PRIVATE SECTOR PAY REVIEW 2005

CIRCULAR TO ALL MEMBERS No. 105/04 17 September 2004 Dear Member, PRIVATE SECTOR PAY REVIEW 2005 As Chairman of the Hong Kong General Chamber of Commerce, I would like to offer the Chamber's views on the annual pay review process for calendar year 2005. As you know, each year, we assess and report to you the Chamber's views - for reference only - on pay trends and the outlook for the coming year. In 2004, as we say in every year, members should assess the circumstances of their own business or industry sector in determining their own pay policies. And individual performances should dictate the pay policy regarding personnel. This year has been a particularly strong one for Hong Kong, but only in comparison to the poor performances of the recent past. In nominal terms, our economy is still more than six percent below where it was in 1997. In addition, some sectors clearly are not doing as well as others. Recovery is uneven. Our Advice After several years of holding pay steady in the face of weak demand and falling prices, there are growing calls, which we should resist, to return to the old practice of across-the-board pay hikes. Instead, here is the Chamber suggestion for 2005: "Modest pay increases for well-performing staff can be considered for 2005, while taking into account specific business conditions or industry competition which impact your company. For all companies, we urge further moves toward pay-for-performance and special one-off bonuses in recognition of superior contribution to the company's objectives and bottom line." We hope these thoughts will assist you in your staff relations and business planning. Joint recognition between employers and employees that Hong Kong faces stiff competition and can best succeed by improved productivity and enhancing employment prospects for all. Market forces should apply. Although deflation is now behind us, employers need to continue to control all operating costs, not merely wages. Background In reaching a decision on our suggestion on pay for 2005, we have taken into consideration the following factors: - Economic and business prospects. The global and local economic situation is greatly improved this year, primarily in comparison to 2003. But economic growth in the US and China is expected to slow in the coming year, which will have a significant impact on our own prospects. This points to the need for caution in assessing the wage situation. - Cumulative increases out-pacing prices. Real compensation has increased steadily for several years, as the cost of living declined. Many companies are reporting increased volumes and increased costs, yet stable or only mildly rising profits. - Continued high unemployment. The labor force continues to increase faster than overall population growth, and while employment reached record highs in the Summer months there remains a large pool of under- and unemployed in the SAR. - Competitiveness. The recent - and perhaps temporary - return to stable prices will not off-set the continued cost differential between Hong Kong and nearby areas. The rapidly deepening integration with the rest of the Pearl River Delta will continue to exert pressure on companies to hold down their cost of doing business. Under such conditions, the Chamber urges all members to study prudently the views in this letter, in light of their own corporate and industry conditions. This is not only important for your own business costs, but also for the cost structures 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, Anthony Nightingale Chairman