By Ronald Fink
US and other North American banks trail far behind their European counterparts in responding to regulators' demands that they link executive compensation to performance, a survey released on Tuesday shows.
The survey of 39 financial institutions by consultancy Mercer found that overall, more than 65 percent of the companies have a mandatory bonus deferral program and about 40 percent have linked bonus deferral payouts to subsequent performance. However, 53 percent of European-based firms now have performance-based deferrals, compared with a mere 10 percent in North America, according to the the survey.
Partipants on both continents are moving in the direction of regulators' demands. The majority have decreased the annual cash bonus element as part of their employee pay mix and increased base salaries and the use of deferred compensation. The changes have followed regulatory guidance aimed at addressing concerns that a short-term bonus culture within the sector encouraged excessive risk taking and contributed to the financial crisis.
However, a clear difference in regulatory approach helps explain the greater alacrity with which the Europeans are moving. New legislation expected from the European Union would set out even more stringent guidelines. The legislation, expected to be passed by the European parliament later this month and to take effect next January, would cap the cash element of bonuses for those in the financial services sector at 30 percent. The remaining bonus payments would be delayed and linked to long-term performance, with 50 percent paid in shares.
In the US, the Federal Reserve merely issued guidance recently on bank incentive pay designed to bring closer scrutiny of risk-reward practices. The principles-based guidance does not mandate pay caps or prohibit particular practices in its effort to discourage excessive risk taking.
"Our survey shows that there has been significant progress in responding to the regulatory guidance," said Vicki Elliott, a partner at Mercer, in a statement accompanying the release of the results. "However," Elliott added, "there is still more work to do to fully comply with the regulators' intentions, particularly ensuring that performance measurement is aligned with the nature and time horizon of risks."
Almost all participants noted they have changed the weighting of components in their remuneration packages. Seventy percent have increased base salaries while decreasing annual cash bonuses (94 percent). The weight of long-term incentives has also been increased by 56 percent of respondents. Thirty-eight percent of companies have reduced the proportion that stock options form within the long-term incentive mix.
Half of the organizations with mandatory bonus deferrals have structured the deferral to have both upside and downside payout opportunities. Another 35 percent indicated that they had increased the amount of mandatory bonus that was deferred.