Reuters | Thu Jul 8, 2010 | 8:07am IST
U.S. and European financial firms have cut back on cash bonuses, moving instead to higher base salaries, a survey released on Wednesday showed. Mercer, a consulting and investment firm said its survey of 39 financial services firms revealed almost all of the participants rejiggered pay formulas, with 70 percent increasing base salaries and decreasing annual cash bonuses. The shift occurred in the wake of the 2007-2009 financial crisis, during which bonuses were blamed for encouraging wild risk-taking that fueled the global meltdown. Bonuses became a flash point, with the Obama administration railing against Wall Street pay as U.S. unemployment soared. "For a bunch of reasons, including regulatory and political pressure, base salary has increased, which I think is by and large a good thing," said Alan Johnson, a Wall Street compensation consultant.
Mercer said financial firms have made significant progress reforming pay practices, but noted more work needs to be done, particularly to ensure pay is linked to long-term performance. The survey, which was conducted in April and included banks, insurance companies and other financial services organizations, found 56 percent of the respondents increased the importance of long-term incentives, while 38 percent have reduced the weight of stock options in the mix. Almost two thirds of the firms require bonus payments to be deferred — but only about 40 percent of the surveyed firms have linked these deferred bonus payments to performance by workers. Only 10 percent of North American firms have performance-based deferrals, compared with over half of the European respondents in the survey.
The survey noted the changes have come after regulators upped their scrutiny of banker pay and have issued new guidance on how to properly align incentives. The European Parliament is expected to pass legislation in July that would cap cash bonuses at 30 percent and require the remaining 70 percent to be paid over a longer period and be at least 50 percent shares in the company. The Federal Reserve has used a lighter touch in the United States, issuing initial guidance last October mandating that incentive pay doesn’t encourage "imprudent risk," pay is aligned with banks’ firm-wide risk controls and boards of directors oversee bonuses. It issued finalized guidelines June 21 and gave an assessment of banks overall pay reforms, saying many big banks were still "deficient" in curbing excessive risk-taking.
Rose Marie Orens, senior partner at Compensation Advisory Partners, said financial firms are trying to be smarter about reining in big paychecks that do not take into account the long-term performance of risk-taking by employees. But she warned against regulators being too prescriptive. "I think it’s very good that we don’t attempt to micromanage this," Orens said, adding that smart people will always be able to get around rules when it comes to compensation.