A new report by Mercer highlights that 2015 saw the world’s financial services organisations continue to respond to regulatory developments by increasing fixed pay, decreasing variable pay (bonuses) and increasing the emphasis on non-financial performance.
While processes to penalise misconduct and non-compliance are widespread, rewarding positive risk behaviors continues to be a challenge, says the consultancy.
The data comes in the 11th edition of Mercer’s Global Financial Services Executive Compensation Snapshot Survey, which was conducted in October and November 2015. The survey reviews the pay practices of 71 global financial services companies — banks, insurers, and other financial services — based in 20 countries in Europe, North America, Asia, and South America.
The majority of organizations are not planning to make changes to their pay mix in 2016. 13% of organizations (and 21% of European organizations) are increasing the weight of their base salaries.
In addition, 10% of organizations are increasing the weight of role-based allowances (14% in Europe and Growth Markets). Nine percent of organizations are increasing the weight of mandatory deferrals.
According to Vicki Elliott, senior partner and leader of the Global Financial Services Talent Network at Mercer, “The focus for financial services firms is firmly on 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.”
The report found that sixty-one percent of organisations have increased their employees’ fixed pay by more than 5% while 58% percent had reduced variable pay by more than 5%, marking a shift in pay mix.
Total compensation levels are expected to remain relatively unchanged in 2016 — within plus or minus 5% (92%) — and most organisations are not planning further changes to their pay mix.
According to Dr. Hans Kothuis, Partner and Executive Rewards Practice Leader, Asia & Middle East at Mercer, “We are at a tipping point in Asia, as companies prioritise business critical functions and share resources across their businesses to increase overall productivity. Financial institutions in Asia are adopting a cautious outlook towards compensation for 2016.”
Overall, 2016 projected base salary increases for the sector are modest with average forecasts globally expected to be between 2.0% and 2.7%. Latin and South America and Asia are projecting higher average salary increases (4.3%) while North America and Europe are forecasting lower average salary increases of 2.4% and 2.3%, respectively.
The banking industry is generally projecting slightly lower salary increases than the insurance industry. The majority of organisations predict 2016 annual incentive levels to be similar to those in 2015; those expecting change predict that levels will decrease.
“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,” says Dirk Vink, Mercer principal and financial services project manager.
Fostering a sound risk culture
When asked how their organisation is fostering a strong risk culture, the most prevalent response was penalising misconduct and non-compliant behaviours (93%) followed by the role of risk management in performance expectation setting and evaluation (89%).
Setting the right tone at the top of the organisation, for example, through top management leadership, communications and real consequences, was also highly cited (88%), as was training and coaching managers on sound risk culture (87%).
Intriguingly, with all parts of the business impacted by these risk management efforts, the report highlights that some organisations, particularly in North America, are finding it more difficult to attract and retain staff in the crucial functions that oversee these processes, the control functions (risk, legal and compliance).
“We have concluded that the most positive impact on sound risk-taking behaviours and decision-making has come from significantly improved governance and increased involvement of risk management in the performance management and compensation process,” Vink added.