As a result, Mercer said, European banks may find themselves having to pay more to attract top talent to overcome some of the regulated pay structure restrictions they now face compared to their U.S. competitors.
According to a Mercer news release, the U.S. approach to regulating financial services pay, post financial crisis, has been principles-based. This has involved setting out guidelines on what is expected and allowing companies flexibility in how the guidelines are interpreted and applied. By contrast, Europe has taken a more prescriptive approach; regulators have stated specifically how they expect companies to structure deferrals and the types of pay instruments to be used. Regulators in Switzerland, China, Japan and Australia have also taken their own slightly different approaches.
“Globally, there is a patchwork approach in the regulation of financial services remuneration,” said Vicki Elliott, Senior Partner leading Mercer’s Global Financial Services Human Capital Consulting team, in the news release. “Our research suggests that this is creating an unlevel competitive playing field and means that the original intent of some reforms is not being met. On one hand, the European approach has produced more consistency in compensation program design. On the other, it has caused some changes that will cost companies more – without necessarily achieving the desired behaviors to help manage performance and risks.”
According to Mercer’s Global Financial Services Executive Incentive Plan Snapshot Survey, the “unlevel playing field” is caused by the differing U.S. and European approaches to “deferred bonuses”. This bonus deferral is intended to discourage a short-term approach to risk as part of the post financial crisis reforms. A portion of an individual’s bonus will be postponed, ordeferred, typically for at least three years. Most European banks now have performance conditions – or “malus” arrangements – for reducing or eliminating deferred amounts if there are losses or performance conditions are not met.
In contrast, many U.S. banks have not yet introduced these performance conditions for deferral payouts. The report highlights that 88% of European companies have long-term incentive stock awards dependent on performance conditions compared to 50% of U.S. respondents. For stock option plans, 75% of European companies required performance conditions be met while no North American respondents did.
The report also suggests that the regulations may be falling short of their original intent. The data showed that while 75% of companies with performance-based deferrals tie them to subsequent company performance, far fewer tie them to business unit performance (32%) or an individual’s non-financial performance (29%) Thus, the incentives for an individual are less impactful due to the longer line of sight to company performance.Sixty-three international financial organizations participated in the survey from banking and insurance.