Survey on banking remuneration post-financial crisis
New data 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.
The changes have followed 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.
Vicki Elliott, Partner leading Mercer’s rewards consulting in the financial services industry, said: “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”.
The report investigates how, in light of G20 support for the Financial Stability Board (FSB) guidelines, financial services companies are changing their approach to executive remuneration and incentive programmes.
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:
70% have increased base salaries while decreasing annual cash bonuses (94%).
The weight of long-term incentives has also been increased by 56% of respondents.
38% have reduced the proportion that stock options form within the long-term incentive (LTI) mix.
Bonus deferral widely used
Over 65% of companies have a mandatory bonus deferral programme; however, only about 40% have yet linked bonus deferral payouts to subsequent performance.
Performance-based deferrals are more prevalent in European-based firms (53%), compared with North America (10%) 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% indicated that they had increased the amount of mandatory bonus that was deferred.
Annual bonuses linked to performance, fewer guarantees
94% of respondents have made or plan to make changes to their annual short-term incentive (STI) scheme, commonly known as “the bonus”.
One-year bonus guarantees are used less than in 2009, with over half of the organisations (57%) significantly limiting or eliminating these guarantees.
Furthermore, the vast majority of organisations (76%) have limited or eliminated multi-year bonus guarantees.
54% of respondents have introduced caps or maximums for bonus pools and 60% of respondents have introduced them for individual payouts.
Most organisations also have minimum threshold performance requirements for the bonus pool and individual payouts.
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 a 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.
Performance contingent long-term incentive plans prevalent
Nearly all respondents (80%) either have an LTI plan or plan to introduce one (10%).
Share-based plans are the most prevalent (78%) with half of the organisations also offering stock options (52%) or cash based plans (48%).
Generally LTI plans are performance contingent (less prevalent for stock option plans in North America), linked to corporate level measures with most including relative (to peers or index) and internal measures.
Two-thirds of the organisations have changed the Remuneration Committee charter and organise periodic training for their committee members.
Some have sought to strengthen the membership in their Remuneration Committees as well.
A final word
“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.” - Vicki Elliott, Partner leading Mercer’s rewards consulting in the financial services industry.
Want to know?
Title: Mercer’s Executive Incentive Plan Snapshot Survey.
Survey details: The report analysed data from 39 financial services organisations: 66% of respondents were banks, 26% insurance companies and 8% other financial services organisations. Two-thirds were based in Europe and the remainder in North America.
Data was gathered in April 2010.
The report provides data on changes to pay mix, incentive programmes, annual bonus/short term incentive (STI) design, mandatory bonus deferral programme design, long-term incentive (LTI) plan design and corporate governance structure.
Availability: For further information, read Mercer’s Perspectives at www.mercer.com/erperspectiveeu.
Mercer is a “leading global provider of consulting, outsourcing and investment services”. The firm’s 18,000 employees are based in more than 40 countries. For more details visit www.mercer.com.