A recent study by Mercer focusing on executive compensation in the global financial services industry found that a majority of firms are prioritizing the development of robust risk cultures within their organizations. Sixty-two percent of surveyed firms reported significant efforts to penalize misconduct and non-compliance, while 60% demonstrated clear leadership commitment to ethical behavior. Furthermore, 58% have established and communicated unambiguous objectives related to risk culture.

Vicki Elliott, Senior Partner and Financial Services Talent Leader at Mercer, highlighted the importance of senior leaders setting a positive example when it comes to risk management and compliance. She emphasized that strong and genuine leadership, willing to address both positive and negative behaviors, is essential for building a sound risk culture and discouraging excessive risk-taking. The study, however, revealed that proactively rewarding positive risk behavior remains a challenge, with only 11% of organizations actively doing so. Elliott suggests that while implementing such a system is complex, it is more likely to promote a positive risk culture in the long run compared to purely punitive measures.

The Mercer survey, which included 68 financial services companies across banking, insurance, and other financial sectors in 20 countries, also examined talent management and reward strategies. It revealed that over 90% of banks and 72% of insurance companies have implemented malus policies – primarily driven by regulatory requirements – allowing for the reduction or forfeiture of deferred or unvested awards. These policies are mostly triggered by individual misconduct (89%), compliance breaches (89%), and poor business performance (74%). Although roughly half of the banks surveyed have used malus for individual performance issues, about 60% do not retain individuals subject to malus, raising questions about the overall effectiveness of such policies.

According to Dirk Vink, Principal in Mercer’s Talent business, creating an efficient performance management system remains a significant challenge for financial services organizations. However, Vink argues that when done correctly, it can be more influential than simply adjusting compensation plans in shaping behavior and driving performance. He sees performance management reform as a critical tool for cultural change.

While more than half of the survey respondents believe their performance management systems are effective, only a small percentage consider them exceptional. The study indicates impending change in this area, with half of all banks planning to modify their performance management procedures within the next year. In contrast, only 16% of insurers plan similar changes, though 32% acknowledge the need for change without a concrete timeline. The survey also highlights a growing trend of banks involving risk management in performance metric selection, goal setting, and evaluations to better align individual performance with prudent risk-taking.

The report also found that many financial services firms are adapting their employee value proposition (EVP) beyond just compensation to attract and retain top talent. The most common initiatives include learning and development programs (47%) and remote working arrangements (43%). Other popular changes include implementing career frameworks (37%), flexible working options (37%), and non-monetary recognition programs (34%).

Mark Quinn, Partner and Head of Mercer’s UK Talent business, notes that the financial crisis severely tarnished the reputation of traditional financial services firms. He observes that recent graduates, particularly millennials, are less motivated by purely financial rewards and instead seek a sense of purpose, flexibility, and career development opportunities in their work. To attract this talent pool, Quinn suggests that companies need to cultivate a strong and authentic employee value proposition driven by a clear sense of purpose.