Mercer’s latest Global Financial Services Executive Compensation Snapshot Survey found that most financial services companies are taking significant steps towards fostering a sound risk culture amongst their staff (Figure 1). Of the companies surveyed 62% have carried out initiatives to penalise misconduct and non-compliance to a ‘great degree’, 60% can show evidence of setting the right tone at the top and 58% are communicating clear (risk) culture objectives.
“It’s encouraging to see companies engaging senior leaders to set an example when it comes to risk taking and compliance behaviours,” said Vicki Elliott, Senior Partner and Financial Services Talent Leader at Mercer. ”The best way to foster a sound risk culture and combat excessive risk taking is with strong, authentic leadership who are willing to manage consequences for good and bad behaviour.”
Mercer research showed that rewarding positive risk behavior continues to be challenging with only a few organisations having taken these steps “to a great degree” (only 11%). “Proactively rewarding positive risk behaviour can be tricky but it is likely to have a more positive impact on culture in the long term compared to punitive measures,” said Ms Elliott.
Mercer’s survey reviewed the practices of 68 financial services companies globally – banks, insurers and other financial services companies – based in 20 countries in Europe, North America, and Asia. The report provides an update on key changes in talent management and rewards practices in financial services.
Over 90% of banks and 72% of insurance organisations have malus policies in place largely due to regulation which requires that all or a portion of deferred or unvested awards can be reduced or wiped out. Such policies are mostly triggered by individual misconduct (89%), individual breach in compliance (89%) and negative business performance (74%). About half of banks have applied malus for individual performance reasons. However, approximately 60% of them do not retain individuals involved in malus cases, which may call into question their overall effectiveness.
“Establishing an effective employee performance management system continues to be a highly challenging task for financial services organisations,” said Dirk Vink, Principal in Mercer’s Talent business. “However when done right it can have a greater impact on behaviour and performance than just changing compensation plans. Performance management reform is a key lever to help manage toward desired culture change.”
In Mercer’s study, more than half responded that their performance management approach works well, though only a small proportion indicated that it delivers exceptional value. Mercer’s survey finds that change is on the horizon, with half of all banks planning to make changes to their performance management processes in the next 12 months, this compares to just 16% of insurers. However, 32% of insurers want to change their processes but are unsure when. Almost half of respondents indicate that their feedback process and performance management linkage to development needs work. Most banks are increasingly involving their risk management function in selecting performance measures, goal setting and performance evaluation, which is a significant development for aligning performance with sound risk-taking.
Mercer’s report found that many financial services companies have made or are making changes to their employee value proposition (EVP) beyond pay in order to better attract and retain talent who might otherwise choose not to work for them The most prevalent initiatives planned, or already in place, are learning and development programmes (47%) and remote working programmes (43%). Other popular changes include implementing career frameworks (37%), introducing flexible working (37%) and non-monetary recognition programmes (34%).
“Following the financial crisis, the reputation of traditional financial services firms suffered badly. Esteem turned to stigma as a new generation of graduates started rejecting a culture they viewed as aggressive and lacking in integrity” said Mark Quinn, Partner and Head of Mercer’s UK Talent business. “Banks, in particular, who have since been struggling to attract and retain the best new talent, are realising that these so-called millennials are not just in it for the money. They look for a sense of pride and purpose in their work, as well as flexibility and career support. To attract them, companies need to develop a strong and genuine purpose-led employee value proposition.”
“Over the past few years, we have seen an institutionalized de-leveraging of pay in the West; with fixed pay levels going up and short-term incentive levels dropping. As expected, this permeated in Asia with more and more companies reviewing their pay mix. 35-40% of survey respondents in Growth Markets felt that their increases to fixed pay had a positive impact to ability to attract retain and motivate talent.”, noted Shai Ganu, Asia business leader for Mercer’s talent consulting business. “This is really interesting, because only 15-20% of respondents in Europe and North America felt a positive impact of fixed pay increases. This suggests that the specific “first movers” companies in Asia and Growth Markets to change their pay mix, may have seen more positive impact than western counterparts, where the entire market had to move. Another encouraging trend is that majority of survey respondents in the region, have increased the prominence of conduct/compliance behaviours in their annual incentive plans. There also seems to be a growing emphasis on Learning and Development plans, and Career Frameworks in the overall employee value proposition. All suggestive of a more balanced, sustainable view towards managing people-related issues.” Mr. Ganu added.
Figure 1: Steps taken towards fostering a sound risk culture
This edition of the survey looks at changes in annual, deferred and long-term incentives, pay mix and role-based allowances. Forty-seven percent of companies are based in Europe, 32% in North America and 21% in Asia. Fifty percent of companies are in banking, 28% in insurance and 22% in other financial sectors (asset managers, for example).
Bonus Malus – Refers to the part of the deferred bonus that has not yet been paid out and can be ‘reclaimed’ because, for example, an acquisition’s due diligence is not carried out thoroughly.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers of their most vital asset – their people. Mercer’s more than 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 professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 60,000 colleagues worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.