PRIVATE SECTOR PAY REVIEW 2008

The Hong Kong General Chamber of Commerce's annual review of private sector pay trends is an important indicator for members. It is the result of careful and thorough analysis, and I am pleased to present to you – for your reference only - the Chamber's views on pay trends and the outlook for the year 2008. Very strong economic growth over the past four years is putting enormous pressure on companies to raise employees' pay. At the same time, competitive pressures are not easing, placing very important limits on companies' ability to raise prices. The government's decision to raise public sector starting pay by an average of 18% will make hiring more difficult, and the 3.9-5.0% pay increase for civil service staff is broadly considered to be above recent market rates. External pressures will add to the cost of doing business, not only from the rising value of the renminbi but also high oil prices and strong demand for other commodities. As the most globalized city on earth, we have few options. Our strategy, one that has served us well for many years, is to remain as flexible as possible, so as to be prepared to respond swiftly to challenges and to seize new opportunities that may arise. Our Advice Our key concern this year is that pressure to add to the base cost of doing business will further limit our ability to react. While we firmly believe that businesses should reward those who create their success, building in higher fixed costs is not the best approach for sustainable development. And so, our recommendations this year may be summarized in three main points: 1. Companies should avoid blanket or across-the-board pay adjustments. Employees, divisions and industries are too diverse to warrant simplistic solutions. Rather, companies should look to their individual business and industry characteristics as the primary benchmark. 2. As a business management tool, companies should consider total compensation paid to all employees, as opposed to specific percent changes to individual pay. Specific adjustments to individual staff or departments should be based on productivity, competitive pressure and other unique characteristics. 3. Whenever possible, adjustments should be made in the form of discretionary and performance-based bonuses. Those who do not already do so may wish to consider extending one-off bonuses to staff in the lower pay levels. However, Hong Kong's recent experience with deflation should discourage companies from making irreversible changes to the cost of doing business. We trust that these ideas will assist you in planning for the coming year. While each company's individual circumstances will necessitate customized compensation policies, the broad principles outlined above should help to maintain Hong Kong's competitive position, broad employee satisfaction and acceptable corporate profitability. Background In reaching a decision on our suggestion on pay for 2008, the following factors were considered: · Economic outlook. US merchandise imports are growing at their slowest pace in five years, and while China continues to power along, we anticipate rising production costs and moderating demand will put pressure on prices. · Competitiveness. The business environment in competing economies has steadily improved over the past several years, offering companies a wider choice of operating venues. Rising costs in Hong Kong, and the general lack of significant improvement in our own regulatory environment (which, we hasten to add, is quite reasonable) are combining to reduce the SAR's overall competitive position. We recognize that every company faces different pressures and conditions. That is why we believe it is so important for companies to consider very carefully and individually the implications of general wage increases, and the benefits – to employees, employers and our overall competitive position – of discretionary, one-off bonuses as a means of rewarding excellent work. Your decisions will affect your own business costs and your employees' morale while helping to set the tone for other companies. Regards, Lily Chiang Chairman (Letter from CY Leung)