Mercer—a global consulting leader in talent, health, retirement, and investments—recently released the 11th edition of their Global Financial Services Executive Compensation Snapshot Survey. The survey reviewed the pay practices of 71 global financial services companies — including banks, insurers, and other financial services companies — based in 20 countries across Europe, North America, Asia, and South America. The survey was conducted in October and November of 2015 and most notably found changes to how companies are structuring pay.
Financial services around the world have been forced to respond to new regulatory developments put in place after the financial crisis. Companies have been forced to find new ways to properly discourage, uncover, and punish risky business behavior that could harm the global economy. This effort has lead many companies to increase fixed pay (i.e. guaranteed pay) while decreasing variable pay (i.e. bonuses).
The logic is fairly straightforward: increase emphasis on non-financial performance for individuals, and hopefully this should decrease the incentive for businesses to end up in risky financial situations. The majority of those surveyed seemed to think this plan makes sense. In fact, in the last year 61% of those surveyed organizations were found to have increased their employees’ fixed pay by more than 5%, while 58% reduced variable pay by more than 5%.
As Vicki Elliott, the Senior Partner and Leader of the Global Financial Services Talent Network at Mercer, explains, “The focus for financial services firms is firmly trying to set the right tone from the top with strong governance and high involvement of risk management. Overall, total compensation levels remain broadly the same compared to levels prior to regulated bonus caps. However, banks, particularly in Europe, have significantly increased fixed pay levels, improving the certainty of pay delivered to key risk-takers.”
This is a fairly stark shift in pay mix to undergo in just one year, but the report also predicts that total compensation levels will remain relatively unchanged throughout 2016, likely within plus or minus 5% (92%.) Furthermore, most reported that they are not planning any further changes to their pay mix in the coming year.
Overall, 2016 projected base salary increases for the sector were considered modest. Average forecasts globally are expected to be between 2.0% and 2.7%. Latin America, South America, and Asia have a slightly higher average salary increases (4.3%) while North America and Europe are forecasting lower average salary increases (2.4% and 2.3%, respectively.)
The banking industry is projecting slightly lower salary increases than the insurance industry, with the majority of organizations predicting 2016 annual incentive levels to be similar to those in 2015. Those who reported expecting any change at all actually predicted that levels would decrease.
While formal processes to penalize misconduct and non-compliance have become more widespread, rewarding positive risk behaviors continues to be a huge challenge for the industry.
“There continues to be a concern that increasing the focus on fixed guaranteed pay breaks the link between pay and performance, and may actually be counter-productive for aligning pay with risk,” explained Dirk Vink, Mercer Principal and Financial Services Project Manager. “We have concluded that the most positive impact on sound risk-taking behaviors and decision-making has come from significantly improved governance and increased involvement of risk management in the performance management and compensation process.”
What’s most important now for these companies is to establish was is called a strong “risk culture.” When asked how these organizations plan to build their risk culture, there were several common responses. The most popular response was to penalize misconduct and non-compliant behaviors (93%.) Second, companies cited the importance of the role of risk management in setting performance expectations and evaluations (89%). Third, organizations put an emphasis on setting the right tone at the top of the organization, through efforts like top management leadership, communications, and real consequences (88%). And finally, training and coaching managers on sound risk culture was also seen as a big priority (87%).
One interesting challenge these companies seem to be facing is the lack of staff they are able to attract and retain in order to carry out the crucial functions necessary for these policies and procedures to be effective, namely risk, legal, and compliance. One of the key initiatives these companies may need to focus on next is recruitment and talent management in these departments.
Shane Stirling is a seasoned HR & HSEQ Manager in Cairns, Queensland. To learn more about his life and career, please visit his professional website.