Global Financial Services Executive Pay Survey
Progress made in linking pay, performance and risk may be eroded in 2014
United Kingdom , London - Recent regulatory changes may undermine the concept of pay for performance and perpetuate an un-level playing field within the international financial sector, according to a new report by Mercer. The issue is of particular concern to European banks which are subject to more onerous regulatory requirements compared to competitors in North America and the Emerging Markets.
The insights come from Mercer’s Global Financial Services Executive Remuneration Report which analysed data from 78 financial services organisations, including banks and insurers, across Europe, North America and the Emerging Markets. Pay within financial services, and amongst senior executives more broadly, is the subject of much regulatory activity globally, including developments such as say on pay and bonus caps, with particular impact in Europe.
According to Vicki Elliott, Senior Partner at Mercer, “Our report is aimed at providing insights on how global organisations are responding to this increased scrutiny. The clearest trend in the face of bonus caps is an increase in base salaries. Organisations are also looking at other ways of maintaining pay levels to support staff retention. However, reducing the amount of variable pay, like bonuses, weakens the link between performance and pay. With less variable pay that can be linked to performance, there will also be less pay that can be deferred and aligned with the risk time horizon of the business. This is contrary to the principles developed by the Financial Stability Board after the financial crisis. Rewards in banks and other financial organisations should be tied to multi-year performance to help manage risk.”
One of the most telling findings from this study was that most companies (68%) had not yet set a fixed/variable compensation ratio cap, and many indicated it was not on their agenda, albeit prior to the finalization of CRD IV requirements. Organizations in Europe were thinking about it more than other geographies, but setting such a ratio still represents major change and many challenges for these companies to manage.
Opinions on the impact of regulation
Seventy-six per cent of organisations stated that the proposed requirements were creating an un-level playing field and only 22% said that their organisation would benefit competitively. Sixty-three per cent said that the proposed compensation caps will reduce the organisation’s ability to pay for performance and 53% believed that they would maintain total compensation levels, regardless of the level of bonus cap. Unsurprisingly then, 75% of companies were looking at creative compensation alternatives. Interestingly, 70% said that that there would be a shifting focus from compensation to other elements of the total employee value proposition (e.g. flexible working arrangements, training and career development).
According to Mark Quinn, Mercer Partner and UK Rewards Leader, “Since bringing new talent into the organization is becoming more costly due to higher fixed salaries and larger amounts of deferred compensation, many companies are increasingly focusing on programs to engage and develop existing talent.”
Future changes to Executive Compensation programmes
The European Union has taken a prescriptive approach to Executive Pay. While European organisations will begin preparing for CRD IV changes in 2013, the most impactful changes will be for the 2014 performance year. Respondents indicated that they will respond by raising base salaries for impacted employees as well as raising allowances and non-core compensation. Companies may also increase the vesting period for deferred compensation to five years and/or introduce new long term incentive programs to take advantage of the discount CRD IV allows for this longer vesting on 25% of variable pay. There has also been some recognition that it is important to provide forward-looking long-term incentives for the executive management team beyond a pure annual bonus deferral program. This will help maintain a consistent focus on the long-term success of the company. For example, if there are no bonuses or significantly reduced annual bonuses awarded, then there is nothing to defer over the long-term.
In North America
US regulators in particular are working with the largest banks to ensure pay practices are aligned with the FSB principles, and have resisted “one size fits all” solutions. North American companies expect less be impact from EU regulation than counterparts in Europe even though their EU-based material risk-takers will be covered by the same requirements. As in Europe, the main response in this region is to raise base salaries, allowances and non-core compensation for those employees touched by the CRD IV regulation. Mercer has observed that US banks are also reducing their maximum payout ranges in their corporate incentive programs, thereby reducing the leverage in their plans.
In Emerging Markets
The approach on regulating executive pay in Asia has been predominently principles-based, providing guidelines rather than instructions. Like North America, companies expect to be affected much less by the regulation. It is notable that in 2013 few expect to do much more than raise base salaries. More activity in the Emerging Markets is expected in 2014 where using carried interest incentive programs is of particular interest
Notes for Editors
Mercer’s GFSECSS provides insight into current approaches to annual incentives, changes in and structure of variable compensation in light of global regulatory developments, developments on ‘malus’ adjustments and ‘clawbacks’, the prevalence of performance measures, characteristics of material risk takers and details on the structure of the compensation function.
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