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Managing Compensation in a Downturn

It seems like we are in for a rocky ride in 2016. While underlying economies of many countries and the financial performance of many companies still appear solid, numerous firms are preparing for a tough year ahead.

EBA Consults on Draft Remuneration Guidelines for Sales Staff

On December 22 2015, the European Banking Authority (EBA) published a consultation paper on its Draft Guidelines on remuneration policies and practices for staff offering and providing retail banking products and services.

EBA Publishes Final Guidelines on Sound Remuneration Policies under CRD IV

The European Banking Authority (EBA) published its final guidelines on sound remuneration policies under CRD IV (Guidelines) on 21 December 2015. Following a strong industry response to the first draft of the Guidelines that was published in March 2015, there have been changes to the original text. Most notably, proportionality is not addressed in the Guidelines; instead a separate Opinion that is addressed to the European Commission (EC), European Parliament and Council has been published. The EBA’s Opinion on proportionality confirms that the EBA will provide guidance to the EC on potential changes to the text of the Directive to clarify how proportionality is to apply.

The Great Fall of China - No Monkey Business

In October 2015, McLagan published an alert titled "The Great Fall of China?", where we discussed the slowdown in the Chinese economy, the steep fall in the Shanghai Composite and their potential impacts on pay in China and the Asia Pacific region. At the end of the year, and as we enter the Year of the Monkey, we've taken a fresh look at how that has played out in 2015 and what it could mean for 2016.

To Rate or Not to Rate: A Thoughtful Guide

In recent months, with increasing frequency, we have read of firms eliminating performance ratings and "blowing up performance management". Few trends in Human Resources have had more momentum and, while this might not be a popular thing to say, have been misunderstood or done with less forethought. Support for dismantling traditional performance management approaches has been informed by employee feedback, research, and positive intentions. But what sometimes feels missing in firms' change processes are rigorously defined desired end states, and thorough reviews of the role that performance management and ratings (specifically) play at those firms. We believe there is a sweet spot between "transformative" and traditional performance management. It will look a little different for each firm, particularly in financial services, where highly differentiated compensation is at the very core of how firms operate—but the sweet spot can only be achieved through rigor and not a rush to join a crowd. In this paper we will look at what is changing, what are the intended outcomes, who are the stakeholders in this change, and what are the specific implications for rewards at financial services firms. 

Competing in Hong Kong

The Competition Ordinance (Commencement) (no 2.) Notice 2015 was published in the Gazette on 17 July 2015, which declares 14 December 2015 as the effective date for the rule. This Ordinance, first outlined in 2012, restricts four types of conduct that are described as anti-competition - pricing manipulation, market division/allocation, output restriction or control, and bid rigging. Though not specifically targeted at employment matters, it is clear that the Competition Ordinance (CO) restricts practices like wage-fixing, formal and informal sharing of pay or benefits related information with competitors, industry-wide negotiations that impact wages and employment terms, and no-poaching agreements.

The Great Fall of China?

Impacts on compensation and talent management in China and Asia Pacific after the Recent Chinese Stock Market Correction and Renminbi Devaluation

Securities and Exchange Commission—Proposed Clawback Rules— Technical Insights

On July 1, 2015, the Securities and Exchange Commission (SEC) released proposed rules addressing the final executive compensation regulation required under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).  Proposed Exchange Act Rule 10D-1 requires the SEC to adopt rules directing the national securities exchanges and associations to prohibit the listing of any security of an issuer that does not develop and implement a policy providing for the disclosure and recovery of excess incentive-based compensation received by a current or former executive officer whenever the issuer is required to prepare an accounting restatement in order to correct erroneous financial data.

The Technology Talent Demand Convergence

It wasn’t so long ago that information technology (IT) was a back office function at most firms and, while companies would look at Apple or other innovators with envy or admiration, information technology was seen primarily as a way to execute or operate more efficiently – particularly at financial services and consulting firms. While there were pockets of innovation and firms dabbled with client-facing technology solutions, the overall IT focus was on automating repetitive tasks, storing and analyzing data, and running communication systems. As a result, the market for technology talent at financial and professional services firms was a relatively soft one.

Who wants to be an Investment Banker?

It is no secret that investment banks are concerned about their ability to attract and retain the best talent. The fading allure of investment banking as a career, increased competition for talent, reputational damage, cost pressure, regulation, and attitudinal shifts associated with the changing of the generational guard have all contributed to what is now widely regarded as one of the biggest challenges facing the industry.

Proposed Pay Versus Performance Rules Preliminary Observations

On April 29, the Securities and Exchange Commission (SEC) voted in favor of issuing proposed rules for the Pay Versus Performance disclosure that Congress included under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Breaking the Digital Banking Talent Code

Innovative digital developments have had a profound impact on the day-to-day lives of individuals, including retail banking customers. In response, the banking industry has begun to embrace the digital era, where mobile apps and smart ATMs are no longer a luxury but have become a necessity. The wave of digitalization has led many banks to reevaluate their business and talent strategies to attract, engage, and reward a new generation of staff that can successfully transform their existing platforms and provide the digital experience their customers have come to expect.

EBA Consultation on Guidelines on Sound Remuneration Policies

On 4 March 2015, the European Banking Authority (EBA) published a consultation paper on draft guidelines on sound remuneration policies. These guidelines seek to clarify how firms and regulators should interpret the remuneration rules in CRD IV. The proposed text updates guidelines previously published by the Committee of European Banking Supervisors (CEBS – the forerunner to the EBA) about pay regulation under CRD III.

Exams, elephants, and advisor performance: Dealing with the disconnect between client satisfaction and advisor performance

When polled to give their wealth manager an exam score, US HNW investors levied a score of 72.7%, which would equate to a C- grade. This score would likely result in dire consequences in most households with children. Yet at the same time, net new money inflows – which averaged USD 1.8 billion (or 1.7% of assets) across the industry in 2013 – seem to affirm the health of global wealth managers.

Restoring the Culture / Reward Link

Firms are trying to do more with less regarding compensation but two powerful, conflicting forces are affecting how they manage reward. Diminished business performance is increasingly driving firms to customized solutions, with the focus less on conforming to market practice, and more on what is optimal for survival. Regulation is a powerful force in driving firms toward more standardization. Even firms that are operating outside the regulatory crosshairs are influenced by what they are seeing in the larger, more regulated marketplace around compensation. In the midst of trying to tailor plans to be unique and practical, as well as aligned with regulatory guidelines, the linkage between a firm's culture and reward is often falling by the wayside.

Client Experience: The drive to put clients at the heart of wealth management

“Put the customer at the heart of the service experience” – that’s the gauntlet that one global wealth management firm intends to throw at the feet of its new executive and head of client experience (CX).  Challenged to “drive transformational change in customer journeys” and deliver “sustainable competitive advantage through best-in-market customer experience”, the optimism of all would-be candidates must be applauded.

Allowances and Benefits in the Financial Industry: Current Strategies and Changing Landscape in the Middle East

The structures for allowances and benefits in the regional financial industry are often complex and in many cases, independent of the business and HR strategies. Given the regional employee demographics, with a mainly expatriate workforce, and the tax-free environment, international banks often struggle to maintain parity with their foreign operations in regard to reward structures. Local financial firms also face issues such as, legacy compensation structures with excessive numbers of allowances, and complex employee demographics.

Consciously Uncoupling Complexity in Retail Banking Incentives

Historically, branch employees were the main interface with the customer. Today customers have more frequent interactions with their banks through technology, thus altering the role of branch employees. Within retail banking, incentive plans have grown overly complex in response to the historic branch business model.  However, technology-driven changes in the branch are enabling model firms to simplify their incentive plans and drive desired staff behaviors within a new banking model. Firms that are able to make this change will have a competitive advantage in recruiting staff and serving customers. 

Refining Your Existing Staff Location Strategy

Difficult market conditions, increased regulatory obligations, and global competition are adding to the significant pressures on financial services firms to further reduce their operating costs. Over the past 10 years, many institutions have achieved substantial savings through outsourcing and/or offshoring some of their support functions. IT support, call centers, and transaction-intensive operational processes have been outsourced to large Business Process Outsourcing firms. Furthermore, most of the large banks have created their own captive centers in low-cost locations to maintain control and realize savings.

The Changing Face of Variable Pay Schemes in GCC Consumer Banking Industry

Over the last couple of years, incentive/commission schemes in the Gulf Cooperation Council (‘GCC’) have gained a lot of traction amongst local Consumer Banks. In some countries, banks have introduced incentive schemes in order to reduce the overall compensation expense which is derived from their bank-wide bonus pools. Though, most banks generally pursue the overarching concept of a ‘Pay-for-Performance’ philosophy, when introducing such schemes.

Changing Times: Quantifying Research

Research continues to form an integral part of a firm’s product offering, although, like all functions, it has come under intense pressure over the past 4-5 years as the dip in firm-wide revenues has pressured margins. While the economics of providing research improved in 2013, driven by a rebound in equities revenue, firms are still considering whether to categorize research as a revenue producing function or a cost centre.

Re-thinking the link between client satisfaction and advisor pay

It is hard to believe, but in wealth management today one of the most controversial statements you can make is that client satisfaction is at the heart of the business. This seems counterintuitive, especially in a business that prides itself on building lifetime relationships with clients who have complex financial needs.

The Innovation Requirement

Since the crisis of 2008 we have seen significant change within financial services, however, much of the action taken by market players has been reactionary and defensive. Although a great deal has been said about the excesses and errors of the past, the current focus for banks, in particular, must be on the need to innovate or risk becoming stagnant and losing the ability to compete for exceptional talent. In this matter, banks should take a lesson from today's leaders in technology.

The Impact of CRD IV on Compensation

The Capital Requirements Directive, CRD IV, is poised to restrict incentive compensation for an important segment of banking employees. As a result, a number of firms are struggling to structure attractive reward packages so they can continue to compete effectively for talent with firms that will not be covered by this legislation. Should CRD IV be implemented as currently drafted, code staff bonuses will be capped at 1x fixed pay. There is still a chance that shareholders will vote for an exceptional cap of 2x fixed pay which would improve the ability to compete but would still leave European firms at a substantial disadvantage to non-EU peers for staff outside of Europe.

New Banks: License to Skill

​For the majority of 2012 and 2013, the Reserve Bank of India (RBI) has seemed reluctant to take decisive action on policy issues and monetary mechanisms. It finally managed to rouse the banking industry in India, by giving the go-ahead for corporates and non-banking finance companies (NBFCs) to apply for new banking licenses. This decision has been long debated and even longer awaited, coming after a hiatus of 10 years.  The RBI had issued only two licenses in the early 2000s and prior to that its last activity was in 1993-94.

SEC Publishes Proposed Rules for the Implementation of the Pay Ratio Disclosure

Among the many executive compensation related items included in the Dodd-Frank Wall Street Reform Act of 2010 (the Dodd-Frank Act), one of the most heavily debated and anticipated was the Pay Ratio Disclosure, or Section 953(b). This ratio, designed to illuminate the relationship between total reported compensation for a CEO and the median employee of the company (not including the CEO), sounds simple in concept, but generates a number of complex challenges. These challenges explain much of the two year delay in moving forward with the rule.

Middle Market Horizontal Review: Potential Impact

The nation's largest banks recently received letters from the Federal Reserve related to a horizontal review of Commercial Lending, which for most clients will impact their Middle Market and Specialty Lending practices.

Changing Banking for Good: UK Parliamentary Commission's Remuneration Proposals

This McLagan Alert summarises the key points relating to remuneration from the final report of the UK's Parliamentary Commission on Banking Standards (PCBS or the Commission), published last week. It considers possible implications, scope and the process that follows the report's publication.

Constraints, Caps & Clawbacks: The New Compensation Paradigm for Bankers

It has been a crazy five years for United States banks. So much has changed and yet so little progress has been made. The three key groups of stakeholders in financial industry pay are regulators, shareholders and staff. While all the stakeholders will no doubt agree that change has occurred, the real debate starts when we consider whether or not the sum of the changes have produced better or worse results.

Alternatives to Pay that Reward Employees and Increase Engagement

As premiums for working in financial services shrink and demands on staff grow, morale and motivation are becoming a daily challenge for line managers and HR alike. Many banks are currently considering new approaches that effectively reward and engage without pay.

 

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