Bonus malus/clawback provisions and non-financial performance metrics rise as banks and insurers respond to regulatory pressures
Non-financial measures increasing to assess quality and sustainability of performance
Mercer’s latest Financial Services Executive Compensation Snapshot Survey shows that 78% of companies are making changes to their executive pay programs as a result of difficult market conditions. The most popular changes planned are the strengthening of bonus malus and clawback conditions (47%), strengthening the link between performance management and compensation (44%) and increasing the use of non-financial measures (31%) in reviewing performance.
The survey reviewed the pay practices of 55 global financial services companies – banks, insurers and other financial services companies – based in 15 major countries in Europe, North America and Asia. Mercer’s report is intended to provide an update on key global changes and practices in financial services compensation programs. The report is designed to capture the latest changes or anticipated changes to compensation programs among major financial services companies.
According to Vicki Elliott, Senior Partner at Mercer, “Financial services HR teams and Remuneration Committees are being challenged to find ways to structure pay to engage, motivate and retain high-performing staff while being mindful of regulatory requirements and public pressure. Since 2008, we’ve seen a steady change in approach as companies actively tie rewards more closely to risk and multi-year performance.”
Mercer’s latest report highlights changes financial services companies are making to their approaches in 2015. For example, there is much focus on increasing individual differentiation in their bonus distributions.
Bonus deferrals, bonus malus and clawbacks
Broadly, most organizations have a mandatory bonus deferral in place with nearly all banks and almost half of insurance companies having these plans. Interestingly, 42% of North American organizations do not have a mandatory deferral program in place. This is in stark contrast to Europe (86%) where EU regulation has been more prescriptive on the issue.
Thirty-two percent of European organizations plan to increase the use of bonus malus in 2015 compared to 14% in North America. However, more organizations in North America (36%) plan to increase the use of clawbacks on vested awards compared to 32% of European companies in 2015.
Forward-looking long-term incentive plans
Nearly 75% of organizations currently have a forward-looking long-term incentive plan in place in both North America (88%) and Europe (62%). They are somewhat more prevalent in the insurance industry (89%), but a majority of banks (60%) have them also. Ms. Elliott says, “Companies are learning that it is crucial to maintain a forward-looking long-term incentive plan to link top executives to the accomplishment of long-term performance goals rather than relying on a mandatory deferral plan. For example, in a scenario where there is no annual bonus or a significantly reduced bonus paid, there would be limited ties to longer term performance if only a mandatory deferral was in place.” Of particular concern right now is how the EBA is proposing to count the value of long-term incentives in determining the variable to fixed pay cap compliance, which would unfortunately discourage the use of long-term incentives.
Non-financial performance measurement
Most organizations link non-financial performance to incentive compensation. Compliance/risk management (64%) is the most prevalent non-financial metric used, especially among banks. Most banks assess compliance/risk management elements as part of their incentive compensation programs (85%). Employee metrics (60%) are also widely used across the sector both in banking and insurance. Customer metrics are prevalent in banks (67%) and less so in insurance companies (36%). Other metrics include achievement of strategic initiatives, business expansion, corporate social responsibility, leadership metrics, corporate citizenship and people management, to name a few.
According to Dirk Vink, Mercer consultant specializing in executive remuneration and manager of this survey, “The clearest trend since the EU bonus caps is the increase in fixed compensation. However, reducing the amount of variable incentive pay weakens the link between performance and pay. As a result, there will also be less pay that can be deferred and aligned with the risk time horizon of the business.”
There is an emerging difference in the pay mixes between European and North American banks, largely due to regulatory developments in the EU. European banks are increasing the weight of base salaries, particularly for their identified staff, whereas the North American banks are not. However, the question remains whether this trend will ultimately influence North American banks to do so to remain competitive on fixed compensation for their key risk takers.
Notes to Editors
This edition of the survey looks at changes in annual, deferred and long-term incentives, pay mix and role-based allowances. Fifty-three percent of companies are based in Europe, 44% in North America and 4% in Asia. Fifty-five percent of companies are in banking, 35% in insurance and 11% in other financial sectors (asset and hedge fund managers, for example).
Mandatory deferral – Bonuses (short-term incentives) can be deferred over time (for example, performance of 2015 will be re-evaluated in 2018). This allows employers to consider how successful results have been over several years, so preventing short-termism.
Bonus Malus – Refers to the part of the deferred bonus that has not yet been paid out and can be ‘reclaimed’ because, for example, an acquisition’s due diligence is not carried out thoroughly.
Clawback – This is applied to a bonus that has already been paid out. It can be reclaimed by the employer in, for example, cases of gross negligence or non-compliance.
Mercer will be discussing the findings of this survey in a webcast on July 9. To register, visit http://www.mercer.com/events/webcasts/the-latest-on-executive-remuneration-in-financial-services.html.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in more than 40 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.
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