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  Remuneration Survey

  
  

  Global Financial Services

  
  


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  Posted January 11th, 2010 by Mercer
  
  in
  
  

  Changes in short-term incentives as financial organisations respond to regulatory guidance resulting from financial crisis

  
  


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   Increasing use of bonus deferrals, claw-backs and balanced performance measurement

  
  

Financial organisations have changed the mix of pay, moving emphasis
away from short-term incentive schemes in favour of increased salary,
deferred compensation schemes and modified incentive programme design,
according to a global survey by Mercer, the human capital, compensation
and employee benefits consultancy. 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 programmes 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 (STI) 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 behaviours. 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 organisations, in particular,
have introduced a mandatory bonus deferral linked to performance.

Many organisations 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 organisations 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 the
survey, while organisations now do, or plan to, link deferral payouts
to their company performance, the majority of businesses haven’t 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 group, “Regulators are concerned that bonuses in financial
organisations 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 organisations 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. 

Notes for Editors

Over half (58 percent) of the organisations were
based in North America with the remainder (42 percent) based in Europe.
Organisations varied in size with over half (56 percent) employing
10,000 employees or more. Data was collected in October 2009.  A copy
of the report is available on request.

Mercer is hosting a webcast on ‘Executive Pay in the Financial
Sector: Current state and future expectations’ at 3.00 p.m (GMT) on the
12th January. Attendance is free of charge.