Mercer research: Pay regulation creates unlevel playing field in financial services

European and US pay regulations have created an unlevel playing field in financial services, creating a disadvantage in the competition for high-performing staff, according to a survey by Mercer.

Its Global Financial Services Executive Incentive Plan Snapshot Survey, shows European banks may have to pay more to attract top talent to overcome some of the regulated pay structure restrictions they now face compared to their US competitors.

The US applies a principles-based approach to regulating financial services pay, post-financial crisis, which involved setting out guidelines on what is expected and allowing organisations flexibility in how the guidelines are interpreted and applied.

However, EU regulators have stated specifically how they expect organisations to structure deferrals and the types of pay instruments to be used.

Regulators in Switzerland, China, Japan and Australia have also taken their own slightly different approaches.

The survey found the unlevel playing field is caused by the differing US and European approaches to deferred bonuses, which is intended to discourage a short-term approach to risk as part of the post-financial crisis reforms.

A portion of an individual’s bonus will be postponed, or deferred, typically for at least three years.

Most European banks now have performance conditions – or ‘malus’ arrangements – for reducing or eliminating deferred amounts if there are losses or performance conditions are not met.
However, many US banks have not yet introduced these performance conditions for deferral payouts.

The report found that 88% of European organisations have long-term incentive stock awards dependent on performance conditions compared to 50% of respondents in the US.

For stock option plans, 75% of European organisations require performance conditions to be met compared to none of the US participants.

The report also found the regulations may be falling short of their original intent. The data showed that while 75% of organisations with performance-based deferrals tie them to subsequent business performance, only 32% tie them to business unit performance and 29% to an individual’s non-financial performance, creating less impactful incentives for an individual due to the longer line of sight to business performance.

Vicki Elliott, senior partner, global financial services human capital consulting team at Mercer, said: “Globally, there is a patchwork approach in the regulation of financial services remuneration.

“Our research suggests this is creating an unlevel competitive playing field and means the original intent of some reforms is not being met.

“On one hand, the European approach has produced more consistency in compensation programme design.

“On the other, it has caused some changes that will cost organisations more – without necessarily achieving the desired behaviours to help manage performance and risks.”

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