Financial services firms banish short-term bonuses: survey

Financial services firms are responding to the perceived negative impact of their remuneration practices by changing the mix of pay, moving emphasis away from short-term incentive schemes in favour of salary, according to a global survey of more than 60 organisations by Mercer.

According to the survey, financial organisations are also changing the nature of their short-term incentive schemes with more focus on risk-adjusted performance measurement and deferral of bonus payouts over a multi-year timeframe.

Many European organisations, in particular, have introduced a mandatory bonus deferral linked to performance.

The Mercer survey found that the changes are a direct response to executive remuneration practices being held partly responsible for the financial crisis, in particular the focus on short-term performance at the expense of long-term sustainability.

In response, more than 80 percent of all firms surveyed have made, or plan to make, changes to their annual bonus or short-term incentive plan design.

Vicki Elliott, worldwide partner and leader of Mercer’s financial services human capital consulting network, said national regulators are attempting to make the sector consider risk more thoughtfully in their performance measurement and reward schemes so as not to encourage excessive risk-taking behaviours.

“Our data shows that the majority of participants are changing the nature of their pay structures and their short-term incentive schemes, including the way performance is measured and evaluated. The industry is moving in the right direction.”

In general, the majority of companies are decreasing the proportion of the annual cash bonus in the compensation mix, while increasing base salaries and mandatory deferrals.

Long-term incentives are treated differently across the sector, with some companies increasing and others decreasing them with greater attention being paid to including performance conditions beyond share price appreciation.

Many organisations have also increased the amount of bonus being deferred, creating a greater opportunity to “claw-back” the bonus if performance is poor.

A bonus-malus arrangement – where the annual bonus is held in escrow and can be reduced retrospectively in case of future losses – is the more popular approach.

“Deferring bonuses helps companies to control for short-termism,” Elliott said. “It means that a portion of bonus is payable to employees in installments, based on subsequent company and/or business unit performance. This claw-back approach sends the message that the bonus isn’t finally determined until company or business performance is sustained.”

The survey found that 68 per cent of organizations have introduced performance scorecards to measure business success on both financial and non-financial performance criteria.