Mercer recently held a pan-European roundtable of major financial services companies during which senior HR and compensation executives discussed topics of highest interest surrounding the financial crisis and recent regulatory developments. This Mercer Perspective reflects the major points taken from this discussion.
 

While the financial crisis may not have been caused by executive remuneration excesses, it did reveal major shortcomings in both executive and risk-taker remuneration schemes, including:

• The prospect of very high rewards and the lack of relevant risk-adjusted metrics have been blamed for encouraging excessive risk-taking.
• The use of compensation benchmarks has been criticised for inflating pay levels.
• The cash payment of bonuses and lack of clawbacks have been considered a major source of misalignment with the true economic performance of the banks.

In response to these issues, a number of authorities are offering their opinions on the best principles for prudent banking remuneration, including:

• Institute of International Finance guidelines, published July 2008, and a subsequent compensation study in March 2009
• Financial Services Authority principles, released in February 2009
• Financial Stability Forum guidance, published in April 2009
• European Union efforts (via the Committee of European Banking Supervisors, as well as de Larosière report)
• In each country, every major regulator, finance ministry and government

In early summer, Mercer conducted a two-day roundtable with major European banking and insurance companies from which a list of key issues emerged as important executive remuneration topics to be addressed in 2009/2010, including:

• Pay for performance in the new business environment (risk-adjusted metrics)
• Regulators’ impact and pay mix rebalance
• Bonus deferral arrangements
• Forward-looking, long-term incentive (LTI) plans
• Benchmarking “validity”
• Managing line managers’ remuneration expectations in the new environment.