Mercer research: Financial services firms redesign pay and bonus structures

Most financial services companies have decreased the annual cash bonus element and increased base salaries, as well as the use of deferred compensation according to research conducted by Mercer.

The consultancy’s Executive Incentive Plan Snapshot Survey, which analysed data from 39 financial services organisations, showed that almost all respondents had changed the weighting of components in their remuneration packages. It revealed that 70% of firms have increased base salaries while decreasing annual cash bonuses and 38% of have reduced the proportion that stock options form within the long term incentive package.

Bonus deferral
Over 65% of companies have a mandatory bonus deferral programme but only around 40% have yet linked bonus deferral payouts to subsequent performance. Meanwhile, performance-based deferrals are more prevalent in European-based firms (53%) compared to North America (10%) and are generally linked to overall company performance.

Half of the organisations with mandatory bonus deferrals have structured the deferral to have both upside and downside payout opportunities. Another 35% indicated that they had increased the amount of mandatory bonus that was deferred.

Annual bonuses linked to performance
The majority (94%) of respondents have made or plan to make changes to their annual short term incentive scheme, commonly known as ‘the bonus’. One year bonus guarantees are used less than in 2009 with over half of the organisations (57%) significantly limiting or eliminating these guarantees.

Furthermore, the vast majority of organisations (76%) have limited or eliminated multi-year bonus guarantees.More than half (54%) of respondents have introduced caps or maximums for bonus pools and 60% of respondents have introduced them for individual payouts. Most organisations also have minimum threshold performance requirements for the bonus pool and individual payouts.

Performance contingent long-term incentive plans prevalent
Nearly all responding organisations (80%) either have a long term incentive plan or plan to introduce one (10%). Share-based plans are the most prevalent (78%) with half of the organisations also offering share options (52%) or cash based plans (48%).

Enhanced governance
Two-thirds of the organisations have changed the remuneration committee charter and organise periodic training for their committee members. Some have sought to strengthen the membership in their remuneration committees as well.

However, despite these changes, new legislation expected from the European Union is setting out even more stringent guidelines. The legislation, expected to be passed by the European parliament in July and binding from January 2011, would cap the cash element of bonuses for those in the financial services sector at 30%. The remaining bonus payments would be delayed and linked to long-term performance, with 50% paid in shares.

Moreover, in the United States, the Federal Reserve recently issued guidance on bank incentive pay that will bring closer scrutiny of risk-reward practices at organisations. The principles-based guidance does not mandate pay caps or prohibit particular practices in its effort to discourage excessive risk taking.

Vicki Elliott, a partner leading Mercer’s rewards consulting in the financial services industry, said: “Our survey shows that there has been significant progress in responding to the regulatory guidance. However, there is still more work to do to fully comply with the regulators’ intentions, particularly ensuring that performance measurement is aligned with the nature and time horizon of risks.”

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