A new survey by Mercer shows changes in short-term incentives as financial organisations respond to regulatory guidance resulting from financial crisis.
Human capital, compensation and employee benefits consultancy Mercer's Global Financial Services Executive Incentive Plan Survey reveals an increasing use of bonus deferrals, claw-backs and balanced performance measurement
Financial organisations have changed the mix of pay, moving emphasis away from short-term incentive schemes in favour of increased salary, deferred compensation schemes and modified incentive programme design, reports Mercer. The sector is also changing the nature of its short-term incentive (STI) schemes, with more focus on balanced, risk-adjusted performance measurement and deferral of bonus payouts over a multi-year timeframe.
The survey indicates that, in light of many firms having to seek financial aid from governments and recent regulatory developments, there has been a notable impact on remuneration practices. The data came from 61 global financial firms in the banking and insurance sector. One third of the respondents had received government aid in some form, the majority of which had limits imposed on their executive remuneration programmes over the duration of that support.
Some of the blame for the financial crisis was leveled at executive remuneration practices in the financial sector and, in particular, the focus on paying for short-term performance at the expense of long-term sustainability. In response, over 80 percent of all firms surveyed have made, or plan to make, changes to their annual bonus or short-term incentive (STI) plan design.
In general, the majority of companies are decreasing the proportion of the annual cash bonus in the compensation mix, while increasing base salaries and mandatory deferrals. Long-term incentives are treated differently across the sector, with some companies increasing and others decreasing them with greater attention being paid to including performance conditions beyond share price appreciation.
However, many firms are modifying their existing STI arrangements. Many European organisations, in particular, have introduced a mandatory bonus deferral linked to performance.
Several organisations have also increased the amount of bonus being deferred, creating a greater opportunity to ‘claw-back’ the bonus if performance is poor. A bonus-malus arrangement – where the annual bonus is held in escrow and can be reduced retrospectively in case of future losses – is the more popular approach.
“Deferring bonuses helps companies to control for short-termism,” said Mercer consultant Vicki Elliott. “It means that a portion of bonus is payable to employees in installments, based on subsequent company and/or business unit performance. This claw-back approach sends the message that the bonus isn’t finally determined until company or business performance is sustained.”
Sixty-eight percent of organisations have introduced performance scorecards to measure business success on both financial and non-financial performance criteria in an attempt to respond to regulator concern that reward considers broader performance factors than pure financials. Non-financial criteria might include client satisfaction, risk management and compliance. These often include ensuring that profits are sustainable over time. According to the survey, while organisations now do, or plan to, link deferral payouts to their company performance, the majority of businesses haven’t yet differentiated the bonus deferral based on the nature and time horizon of each role or line of business.
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