Australian employment issues A few things to key in mind…

LABOUR LAWS

TOTAL REWARDS

Severance payments

Restructuring costs

Reward harmonization

At-risk compensation

Compliance with statutory requirements

Superannuation plan and projected costs/ liabilities

Limited employer-sponsored healthcare plans

Scope of benefits and employee choice

Benefits harmonization/ integration on providers/ administration, if any

HEALTH & BENEFITS

Transmission of business

Union negotiations, if any

Executive remuneration and retention

Work lifestyle

RETIREMENT (PENSIONS)

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Navigating the Australian labor law landscape

Employment contracts:

Common contracts for most managerial/ professional staff.

Non-managerial employees are covered by employment conditions in the form of a Collective Enterprise/ Bargaining Agreement.

The Fair Work (FW) Act 2009 regulates industrial and employment law in respect to all companies across Australia.

10 National employment standards :These standards provide a minimum set of entitlements for employees, including:

Maximum weekly hours

Entitlement to request flexible working arrangements

Parental leave and related entitlements

Annual leave (four weeks or 20 business days per year)

Personal/carer’s leave and compassionate leave

Community service leave

Long service leave

Public holidays

Notice of termination and redundancy pay

Provision of a Fair Work Information Statement

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Navigating the Australian labor law landscape

Collective agreements: unions or employee groups may wish to enter into a collective agreement with their employer. Good Faith Bargaining applies to all employers

Unfair dismissals: broad protection for employees in organisations with greater than 15 employees

Transfer of business: Changes to employment arrangements

Adverse action: Increased monitoring of employers

Sham contracting: multi-factor test for contractor relationships and monitoring of contractor arrangements

Redundancy and severance: An employee’s entitlement to severance benefits is based on their length of service. Typical severance benefits are based on ordinary time-rate and years of service. Notice periods also apply.

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Key issues

Unionisation: Representation is common for “blue collar” roles (generally paid wages as opposed to salaries), and more common for some industries (eg. manufacturing, health, retail, education etc.)

Diversity: Equal employment opportunity, equal pay for equal work and female representation in executive and board roles are current hot topics. Listed companies with >100 employees are now required to include in their annual reports how they are tracking against their policies on attracting and retaining women.

Executive pay and benefits: Under the Corporations Act, shareholders can now make a non-binding vote on Executive Pay proposals.

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Approach to ‘Total Rewards’

Common for Top executives

Common use of a ‘Total Rewards’ approach: recognises the ‘employee value proposition’ and includes employment cost (fixed and variable pay plus benefits), careers & development and work lifestyle

Pay levels: can be determined through job sizing or market pricing approaches, or based on classification structures based on job size that are linked to market practice (eg. specific industry pay practices)

Performance reward orientation: private sector and listed companies place a greater emphasis on variable reward and performance-based pay:

– Executive and senior management roles tend to be measured on organizational and individual performance

– Professional roles tend to be measured on individual and/or team performance

Use of short-term incentives: common for executives, senior management, and professional roles and are based on individual and organizational performance

Use of long-term incentives: common for executives, particularly for listed companies and can include complex arrangements linked to key organizational measures

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Approach to retirement

Statutory/Government provisions: All employers must provide retirement benefits to employees - 9% mandatory contribution to Superannuation Guarantee (SG – which will gradually increase to 12% by 1 July 2019. Means tested age pension at basic level.

Prevalence of defined benefit plans: Defined benefit funds or defined benefit guarantees are still present. Majority of DB plans are closed to new employees.

Prevalence of defined contributions plans: Likely to be universal covering at least some employees in every company.

Pre-funding requirements: None.

Employee contributions to defined benefit: Typically 5% of salary, with additional voluntary contributions possible.

Employee contributions to defined contribution: Generally not required; voluntary contributions are possible.

Non-discrimination tests: Unlikely to be an issue in DC plans. DB plans most likely have addressed this in the past.

Prevalence of executive plans: If DB plan, common to have higher benefit level. Uncommon in DC due to concessional tax limits on contributions.

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Approach to health & benefits

Statutory/government sponsored programs: Universal Government sponsored Medicare program; statutory Worker’s Compensation (mandatory employer benefits)

Most common benefits provided by employer:

- Death & Total Permanent Disability Insurance

- Salary Continuance Insurance (disability income benefit) – prevalence for both high, often through superannuation fund

- Private Health Insurance

-Higher prevalence in high-tech and mining/resources sectors. Low prevalence in market overall.

-Fringe benefits tax main deterrent in provision of employer subsidised medical cover

-Community rated (not risk rated). Cannot be placed in a multinational pool.

Employee choice / Flex : Not common due to Fringe benefits tax

Retiree medical benefits: Provided by government program – Medicare.

Wellness programs: over 50% of employers offer some form of wellness program/initiatives.

Moving critical staff to Australia

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1. United States2. China (mainland)3. United Kingdom4. Germany5. Singapore6. Japan7. Hong Kong8. France9. Switzerland10. India11. Thailand12. Australia13. Netherlands

14. Brazil15. Mexico16. Belgium17. United Arab Emirates18. Canada19. South Korea20. Taiwan21. Malaysia22. Russia23. Italy24. Spain25. Indonesia

Source: 2010 Mercer/ORC Worldwide International Compensation Services

Moving critical staff to Australia Australia in the top 25 destination countries for expatriates

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Moving critical staff to Australia The cost and quality of living in Sydney is similar to Singapore…

Source: Mercer Cost of Living Calculator, Mar 2010

Source: Mercer Quality of Living Calculator, Mar 2010

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Quality of Living - Base City Singapore

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Financial Controller Benchmark Job

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Moving critical staff to Australia …as are actual pay levels

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Effective Income Tax Rates

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Controller Benchmark Job, Family Size of 4

Moving critical staff to Australia However, Australia has one of the highest effective income tax rates…

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Moving critical staff to Australia …and a relatively small, but highly skilled labour force

Workforce demographic profile– Highly skilled– Highly educated– Diverse & multilingual– Multi-generational

Labour force– Relatively small labour force (11.5M) – low participation rate (65.8%) – low unemployment of (4.9%)

Skills shortage (job vacancy rate is increasing) – The domestic labour market will remain tight as long as the investment

boom gathers momentum, particularly within the resources sector– Attraction and retention of key talent is a major focus and requires deep

understanding of workforce

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Moving critical staff to Australia What’s the trend with expatriate remuneration packages?

Model 2: ‘Localized’ packagesAustralian market rate (including superannuation, bonus, other benefits)

Possible “plus” components + housing assistance at lesser benefit + relocation allowance

Model 1: ‘Traditional expat package / balance sheet’Base salary & bonus of the home country

+ cost of living allowance + mobility premium (depending on policy) + housing benefit + tax equalization + dependents’ education + annual home leave + relocation allowances

Items that are not typically made available as part of the remuneration package however are worth considering in order to be competitive include: house hold storage support for dual-income families

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Moving critical staff to Australia Items to consider when developing a staff mobility plan

What is the nature of the transfer?– Limited term secondment– Indefinite/permanent relocation

Visa requirements (457)– Employer responsibilities– Market rate clause

High income tax rates– Highest top marginal tax bracket (similar to China)– Gross salaries alone shouldn’t be compared when offering a localized package– Traditional packages require tax equalisation; localized packages may require

delivering equivalent net compensation

Pension arrangements– Mandatory contribution

Health insurance– Employer must provide private health insurance for all sponsored temporary workers

Ensuring the success of your expansion

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What’s driving this activity Common deal drivers in Australia

Notes: Deal Volume chart includes deals with unannounced deal values, which may not be reflected in the Deal Value chart; Data only for deals with at least 30% stake; Deals denote either target/seller OR bidder (as opposed to target/seller AND bidder) within each specified geography; by announcement date; 2010 YTD refers to 1 Jan 2010 – 30 Jun 2010.

Source: MergerMarket; Mercer Analysis

Deal Value & Volume 2006-10YTD

Mil.USD # of Deals

Deal Drivers in Australia

Resurgence in M&A activity, following Australia’s quick recovery from the global financial crisis.

2010 deal volume in Australia for 2011 are anticipated to exceed 08, 09 expectations.

Major transactions as a result of industry consolidation in the financial, resources and consumer staples sectors.

Continued interest from Asian-based investors in Australia’s resources sector.

Some of the key sectors that have been active include Resources and Financial Services.

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Indicative characteristics of Australian national culture

Individualism - Collectivism

Power Distance – dealing with authority

Time orientation

Femininity- Masculinity

Uncertainty Avoidance

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IndividualCollective

Short-term

Collaborative & Consensus

Uncertainty is a given

Large

Long-term

Competition & Strength

Uncertainty is avoided

Source: Hofstede, R. M. (2001). Culture's Consequences: Comparing Values, Behaviours, Institutions and Organizations Across Nations, Thousand Oaks, California: Sage Publications.

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Acquiring in Australia: Deal-specific HR actions

Build the HR Transition Plan– Collect and review input documents such as sales and purchase agreement, due diligence

report, transition services agreements, any integration planning already undertaken, business structure of the Australian operation

– Identify specific HR issues that need to be considered unique to Australia

Conduct rapid due diligence on HR matters to supplement the commercial due diligence. This will be key to building a comprehensive HR transition plan.

Employee Transfer (if required)– Design transition process– Clarify legal obligations contained in employment contracts and industrial awards– Draft offer / transfer letters (if required)– Manage the transition process

Industrial relations

Rewards and Benefits– Policy and remuneration philosophy harmonisation– Executive benefits– LTI, STI and stock

Retention of key staff– Identify key staff segments: executives, business-critical roles, high-potentials – Develop retention strategies as appropriate

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Acquiring in Australia: Deal-specific HR actions

Performance management harmonisation – including systems– Business performance goals cascaded to individuals

Cultural integration– Induction– Working for a US/ European/ Asian company– Expectations– Leadership team defining culture recognising company values

HR policies harmonisation

Payroll and related processes– Including data migration

HR staffing– During the integration– Ongoing operations

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Conclusion

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In summary

Australia has a strong and resilient economy, and has been an active market for M&A, with a number of recent deals in the resource, technology and services sectors

Balancing supply and demand is a critical business issue

Keeping pace with minimum statutory requirements from a people perspective will not differentiate you in a competitive labor demand market place

Organizations continue to review and invest in their:– Total Rewards philosophy– Compelling employee value proposition

Attention to communication, engagement and culture is critical for success.

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Questions & answers

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For more information on regional strategies, risks and opportunities

Visit our Breaking Down Borders website to access articles, points of view, podcasts and more information on investing in Australia.

Access recordings of past webcasts on: – Doing business in India– Doing business in Japan– Doing business in China– Doing business in Korea– Doing business in Indonesia

www.mercer.com/breakingdownborders

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Speaker contacts details

Ben Walsh Partner & Asia Pacific Regional Market Development Leader

ben.walsh@mercer.com

Michael Hill Partner, Mergers & Acquisition, Australia and New Zealand

michael.f.hill@mercer.com

Georgina Harley Principal, Information Product Services, Australia and New Zealand

georgina.harley@mercer.com

www.mercer.com