The sector is also changing the nature of its short-term incentive (STI) schemes, with more focus on balanced, risk-adjusted performance measurement and deferral of bonus payouts over a multi-year timeframe.
Mercer's Global Financial Services Executive Incentive Plan Survey indicates, in light of many firms having to seek financial aid from governments and recent regulatory developments, that there has been a notable impact on remuneration practices. The data came from 61 global financial firms in the banking and insurance sectors.
One third of the respondents had received government aid in some form, the majority of which (82%) had limits imposed on their executive remuneration programmes over the duration of that support.
Some of the blame for the financial crisis was leveled at executive remuneration practices in the financial sector and, in particular, the focus on paying for short-term performance at the expense of long-term sustainability. In response, over 80% of all firms surveyed have made, or plan to make, changes to their annual bonus or STI schemes.
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. 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 European organisations, in particular, have introduced a mandatory bonus deferral linked to performance.
Elliott added: "Deferring bonuses helps companies to control for short-termism. 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."
Sixty-eight per cent of organisations have introduced performance scorecards to measure business success on both financial and non-financial performance criteria in an attempt to respond to regulator concern that reward considers broader performance factors than pure financials. Non-financial criteria might include client satisfaction, risk management and compliance. These often include ensuring that profits are sustainable over time.
According to the survey, while organisations now do, or plan to, link deferral payouts to their company performance, the majority of businesses haven't yet differentiated the bonus deferral based on the nature and time horizon of each role or line of business.
Another industry practice, of bonus guarantees - where companies guarantee new hires' bonuses over a number of years with little or no performance requirement - is decreasing. Forty-one percent of respondents have restricted, or eliminated, one-year guarantees entirely, while 64% of organisations have limited or eliminated multi-year bonus guarantees.
Forty-two percent of respondents have also eliminated ‘golden parachutes', whereby executives are guaranteed bonus payouts upon departure from the company often irrespective of performance - a practice that generated much debate over ‘pay for failure'.
