2011-02-15
By Editor
Data issued by Mercer show that salaries for risk management roles in financial services organisations are increasing as the sector responds to regulatory guidance. The data also highlights the progress that is being made to reduce the role of short-term incentives (STI) in the pay mix in the financial sector. This reduction of STIs is being accompanied by increases in base pay and a much greater use of deferred compensation and long-term incentives (LTI).
The data comes from Mercer’s annual Pan-European Financial Services Executive Remuneration Survey which provides base pay and bonus data for senior executive level positions. Data was compiled from 38 leading insurance, banking and financial services organisations across Western Europe.
“Executive compensation and remuneration committees have endured another year of strong focus and scrutiny by its stakeholders,” commented Vicki Elliott, partner leading Mercer’s rewards consulting in the financial services industry. “Our data shows that corporate governance processes have been strengthened and pay structures have evolved since 2008. The widespread salary freezes and salary cuts for executives have come to an end and most organisations have gone back to regular salary reviews.”
Mercer’s data also indicates that decreasing annual variable compensation levels have been balanced with the introduction of deferrals, turning the bonus system into a more effective means of aligning bonus payouts with the time horizon of risks. The report also notes that there have been widespread reviews of, and reductions in, generous severance pay packages in response to public concern. The trend for pension plans shifting from defined benefit solutions into defined contribution schemes continues unabated.
The report shows that the median salary increase during 2009 to 2010 across all senior roles in the financial services sector was around 2%, reflecting pay restraints in many sectors of the global economy. However, roles with responsibility for internal control in the financial sector received notably higher pay increases with chief risk officers receiving 5%. Seventy-three percent of organisations stated that they would be increasing the salaries of employees in these positions; only around 50% believed salary increases would take place for other roles.
Compared to 2008, the proportion of base salary and LTIs in an employee’s overall 2010 compensation increased, while annual bonuses decreased. This is in direct response to regulator pressure. If we consider the broader C-suite – a corporation’s most senior executives – in 2008 executive positions would have received 25% of their compensation as base pay and 40% in short-term incentives, with the final 35% in the form of LTIs (eg. equity plans). The picture changed dramatically in 2009, with 60% of the same executives receiving no annual bonus. So the real trend is only evident in the 2010 figures. According to this data, in 2010, the same C-Suite received 34% of their compensation in base pay, 30% in STI and 36% in LTI.
For CEO positions, this shift in pay mix is particularly evident where the LTI proportion of their pay mix shifted from 36% in 2008 to 46% in 2010 and the weight of CEO’s annual bonuses dropped substantially from 39% in 2008 to 23% in 2010.
Furthermore, an increasing number of organisations are deferring part of their variable compensation - from 45% of companies in 2009 to 67% in 2010. The average period for a deferred bonus is now three years with the mandatory minimum, according to regulatory requirements the majority of organisations have a deferral setup with a clawback structure, which allows an organisation to take back previous performance-based payments on the basis of restated financials or breached agreement. Around two-thirds of companies have introduced or are considering introducing a ‘malus’ type bonus arrangement in which a major portion of the employee’s bonus is not immediately available and can be reduced if there are losses or if business indicators fall substantially during the mulit-year deferral period.
INSURANCE INDUSTRY FIGURES
Despite recent moves by the industry to increase base pay, the report highlights that the banking industry differs significantly from the insurance industry in the structure of its pay packages. A comparison of data between the banking and insurance industries shows that while the industry as a whole is shifting pay mix in favour of increased base pay and longer-term incentive payouts, the insurance industry already has much less emphasis on short-term incentives as a proportion of total compensation.
Throughout the course of this year, the vast majority of organisations will increase salaries, with an average rise of 2.5% as part of their normal annual salary review. In the past two years, almost all financial services organisations have made changes to their compensation programmes and performance measures. Most commonly, they have introduced a mandatory deferral plan. Moving forward, organisations expect to tailor their deferral plans to new regulatory requirements. A third of the organisations surveyed plan to adjust or introduce clawback arrangements with malus bonus in 2011. While 30 percent of organisations forecast higher 2011 bonus pools compared to the previous year, 60% expect no change. Typically, a bonus pool is determined by corporate or divisional performance or a combination of both.
While this is a snapshot of the financial services industry developments currently, the industry is in a state of flux; Mercer says it expects compensation practices to continue to evolve over the next year, with significant changes still to come.
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