Financial Services' Pay Holds Steady, with Wider Use of Clawbacks

Financial services firms have changed their pay structures to be more aligned with regulator expectations, and to better protect themselves against unexpected developments over multiyear periods

By Stephen Miller, CEBS Apr 4, 2013

In 2013 financial services executives worldwide expect base-salary increases of 2.2 percent to 2.5 percent, little changed from 2012, according to a report by HR consultancy Mercer. Regionally, excluding those who are expected to have pay freezes, executives in the emerging markets are expected to receive the highest salary increases in 2013 of between 4 percent and 5 percent, followed by North America at 3 percent.

There are marked differences among the sectors of the financial industry, as well. For instance, the median salary increase of 3 percent in the insurance industry outpaces the banking sector.

The data come from Mercer’s Financial Services Executive Compensation Snapshot Survey. The report analyzes compensation data for senior executives provided by banks and insurance companies operating in 21 countries across Asia, Europe and North America.

Senior executives in control roles—HR, risk management, legal, internal audit, compliance and finance—are, as in previous years, set to receive increases at the high end of the range, or about 2.5 percent, in 2013. This is a direct response to regulatory pressure, as financial firms use pay as a means of improving risk management by attracting and engaging talented, experienced staff, according to the report.

Bonus Payouts

The size of the annual bonus is frequently based on a combination of individual, team and company performance. Two-thirds of the organizations surveyed plan to keep their 2013 target annual incentive levels similar to last year’s. One-quarter are planning to increase target annual incentive levels.

“The design of the bonus program is a key area of focus for regulators, and the emphasis is on the use of the incentive design to improve risk management and reduce short-termism,” the report states. “It is a reflection of the progress that has been made in this area over the last two years that most organizations are not planning to make changes to their incentive design in 2013.”

About half of the financial services organizations indicated that total direct compensation (base salary plus annual incentives plus multiyear compensation) has increased compared with three years ago. Going forward, most companies are not planning to change the mix of vehicles used in multiyear compensation. Among those that are altering their compensation mix, the most common changes are reducing the use of stock options in multiyear compensation packages and increasing the use of performance-contingent restricted stock, especially at North American organizations.

Clawback Conditions

Most surveyed financial organizations (74 percent) have a policy of not paying out deferred or long-term incentives when performance conditions are not met. More than half (53 percent) of the organizations have a clawback policy that recoups vested amounts already paid when individual performance (e.g., noncompliance, breach of code of conduct) or firmwide or business unit conditions (e.g., loss in financial performance, financial restatement) later come to light. Such clawback policies are present in both the banking and insurance industries in North America and Europe.

Some companies, mostly in banking, are considering a clawback provision to cover a larger group throughout the organization. More organizations in North America than elsewhere plan to revise the criteria triggering clawbacks.

Letting the Dust Settle

Over the past several years, “It is clear that banks, in particular, have made changes to their compensation structures to be more aligned with regulator expectations and better protect themselves against unexpected developments in business outcomes over a multiyear time frame,” said Vicki Elliott, global financial services talent leader at Mercer. “This has included a shift away from significant [annual] cash bonuses to a substantial portion of bonuses deferred typically over at least three years and paid partially in shares or related vehicles.”

"Overall governance of compensation, particularly for senior executives and material risk-takers, has also improved, both internally as well as at the board level," she noted. "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."

Stephen Miller, CEBS, is an online editor/manager for SHRM.​


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