Financial services firms have made fundamental changes to the way they remunerate their employees following the events of the GFC.
New research from Mercer shows that the majority of financial services companies have decreased the annual cash bonus element as part of their employee pay mix, and increased base salaries and the use of deferred compensation.
Vicki Elliott, partner leading Mercer’s rewards consulting in the financial services industry, said the changes are reaction to regulatory guidance aimed at addressing concerns that a short term bonus culture within the sector encouraged excessive risk taking and contributed to the financial crisis.
“Our survey shows that there has been significant progress in responding to the regulatory guidance. However, there is still more work to do to fully comply with the regulators’ intentions, particularly ensuring that performance measurement is aligned with the nature and time horizon of risks,” she said.
New legislation expected from the European Union is setting out even more stringent guidelines. The legislation, set to be passed by the European parliament in this month and binding from January 2011, would cap the cash element of bonuses for those in the financial services sector at 30 per cent. The remaining bonus payments would be delayed and linked to long-term performance, with 50 per cent paid in shares.
Elliot added: “In general financial services companies are pursuing executive remuneration strategies and plan design changes in line with the various regulatory guidelines, but are trying to balance practicality with added complexity in the process.”
The Executive Incentive Plan Snapshot Survey analysed data from 39 financial services organisations.
More findings from Mercer’s research:
Emphasis on base salary and long-term compensation in pay mix
· Almost all participants noted they have changed the weighting of components in their remuneration packages.
· Seventy percent have increased base salaries while decreasing annual cash bonuses (94 per cent).
· The weight of long term incentives has also been increased by 56 per cent of respondents.
· Thirty eight percent of companies have reduced the proportion that stock options form within the long term incentive (LTI) mix.
Bonus deferral widely used
· Over 65 per cent of companies have a mandatory bonus deferral programme; however, only about 40 per cent have yet linked bonus deferral payouts to subsequent performance.
· Performance-based deferrals are more prevalent in European-based firms (53 per cent) compared to North America (10 per cent) and are generally linked to overall company performance.
· Half of the organisations with mandatory bonus deferrals have structured the deferral to have both upside and downside payout opportunities.
· Another 35 per cent indicated that they had increased the amount of mandatory bonus that was deferred.
Annual bonuses linked to performance, fewer guarantees
· Two-thirds of the organisations typically have linked a proportion of their awards to company performance.
· Most companies are using performance scorecards with both financial and non-financial performance criteria.
· Only about one-third of companies have introduced multi-year performance metrics for determining annual bonuses.
· The majority of organisations do not include top executives in the same bonus pool as the division they manage.