Author: Philip Young, Consultant, Leathwaite. 

The issue of banking compensation has long been a subject of controversy in both the UK and Europe, especially since the financial crisis of 2008. The government has been under considerable public pressure to curb the sometimes eyebrow-raising bonuses awarded to executives in the City, though attempts at achieving this through legislation have met with mixed success over the years. Compensation will remain a complex beast, but what’s certain is that the bonus culture is changing and this will have a much wider impact on the banking sector. Firms need to make sure they have a plan in place to adapt to a changing incentive culture or they risk disrupting their access to talent.

Impact of regulation

The long awaited Capital Requirements Directive IV which came into force in January 2014, is designed to “minimise the negative effects of firms failing by ensuring that firms hold enough financial resources to cover the risk associated with their business.1” This legislation includes the provision that bonuses should be no more than 100% of salary, or 200% with shareholder approval. In comparison, bonuses in the past have been largely unregulated and at times have reached 50 times the average UK salary2. Banks are attempting to react accordingly but the worry remains that the best banking talent is jumping ship either to another, less restrictive market or to an entirely new sector.

Bank hiring processes have become much more complex, time-consuming and often expensive. In the past, fixed salary ranges and bonus packages were vastly consistent across the financial sector. Now, there is almost no standardisation and a massive variance in year on year packages with ratios and deferrals. Negotiations now revolve increasingly around fixed salary, which was previously only a minor consideration. In addition, candidates want to know in detail about annual allowances, bonus structures, what current employees hold in terms of deferrals and much more. Firms are also being forced to buy people out of their deferrals which in some cases is proving to be prohibitively expensive. Hiring into the banking sector is now a cumbersome and lengthy process for both the employee and the potential candidate and is certainly leading some candidates to look elsewhere.

Temptation abroad

These candidates can hardly be blamed, as there are attractive alternatives available. Banking talent is being drawn to alternative markets such as the US where more flexible regulation is in place. With the restrictions around compensation structure being more onerous for European banks than their US counterparts, and European bank bonuses largely being deferred for three to five years, and often in bonds and stocks, bankers in the States are typically receiving a greater proportion of compensation in cash straight away. For obvious reasons, an instant cash bonus is a much more attractive option to someone looking to move roles. We are also starting to see banks investing significantly in building new capabilities in regions such as Hong Kong and Singapore where regulation is less restrictive. This could easily lead to a continuation of the trend.

What can we do the keep our talent on our shores?

Many banks are starting to develop initiatives focusing on work/life balance as a way to attract a new breed of candidates. Historically, the career of a banker has been associated with long nights, early mornings and a sacrifice to home-life compensated by a large salary. However, research indicates that modern professionals value job satisfaction over salary3 and banks need to adapt to meet this demand. Implementing efficiency committees is one way of doing this to make sure employees are working smart rather than just working hard.

Traditionally banks have a reputation of being old-fashioned institutions that are reluctant to change, but this isn’t entirely the case. In fact, many are making significant in-roads with the creation of innovation labs and the development of strategic partnerships with entrepreneurs, start-ups and leading technology firms. This is a sensible strategy given that banking professionals are increasingly attracted to fast growing tech firms. Despite a lower cash incentive, the larger stock rewards with high upward potential if the company goes public is proving an attractive proposition. Banks should focus more on innovative initiatives and upgrading unwieldy legacy systems in order to both entice these individuals back and attract fresh candidates from digital tech firms who may be interested in being a part of that change.

Politics may be fluid, but regulation is one topic on which political parties seem to agree. Andrew Tyrie, Conservative MP, said recently that top bankers should have their bonuses deferred for ten years to raise the standard of the industry and improve long term management. Ed Balls seems to agree, stating that a Labour win in the next general election would mean legislation to ensure bankers were held accountable for a decade. In addition, the UK financial watchdog is considering whether to force reckless bankers to pay back their base salaries as well as bonuses. These pressures can be frustrating, and may contribute to some wishing to get out of the firing line and move where they can seek ambitious salaries and personal rewards. The cause is not hopeless, however, and banks should embrace a new hiring era where a focus on innovation, flexibility and creativity will ensure finance remains a viable option.