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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.

Bonus Cap: Capital Requirements Directive IV

Negotiators for the European Parliament and European Council reached a provisional agreement on 27 February 2013 on changes to the Capital Requirements Directive (CRD IV), primarily focused on moves towards the implementation of Basel III. Included in these proposals is the cap on bank bonuses that European Union (EU) politicians have been pushing for. There are still details to be fleshed out; the agreement needs to be set down in writing, EU finance ministers and the European Parliament must ratify the final rules, and aspects of implementation require the European Banking Authority (EBA) to develop new guidance. In the meantime, this Alert summarises the main terms and considers some of the likely impacts.

Sales Incentives and the UK FSA's Guidance: More than Just a Reactive Review is Needed

This Alert summarises the final FSA guidance on the risk to customers from financial incentives; outlines the minimum that firms are required to do; sets out what firms have done to date; and suggests how to makes these changes as effective as possible.

Incentive Pay for Support Staff: Should Banks Consider Moving to Salary Only

As firms look to reduce costs, the topic of how infrastructure or support staff should be paid is frequently raised. A number of firms have broached the topic of removing incentive pay for some or all of these employees and compensating them on a pure salary basis. Other firms, who have moved compensation from variable to fixed over the past 5 years are now unhappy with their rising fixed cost base – not just for revenue generators, but for support staff as well.

Undervalued Private Bankers

Private bank margins have been squeezed from all sides of late. Low federal fund rates and high deposit insurance costs have lowered spreads on banking products; defensively inclined clients, holding high levels of cash, are reluctant to become more aggressive which is driving down fees and commissions; and private banker compensation has been rising faster than the revenue they bring in.

Improving Wealth Management Margins Requires HR Led Change

Steady growth, high margins relative to other segments of financial services, and low capital requirements makes wealth management an attractive sector in a low growth, capital constrained post-Basel III world. However, the influx of investment has kept demand for Relationship Managers high and caused Relationship Manager pay to rise faster than productivity (see Exhibit 1 below). This has exacerbated the margin pressure caused by historically low spreads on banking revenue and weak equity markets. As a result, U.S. private bank margins have declined 25% since hitting a peak of 40% (pre-tax) in 2006. These lower margins have resisted dramatic improvement despite reduced loan loss provisioning in recent years.

UK Financial Services Authority Update on the Remuneration Code

​In an effort to streamline and focus the supervisory process, the UK's Financial Services Authority (FSA) recently issued guidance on the proportionality structure in its Remuneration Code. The requirements that were previously structured as four Tiers based on either assets or regulatory capital have been redrafted in a new three-level system based solely on the firm's total assets.

Re-Aligning Performance / Reward in Investment Banking

2001 to 2007 was a remarkable time for the investment banking business. Firms felt they could do little wrong, and saw a steady increase in share price, revenue and compensation spend. A new set of professionals came of age in this era and it now appears that some of the rigor in rationalizing pay versus contribution has fallen by the wayside. In this article, we will focus on the investment banking advisory business, although some of the thinking may also apply to other lines of business in the securities sector.

Shareholders at the Top 50 Are Getting Tougher

Right or wrong, the public and political perception that undue risk taking and its link to pay was central to the financial crisis has fueled a resurgence in the discussions around executive pay. Those discussions and associated headlines are further stimulated by Dodd-Frank's requirement that shareholders be given their say on the topic. As top banks continue to face higher scrutiny on executive pay, shareholders have not been shy of giving the "thumbs down."

Software Development Lessons from the Technology Sector: Banks Consider New Sources of Talent

Major financial institutions are increasingly viewing the technology sector as a source of talent for key roles such as low latency trading, cloud computing, security, mobile applications and other development/architecture roles.  At the same time, in light of flat or reducing total compensation levels, banks are concerned that they, in turn, will lose staff to the technology sector and are looking to find alternative ways of motivating and rewarding key talent.

Conducting a Comprehensive Classification Review

Organizations, after all, make headlines almost daily, when they become the defendant in an employee lawsuit or the target of a wage and hour investigation. The price tag for such mistakes can be astronomic. In the wake of a U.S. Department of Labor investigation last year, for example, Farmers Insurance agreed to pay more than $1.5 million in back pay owed to employees for unpaid overtime. IBM settled similar allegations for $65 million.

Reforming Wall Street Pay

The noise around "Wall Street" pay is deafening. The industry, its employees and the regulators are under daily attack. The criticisms, while loud, are not particularly constructive. The purpose of this paper is to separate fact from fiction, to distinguish the naive from the realistic and to level set the kinds of reforms that are both necessary and practical.

Location Arbitrage: Gaining Competitive Advantage through an Effective Sourcing Strategy

Offshoring has long been viewed as a way to reduce costs and potentially deliver wider benefits such as increased productivity or new revenue opportunities that might be unprofitable if delivered onshore. Offshore locations such as China and India are well established but a number of new Asian and European centers are challenging the traditional offshore service locations. Placing of support services in highly educated, language capable, low cost locations has proved a widely publicized success story for many banks, but has it been as far-reaching as we have been led to believe?

 

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