Human Resources: Global Financial Services Remuneration Survey

New York, 11 January 2010
Financial organizations have changed the mix of pay, moving emphasis away from short-term incentive schemes in favor of increased salary, deferred compensation schemes and modified incentive program design, according to a global survey by Mercer. The sector is also changing the nature of its short-term incentive (STI) schemes, with more focus on balanced, risk-adjusted performance measurement and deferral of bonus payouts over a multi-year timeframe.

Mercer’s Global Financial Services Executive Incentive Plan Survey indicates that, in light of many firms having to seek financial aid from governments and recent regulatory developments, there has been a notable impact on remuneration practices. The data came from 61 global financial firms in the banking and insurance sector. One-third of the respondents had received government aid in some form, the majority of which (82 percent of that number) had limits imposed on their executive remuneration programs over the duration of that support.

Some of the blame for the financial crisis was leveled at executive remuneration practices in the financial sector and, in particular, the focus on paying for short-term performance at the expense of long-term sustainability. In response, over 80 percent of all firms surveyed have made, or plan to make, changes to their annual bonus or short-term incentive plan design.

According to Vicki Elliott, worldwide partner and leader of Mercer’s financial services human capital consulting network, “National regulators are attempting to make the sector consider risk more thoughtfully in their performance measurement and reward schemes so as not to encourage excessive risk-taking behaviors. Our data shows that the majority of participants are changing the nature of their pay structures and their short-term incentive schemes, including the way performance is measured and evaluated. The industry is moving in the right direction.”

In general, the majority of companies are decreasing the proportion of the annual cash bonus in the compensation mix, while increasing base salaries and mandatory deferrals. Long-term incentives are treated differently across the sector, with some companies increasing and others decreasing them with greater attention being paid to including performance conditions beyond share price appreciation.

However, of more interest is that many firms are modifying their existing STI arrangements. Many European organizations, in particular, have introduced a mandatory bonus deferral linked to performance.

Many organizations have also increased the amount of bonus being deferred, creating a greater opportunity to ‘claw-back’ the bonus if performance is poor. A bonus-malus arrangement – where the annual bonus is held in escrow and can be reduced retrospectively in case of future losses – is the more popular approach.

“Deferring bonuses helps companies to control for short-termism,” commented Ms. Elliott. “It means that a portion of bonus is payable to employees in installments, based on subsequent company and/or business unit performance. This claw-back approach sends the message that the bonus isn’t finally determined until company or business performance is sustained.”

Sixty-eight percent of organizations have introduced performance scorecards to measure business success on both financial and non-financial performance criteria in an attempt to respond to regulator concern that reward considers broader performance factors than pure financials. Non-financial criteria might include client satisfaction, risk management and compliance. These often include ensuring that profits are sustainable over time. According to Mercer’s survey, while organizations now do, or plan to, link deferral payouts to their company performance, the majority of businesses have not yet differentiated the bonus deferral based on the nature and time horizon of each role or line of business.

According to Lex Verweij, co-leader of Mercer’s European reward consulting business, “Regulators are concerned that bonuses in financial organizations were previously implemented with a silo mentality with not enough regard for the sustainability of the company as a whole. It is good to see companies address this issue, but more needs to be done to ensure that line of business and individual performance measures encourage a longer-term view.”

Another industry practice, of bonus guarantees – where companies guarantee new hires’ bonuses over a number of years with little or no performance requirement – is decreasing. Forty-one percent of respondents have restricted or eliminated one-year guarantees entirely, while 64 percent of organizations have limited or eliminated multi-year bonus guarantees. Forty-two percent of respondents have also eliminated “golden parachutes” whereby executives are guaranteed bonus payouts upon departure from the company often irrespective of performance – a practice that generated much debate over “pay for failure”.

“While this survey is a ‘snapshot’ of initial developments in remuneration practices in response to the financial crisis and regulatory guidelines, it is encouraging that the direction of these changes is positive,” concluded Mr. Verweij.