Banks “reverse progress” on link between pay and risk

Risk2EU regulations weaken bank efforts to link bonuses with risk and performance of its main risk-taking employees, a survey has found.

The Capital Requirements Directive IV (CRD IV), a European Union regulation which has placed a cap on variable pay – known as bonuses – in the EU’s banking sector, is weakening efforts by EU-based banks to manage performance and risk through pay, Mercer found.

Linking rewards with the level of risk taken by banks’ material risk takers has been a major aim of post-crisis regulation of banks.

The consultancy’s report shows that, in an effort to remain competitive in attracting and retaining talented staff, large numbers of banks are increasing base salaries or using cash allowances as part of the pay mix. But cash has no variable link to performance.

According to Mark Quinn, head of talent at Mercer UK and a specialist in financial services remuneration, high-performing employees expect remuneration comparable to their peers, but CRD IV restricts EU-headquartered banks in what they can pay in performance-related compensation. So they are looking at other methods of making up the shortfall to prevent staff walking into the arms of other less regulated competitors, such as hedge funds.

Cash allowances are a form of fixed compensation that do not generally require a corresponding increase in benefits costs as base salary increases do.

“However, both are forms of guaranteed cash with no variable link to performance which is far from satisfactory,” says Quinn.

Since 2008, banks have made much progress, he says, in structuring pay so that it allows for appropriate consideration of risk-adjusted outcomes and conduct/compliance behaviors over a multi-year timeframe.

“The progress the banks have made in improving their pay practices over the last several years since the crisis is now being reversed to some extent with the impact of the CRD IV rules”, says Vicki Elliott, also of Mercer. “To remain competitive, banks are shifting a significant portion of compensation into fixed, guaranteed pay which reduces their ability to pay for performance...“

The findings come from Mercer’s Global Financial Services Executive Compensation Snapshot Survey which analyses pay information amongst 78 financial services organisations, including 44 banks in 18 countries.

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