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Banks overhauling remuneration to align with regulator expectations

FINANCIAL SERVICES

Banks overhauling remuneration to align with regulator expectations

Banks have made many changes to their compensation structures to be more aligned with regulator expectations and better protect themselves against unexpected developments in business outcomes, according to new data released by Mercer. This has included a shift away from significant cash bonuses to a substantial portion of bonuses deferred typically over at least three years and paid partially in shares or related vehicles.

“Financial services organisations continue to face economic and regulatory uncertainty. Regulators are watching their compensation policies and decisions with great interest,” said Vicki Elliott, Global Financial Services Talent Leader at Mercer.

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Salary increases


  • Median increases for executives in the global financial services sector are expected to be between 2.2% and 2.5% in 2013.
  • Those in control roles – risk management, legal, internal audit, compliance, finance and HR – are, as in previous years, set to receive slightly higher increases (2.5%) in 2013. Mercer says: “This is a direct response to regulatory pressure as banks use pay as a means of improving risk management by attracting and engaging talented, experienced staff.”
  • Pay freezes remain common for CEOs and their direct reports in banking, with 49% and 38% respectively, expected to have pay freezes in 2013.
  • Fewer than 20% of organisations anticipate freezing salaries for other executives.
  • As a broader trend, salary freezes are more common in Europe and rare in emerging markets.
  • Pay freezes are expected to decline more for North American CEOs; in 2012 65% did not receive an increase, whereas only 38% plan to freeze salaries for 2013.
  • Within the financial services industry, there are marked differences. With median salary increases of 3%, the insurance industry outpaces the banking sector.

“Banks are acutely aware that large pay rises for their senior staff during a time of austerity would attract attention, and this underpins the evident restraint on CEO pay,” said Dirk Vink, Senior Consultant and Snapshot Survey Project Manager at Mercer.

Bonuses

  • The majority of organisations predict 2012 annual incentive levels will be similar to 2011 results.
  • While 30% of organisations expect 2013 bonus pools to be smaller than in 2012, it is European organisations that have the most pessimistic forecast.
  • Banks are also more likely to have lower predictions than insurance companies, reflecting the latter’s stronger business confidence.
  • Most companies stated that those employees in risk-taking roles are most likely to receive smaller bonuses in 2013.

Vink said: “The design of the bonus programme is a key area of focus for US and European regulators and the emphasis is on the use of the incentive scheme design to improve risk management and reduce short-termism.”

He added: “It is a reflection of the progress that has been made in this area over the last two years that most organisations are not planning to make changes to their incentive design in 2013”. Two-thirds of the organisations surveyed are planning to keep their 2013 target annual incentive levels similar to last year. A quarter are planning to increase target annual incentive levels.

Changes to pay mix and compensation level setting


  • Most organisations are not planning to make changes to their pay mix as changes have been made over the past three years.
  • Except for the CEO position, the most anticipated increase in a pay element is increasing the weight of base salary; for the CEO 14% of organisations are planning to increase the weight of forward looking long-term incentives.
  • A large minority (35%) – typically banks and European organisations – are reducing the weight of annual incentives for 2013 while increasing multi-year compensation (mandatory deferrals and forward looking long-term incentives).
  • In emerging markets, more weight will be placed on base salary.
  • About half of the financial services organisations indicated that total direct compensation (base salary + annual incentives + multi-year compensation) has increased compared to three years ago.
  • Decreased opportunities were most often observed in European organisations, especially annual incentives.
  • In comparison with insurance companies, banks more commonly decreased total direct compensation while increasing multi-year compensation.
  • Most organisations are not planning to change the mix of vehicles used in multi-year compensation.
  • The most anticipated decrease in a multi-year compensation vehicle is reducing the use of stock options, mostly in North American organisations.
  • Currently, more changes are planned in North America than in Europe, primarily a shift away from stock options towards greater use of performance-contingent restricted stock.
  • European organisations have already moved to performance-contingent restricted stock in recent years.

Further developments on malus and clawback conditions


  • The vast majority of organisations (74%) also have a malus policy in place where no deferred incentive or long-term incentive is paid out when performance conditions are not met.
  • Some of the European and North American organisations have applied malus: 20% of organisations indicate that actual unvested awards have been reduced in 2012 and 2011 and 28% of organisations have done so prior to 2010.
  • Deferral reductions due to malus conditions are more prevalent in banks than in insurance organisations.
  • Over half (53%) of the organisations have a clawback policy in place that recoups vested amounts when individual performance conditions (e.g. non-compliance, breach of code of conduct) or firm-wide or business unit conditions (e.g., loss in financial performance, financial restatement) are not met.
  • Such clawback policies are present in both the banking and insurance industries in Europe and North America.
  • Some organisations, mostly in banking, are considering introducing a clawback provision to cover a larger group throughout the organisation. More North American participants plan to revise the criteria triggering clawback.

A final word

“Overall governance of compensation, particularly for senior executives and material risk-takers has also improved, both internally as well as at board level. However, total compensation levels are up over three years ago, yet not as high as pre-financial crisis. Perhaps the time has come to let the dust settle to see how effective the regulated structures are in helping to discourage excessive risk taking in financial services.” - Vicki Elliott, Global Financial Services Talent Leader, Mercer.

Glossary

  • Clawback is the repayment of a bonus that has already been vested or given to an employee.
  • Bonus malus is a share award that is unvested and deferred for a certain period of time to ensure that performance conditions are met. If conditions are met, the employee receives their bonus; if not, the bonus is not paid by the company. 



Want to know more?

Title: Financial Services Executive Compensation Snapshot Survey, Mercer, February 2013.

Survey details: The report analyses pay data for senior executives provided by 63 banks and insurance companies operating in 21 countries with 48% in Europe, 38% in North America, and 14% in Emerging Markets (which combines Asia and South America).

It covers forecast 2013 salary movements, annual incentive movements, changes to pay mix and compensation level setting, developments on malus and clawback conditions and approaches in defining material risk-taking positions.

Availability: Contact Mercer in London on tel: +44 20 7626 6000.

Mercer is a “global consulting leader in talent, health, retirement and investments”. Mercer’s 19,000 employees are based in more than 40 countries. For more information, visit www.mercer.com.