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The future of banking bonuses

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The compensation landscape at financial institutions has undergone dramatic changes post-GFC. Sabrina Zolkifi investigates whether rewards structures will ever be the same again.  

Throughout the global financial crisis and the years that followed it, there was no doubt banks and its employees were some of the hardest hit.

Even years after the 2008-2009 global financial crisis (GFC), banking and finance employees remain collateral damage; banks continued to haemorrhage headcount as they struggled to keep the firms afloat.

At the end of 2011, global banks reported more than 200,000 job cuts, more so than the 174,000 jobs slashed in 2009.

Deutsche Bank AG’s co-CEO Anshu Jain perfectly summarised the severity of the banking sector when he said at the Wirtschaftsrat Deutschland Economic Conference in 2012: “The contract between banks and society was broken during the crisis. Banks are now viewed with suspicion.”

Within Asia, banks that were streamlining their headcount towards the end of 2011 included Credit Suisse, which saw 3,500 jobs lost, and Nomura Holdings, which axed 1,000 employees.

Unfortunately, banks continued to shed numbers even in 2013, when HSBC announced it was cutting 14,000 jobs by 2016, bringing the bank’s total global redundancies to more than 56,000.

Employees within the banking and financial sector who managed to hold onto their jobs however, had to content with lower base salaries and bonuses – if they were lucky enough to even be on the receiving end of one.

But as we progress into the second half of 2013, are banks in the region finally seeing the light at the end of the tunnel?

“Overall banking bonuses have changed dramatically since the GFC due to increased public awareness, regulators, and in terms of quantum and how we pay out,” Li-Ki Khaw, head of HR at the Australian and New Zealand Banking Group (ANZ), says.

“The reality is that the banking industry faces increasing competition and regulation, which makes bonus payouts hover at cautious levels.”

But it is also because of that, that the industry’s HR has to further align themselves and their structures to focus on rewarding performance.

Banks play bonus roulette

According to a survey by eFinancialCareers, local finance professionals received bigger bonuses last year, though there was a catch – they had to be in the top 31% of the organisation.

“You started being really selective and acquire better assessment criteria to really make sure that your top performers are being remunerated well during the downturn but obviously, that came as a cost to the ones who were performing at a mediocre level,” Roland Muller, regional head of HR for private banking in Asia, and Singapore’s country head of HR at ABN AMRO Bank N.V, says.

Khaw says companies trying to find the sweet spot between managing cost and providing competitive remuneration to employees need to focus on their compensation and benefits budget to ensure it reflects their long-term business strategies and are focused on pay for performance.

“Manage the internal employee environment in regards to this,” she says.

“Link the external environment to your employees so they understand the business challenges, and provide the ‘why’ to management decisions.”

She adds while pay and benefits are a given component and need to be comparable, HR still needs to balance that with business sustainability and affordability in the long term.

Muller says another thing banks have to keep in mind is that the crisis has caused “a lot more regulatory pressure”.

The dollar directive

In July 2011, the European Commission proposed the Banking Standards’ Capital Requirements Directive (CRD IV), which is expected to come into effect 1 January 2014.

Under this framework, the basic fixed pay to variable ratio will be capped at 1:1, meaning the maximum bonuses one can receive will be equal to their fixed salary.

However, this ratio can be raised to a maximum of 2:1 if there is majority approval from shareholders.

Currently without the CRD IV in place, Muller said bankers are entitled to bonuses multiple times their salary, where an individual might be able to get a bonus twice or three times their base salary.

“I had some people in one of my previous firms whose bonus was about four times his base salary – and he wasn’t that senior,” he says.

“The CRD IV will really curtail the payouts you can give to people.”

According to Mercer’s Global Financial Services Executive Pay Survey report, 63% of organisations surveyed said the framework will reduce their ability to pay for performance.

Although 53% said they will maintain total compensation levels regardless of the cap, three quarters of companies also said they are looking at creative compensation alternatives.

The report suggested that while there have yet been any direct impact, “there may be ripple effects of compensation structure changes at the corporate level of the global banks operating in Singapore and elsewhere in ASEAN”.

Muller agrees, adding it may create “some imbalance from a competitive perspective”.

“Obviously we’re not just competing with European banks here in Asia; we’re also competing with local and American banks.”

Riding the wave

Leaders have always recognised communication as a key asset during times of crisis, and it was no different when it came to allaying the fears of employees during and post-GFC.

“Compensation and benefits is a very emotional subject and its critical leaders at different levels play a key role in cascading and connecting the dots on the external environment, and how it impacts internal decisions,” Khaw says.

Muller shares the same sentiments, adding it is during times like the GFC that it is “really, really, really important” for leaders to stay close to the staff and keep them engaged.

Muller was previously with Credit Suisse from 2007 to 2010, and then with HSBC for a year before joining ABN AMRO in late 2011.

His tenure in Credit Suisse, where he was the head of strategic recruiting for private banking in APAC, saw “different degrees of nervousness”, which was more pronounced among those in support functions.

While it is admittedly a challenge to maintain engagement levels during times of crisis, Muller says sometimes the biggest investment you can make in your staff are non-monetary.

“When was the last time you had a town hall, or had an office gathering? There are multiple things that won’t cost you anything but would go a long way.”

Khaw adds it’s also critical to use the right channels. “There must be the right mix of written and face-to-face communications,” she says.

“Senior leadership sets the tone with the facts and rationale for the decision through bank-wide communications.

But for the message to be ‘brought in’ at an employee level, line managers must be engaged with the same facts and rationale, and communicate consistently to the individual employees where necessary.

Taking a page from the banks

While the economic situation now may not be as severe as during and directly after the GFC, both Muller and Khaw has advice for companies who might find themselves in a similar situation.

Khaw says leaders should focus on the broader benefits within the compensation and benefits suite, and think about the employee value proposition more broadly.

“Over the years, ANZ has built up a very strong culture and appreciation for work-life balance, which is institutionalised through our HR policies, practices and tools,” she shares.

Muller adds it is important leaders to be constantly in conversation with the staff in times of crisis.

“I know I repeat myself but you have to stay close to your staff,” he says. “Don’t let them just wait around, anxious because clearly there are no longer folks where there used to be, and the employees are going to be thinking, day in and day out, if they’re going to be okay.

“Stay close, communicate, and from a payout perspective, differentiate between your top, middle and bottom performers.”

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