- Indications that CEO remuneration being tied to capital adequacy requirements (CRD3)
- Globally, executives set to receive average base pay rises of 2.5%, but great disparity by region with executives in Asia-Pac receiving 5%
- CEO positions not receiving salary increases in 2012
- Risk management and control functions continue to get larger pay increases at 3%, but with corresponding reductions in annual incentive opportunities
Base pay increases in the world’s financial services sector continue to be markedly different depending on region, according to new data issued by Mercer. The data shows that pay rises for employees in Asia-Pacific (Asia-Pac) are twice as high, and more, compared to employees in Europe, Middle East and Africa (EMEA) or the Americas. Forecasted base pay increases in Asia Pacific in 2012 are anticipated to be 5% and the Americas 2.5%. In EMEA, however, base pay increases for most executives are set to average a comparatively sluggish 2% with some executive groups, like CEOs expected to experience another year of base salary freezes.
The data comes from Mercer’s Global Financial Services Incentive Plan Snapshot Survey which reviews remuneration practices and base pay increase data from 63 financial services organisations in Asia-Pac, EMEA and the Americas. The report provides insight into remuneration trends amongst banks and insurance companies across the world.
“Financial services organisations are responding to significant changes in regulatory requirements concerning compensation policies, incentive plan designs and their governance. In EMEA and the Americas they face keen public scrutiny,” says Vicki Elliott, Senior Partner and financial services industry leader at Mercer. “The industry has been responding to this and moderation appears to be the order of the day in Europe and the Americas. In Asia-Pac, we see much more pay growth.”
According to Sophie Black, Partner in Mercer’s UK Executive Remuneration team, “In the UK, we also seeing companies move to tie executive remuneration to meet the FSA requirements in CRD3 tying pay to the capital adequacy of the organisation. At least one major UK bank has done this.”
The report highlights three main trends. The first trend concerns base pay increases and shows that on average, globally, most employees in the sector will receive limited salary increases of around 2.5%. Regionally, however, the report highlights large discrepancies within the sector caused by differing economic circumstances. This sees base pay increases in Asia-Pac continuing to outpace the other two main regions of EMEA and the Americas.
The second trend is the continuing development of pay levels and the changing pay mix for the so-called ‘control roles’ within financial services. Globally, this employee group will receive an above average pay increase of around 3% in 2012. In parallel, their pay mix is changing in direct response to regulatory pressure to put more emphasis on fixed salary. The final trend is the changes to bonus design taking place. In this area, a different regional approach may exacerbate the unlevel playing field that exists in talent attraction between the US and EMEA. This issue was first highlighted by Mercer in July 2011.
Base salary increases
For 2012, globally, across all organisations - including those freezing salaries - CEOs were generally forecast no increase in base salary. By contrast, executives in general are forecast an average 2.5% increase. Broken down regionally, the figures provide evidence that the momentum of executive salaries in Asia Pacific continues to grow. The picture is brighter for employees in the insurance world with employees forecasted to receive higher salary increases of around 3%.
“Since 2010,” said Ms Elliott, “major steps have been taken in the financial services industry to reduce risk, to tie incentives more closely to economic performance and to allow the ‘claw back’ of bonuses. To better balance the mix of fixed versus variable pay and also moderate the potential loss in their employees’ earning power, many organisations have increased based salaries significantly in the last couple of years. So, while it may appear that employees in financial services companies are experiencing the same base pay restraint as other sectors of the global economy, the reality is slightly more nuanced.”
Changes to control roles
In line with greater regulatory scrutiny of compensation practices for key risk-takers, the largest base pay increases appear to be directed towards ‘Control roles’, such as risk management, legal, internal audit, compliance, finance and human Resources. Respondents were predicting base pay increases over 3% for these groups but this may reflect the changing nature of the pay mix for this group. For these roles, the proportion of annual cash bonuses has been continually reduced in favour of a higher base salary and LTI compensation. While this decreasing of annual bonus weighting is prevalent across all regions, the change was most marked in EMEA where 48% of respondents stated that they had decreased this type of weighting and 35% had increased the LTI weighting.
“This trend was first highlighted in Mercer’s 2010 Pan-European Financial Services Survey,” said Ms Elliott, “and shows no sign of abating. Compensation of control roles should no longer be directly linked to the financial performance of the businesses they oversee. ”
Changes to bonus design
In regards to bonus plans, over half of respondents stated that their organisations didn’t plan to make any changes to bonus plan design in 2012. Nearly a third (31%) stated that revisions would be made to performance measures and around 17% plan to introduce ‘bonus malus’ conditions on deferrals. There were notable regional differences within these figures. While EMEA broadly matched the global findings, in the US and Asia Pac, only a minority of respondents stated that they will be revising bonus opportunities and increasing the required mandatory deferred bonus level.
“Broadly, many companies have already made changes to their plans in 2010 and 2011 but it is notable to see companies in the Americas having limited plans to introduce bonus malus conditions. This will further aggravate the unlevel playing field issue, putting European companies at a disadvantage.” said Dirk Vink, senior executive remuneration consultant at Mercer.
Two thirds of companies (60%) surveyed are not planning to make any changes to their long term incentive plans (LTIs) but for those firms that did, many (30%) were looking to revise their plan design. A smaller proportion plan to introduce a forward looking LTI (6%) and revise performances measures (6%).
“In general, companies which are looking to change their bonus opportunities are tending to revise the maximum bonus amount down. We are seeing companies capping the upside of these awards and tying them ever more closely to performance criteria,” commented Ms Black.
Respondents were also asked what the impact of higher capital requirements on compensation programs might be but most (57%) seemed to anticipate no impact. Some organizations expect limited overall changes (22%). Changes to performance measurement are expected by a few companies (15%)
“Many companies currently don’t feel that their remuneration practices and policies will be affected by increasing capital requirements, “ said Ms Black, “but we feel that this is not likely to be the case for much longer. In the future, executives will be judged on appropriate measures, taking into account capital and liquidity requirements, so remuneration committees may be increasingly setting the bar higher.”
Notes for editors
The term ‘bonus-malus’ (Latin: good-bad) is used to describe remuneration that can reward or penalise depending on whether performance criteria are met. The survey was conducted in December 2011 and involved 63 financial services organizations of which roughly two thirds were banks and the remainder, insurance companies. Respondents were based in 21 different countries with 45% in EMEA, 41% in Americas, and 14% in Asia Pacific.
Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerAU @MercerInsights