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.

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.

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.

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.

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.

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.

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.

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.

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?

Proposed UK Disclosure Rules: Top Eight Executives below the Board

The UK Treasury is consulting on proposed regulations to require larger banks to publish anonymous remuneration details for each of the top eight UK-based executives below the board “to enhance the transparency of the relationship between risk and reward for the highest paid senior executives in the largest banking institutions.”  The consultation runs until 14 February 2012. 

Emerging Regions Update

A team of our consultants provide an update on emerging regions including Brazil, Russia, India, China, Middle East, and South Africa.

Infrastructure Pay Update: Rebalancing Value

In a previous article, we discussed how banks largely “back into” funding incentive pay for their Infrastructure or support groups. Many firms use hard financial metrics to measure performance and create incentive funding in their revenue generating areas, and only after these obligations have been satisfied, divide up the balance for the Infrastructure groups.

What Does the Fed Really Want? Practical Ways to Meet the Fed’s Guidelines

For the better part of two years the Federal Reserve Bank and the nation’s largest banks (also known as “LCBOs”—Large Complex Banking Organizations) have been trying to come to agreement on the best way to minimize the possibility that incentive plans would encourage executives and employees to put the bank’s balance sheet at risk for their own personal gain. In short, they want to ensure that compensation is not a contributing factor to future financial crises.

How Motivated Is Motivated Enough?

Prior to the financial crisis, most people outside of the sector likely never gave compensation and incentive plan design a second thought. As the crisis unfolded and the government set out to identify the contributing factors, however, evaluating compensation practices became an important exercise for regulators and banks. The government’s point of view was that banking organizations often rewarded employees for increasing revenue or short-term profit without adequate regard for the risk those activities posed to the organization and the financial system at large.

Shareholders at the Top 50 Say “Yes” on Pay

​If investors are dissatisfied with executive pay, voting results during this proxy season are certainly not reflecting that sentiment. An overwhelming majority of shareholders at the top banks gave their approval on executive pay. However, shareholders have shown a desire to have ongoing input into the pay decision-making process by strongly supporting annual say on pay proxy votes.

What Does the Fed Really Want? Horizontal Review Update

All financial institutions have been besieged by a plethora of new rules coming from domestic and, in many cases, foreign regulators. The volume of compliance work is only outweighed by the collective concern about what these regulations will do to profitability, compensation and shareholder return. At the same time, the Federal Reserve’s (the Fed) position is quite simple and reasonable—they want to prevent compensation from contributing to a future financial crisis.

Proposed Rules: Incentive Compensation Arrangements Under the Dodd-Frank Act

The United States federal regulators are proposing rules (the “Rules”) to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) addressing incentive compensation arrangements with a focus on prohibited and excessive compensation.  On Monday, February 7, 2011, the FDIC published their version of the proposed Rules.  This client alert focuses on both the proposed rules as published, as well as specific areas where the regulators are asking for comment.  

Important CD&A Reminder: Use of Non-GAAP Performance Measures

In July of last year, the SEC staff issued a Compliance and Disclosure Interpretation (C&DI) covering the disclosure in the CD&A of "non-GAAP" financial measures. When the non-GAAP measure is disclosed as the target level of performance for an incentive plan, disclosure must be provided as to how the number is calculated from audited financial statements. However, if a non-GAAP measure is disclosed in the CD&A and is not a target measure (for example it is used in the CD&A or other parts of the proxy to explain the relationship between pay and performance or justify certain levels or amounts of pay), then disclosure of the non- GAAP measure is subject to the more onerous requirements of Regulation G and Item 10(e) of Regulation S-k.

Life after TARP

In 2010, we saw a number of firms repay their TARP funds through capital raises or retained earnings. In addition, for banks under $10 billion in assets the Small Business Lending Fund now provides an opportunity for the best performing TARP banks to swap their TARP capital and be unencumbered by the TARP compensation restrictions. As we look to 2011, we expect both these trends to continue and the pool of TARP banks to shrink.

Update on CRDIII Implementation: Part 2 Convergence of EU Regulations

On 10 December 2010, the Committee of European banking Supervisors (CEBS) published the final guidelines on implementation of the Capital Requirements Directive (CRD)III remuneration regulations in the EU and on 17 December, the UK Financial Services Authority (FSA) published the associated Revised Remuneration Code.

Brazil Update: A Superheated Talent Market

As the world economy struggles to gain its footing, Brazil is in the midst of a new “golden age”. Having overtaken the United States and tying China as the most favorable country for investments as well as playing host to the Olympics and the World Cup in the near future, the stage is now officially set for Brazil to further cement itself as a prominent world player.

Update on Capital Requirements Directive III (CRDIII) Remuneration Guidelines

The long awaited guidance from the Committee for European Banking Supervisors (CEBS) was published 8 October 2010. The guidelines are designed to help institutions and regulators interpret and implement the remuneration aspects of the EU CRD III legislative resolution on the implementation of the Basel III agreement on solvency. In short, these guidelines will direct institutions on how they can compensate a significant number of their most crucial employees. As was anticipated, the guidelines are strict on the conditions and structure of variable pay from a risk management and solvency perspective.

The Perils of Pre-Pays

Over the years, some companies have actively managed the timing of incentive compensation in anticipation of tax rates changing. While there has been a fair amount of speculation around this recently, to date, there has been more discussion than any real action on this front. 

Infrastructure Bonus Pool Funding:

During the last 12 months, pay structures for bank staff have changed dramatically. There have been significant increases in base salaries for some firms and changes to the delivery of incentive compensation. The decision making for these changes has been directed at perceived risk takers in the front offices of banks. However, these changes have also impacted the back offices, i.e., the infrastructure functions. As firms are now beginning the planning process for year-end compensation, should they also reassess the way that the bonus pool for infrastructure functions is calculated and distributed?

The Psychology of the Take-Away

As firms consider ways to deliver pay that are motivating, conform to regulatory guidelines, factor in multi-year performance, and discourage risk, there has been increasing thought and energy devoted to expanding clawbacks, holdbacks, performance hurdles, etc. In some cases these provisions are largely window dressing. Most clawback provisions are linked to employee malfeasance or conduct that is deliberately detrimental. When you consider the recent credit crisis, very little of the conduct would have actually triggered any of these provisions. 

 

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