Limits on variable pay are leading to an increase in guaranteed fixed pay. Asia and Latin America are projected to see average base pay increases of 4.3% in 2016, in contrast to 2% to 2.7% in Europe and North America. Overall, 2016 pay is expected to remain stable, with lower variable pay offset by increases in fixed pay.
Source: Mercer.
Mercer’s 11th annual Global Financial Services Executive Compensation Snapshot Survey reveals that in 2015, financial services companies worldwide continued to react to regulatory changes. They are achieving this by raising fixed pay, lowering variable pay (bonuses), and emphasizing non-financial performance. While penalties for misconduct and noncompliance are common, the consultancy notes that rewarding positive risk behaviors remains a challenge.
The survey, carried out in October and November 2015, examined the compensation practices of 71 international financial services firms, encompassing banks, insurers, and other financial entities, across 20 countries in Asia, Europe, North America, and South America.
Vicki Elliott, Senior Partner and head of Mercer’s Global Financial Services Talent Network, observes, “Financial services firms are strongly focused on establishing the right tone from the top, with robust governance and significant risk management involvement. Generally, total compensation levels haven’t changed much compared to levels before regulated bonus caps. However, banks, especially in Europe, have substantially increased fixed pay, providing more certainty to key risk-takers.”
The report revealed that 61% of companies had raised their employees’ fixed pay by over 5%, while 58% had decreased variable pay by over 5%, signaling a shift in compensation structure. Total compensation is predicted to stay relatively constant in 2016 — within plus or minus 5% (92%) — with most companies not planning further adjustments to their pay mix. Dr. Hans Kothuis, Partner and Executive Rewards Practice Leader for Asia & the Middle East at Mercer, remarked, “Asia is at a turning point, with companies prioritizing essential business functions and sharing resources to enhance productivity. Financial institutions in Asia are approaching 2016 compensation with caution.”
Globally, projected base salary increases for the sector in 2016 are modest, averaging between 2% and 2.7%. The banking industry generally anticipates slightly lower salary increases than insurance. The majority of companies expect 2016 annual incentive levels to mirror 2015 levels; those anticipating change predict a decrease.
“There’s ongoing concern that emphasizing fixed guaranteed pay weakens the connection between pay and performance, potentially hindering the alignment of pay with risk,” states Dirk Vink, Mercer principal and Financial Services Project Manager. “We’ve observed that the most significant positive influence on responsible risk-taking and decision-making stems from considerably enhanced governance and greater risk management involvement in performance management and compensation.”
Fostering a Risk Culture
When questioned about how their organization promotes a robust risk culture, the most frequent response was penalizing misconduct and non-compliant behaviors (93%), followed by integrating risk management into performance expectations and evaluations (89%). Other commonly cited factors included setting the right tone at the top, such as through leadership, communication, and consequences (88%), and training managers on a sound risk culture (87%).
Interestingly, while these risk management initiatives impact all areas of the business, the report highlights that some companies, particularly in North America, are facing difficulties attracting and retaining staff for crucial oversight roles in risk, legal, and compliance.