PRIVATE SECTOR PAY REVIEW 2006

The Hong Kong General Chamber of Commerce review of private sector pay trends for the forthcoming year has become an important guideline for members. It is carefully and thoroughly assessed, 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 2006. We believe that in determining appropriate levels of pay for the coming year, members must take into account the circumstances of their own business and industry sector. In addition we continue to advocate strongly the use of "pay for performance" techniques. The past year has been a good one for Hong Kong, with strong employment growth and low inflation, but deep concerns about the immediate future need to be taken into consideration. Persistently high oil prices and rising interest rates are likely to begin to slow demand in key markets. Moreover, there is a clear slowing trend in capital investment in the Mainland of China that will have important knock-on effects for Hong Kong and the rest of Asia. It is, therefore, a time for caution. Our Advice Increasing pay, or total payroll, is likely to be necessary for many companies in Hong Kong. However, there does not appear to be any justification for a return to the old practice of across-the-board pay hikes. The better solution, though a harder decision for employers, is to combine case-by-case pay rises with one-off bonuses and other flexible means to reward high performers and essential staff members. Making the most of the increases in this way will ensure that any rise in the overall payroll base remains manageable as the economy slows in 2006. Therefore, for 2006, the Chamber will refrain from making a "percentage pay raise" recommendation to its member companies. Rather, we provide the following advice: "Where employees, divisions or companies perform well and exceed their targets, increased financial rewards in the form of higher base pay may be justified. However, wherever possible, increases in total payroll should be implemented through one-off bonuses or other non-permanent compensation enhancements. In making decisions on compensation levels, it is very important to take into consideration business conditions or industry competition specific to your company." We hope these thoughts will assist you in your staff relations and business planning. Hong Kong continues to face competitive pressure from other cities, and the economy is passing the peak of the business cycle. Improving productivity and enhancing employment prospects for all, while rewarding those who exceed expectations, will ensure that employers and employees alike benefit from the advantages our city has to offer. Background In reaching a decision on our suggestion on pay for 2006, we have taken into consideration the following factors: - Economic and business prospects.         Demand in the two key external markets – the US and the Mainland of China – is slowing amid persistently high oil prices, rising interest rates and steps to contain over-heating in their respective markets. The likelihood of a 2006 recession in the US is rising, and should be seen as the key driving force in the world economy in 2006. - Competitiveness.         Competing markets have steadily improved their regulatory environments and tax rates, while Hong Kong, although still competitive, has remained largely static. However, at the same time, office and retail space has and is continuing to suffer from price increases, reducing the SAR's overall competitive offering. The rapidly deepening integration with the rest of the low-cost Pearl River Delta will continue to exert pressure on companies to hold down their cost of doing business. Each company faces different circumstances, and each business sector different pressures. In an uncertain economic environment and amid stiff competition, the Chamber urges all members to study prudently the views in this letter. The decisions you make will not only affect your own business costs and employee morale, but also contribute to setting the tone for those of your fellow members. Hong Kong is having a good year, and we sincerely hope that our key trading and investment partners remain buoyant in the coming 12 months. Good employers will provide proper incentives, training, and career progression possibilities for good employees, while simultaneously working to remain competitive and be good corporate citizens. In the meantime, I hope that you and your business prosper in the coming year. My best regards, David Eldon Chairman