While European companies double down on meeting “prescriptive” new regulations for executive compensation in the wake of the financial crisis, those in the US are strengthening clawback provisions and continuing to develop long-term incentive plans as an alternative to bonuses, a Mercer survey showed.
The different approaches may lead to friction as EU caps on bonuses prompt European companies to raise salary levels higher than their US counterparts, according to Vicki Elliott, senior partner at the talent consultant.
“The bifurcation between North American and European-based firms continues to be reinforced,” Elliott told Advisen. “There is a market dynamic being created.”
European companies operating in the US compete for risk management professionals here as well, for example, and an increase in the fixed-compensation levels that they offer “could result in higher fixed pay overall,” she said.
The “snapshot” survey by the unit of Marsh & McLennan Companies of 55 financial services firms was taken in April and May, before the US Securities and Exchange Commission proposed “clawback” rules requiring executives to return bonuses they would not have received based on a financial restatement.
“North American firms are focusing on strengthening clawback arrangements,” Elliott said, adding that the SEC proposal earlier this month had been largely anticipated by poll participants.
Thirty-six percent plan to increase the use of clawbacks on vested awards, compared to 32 percent of European companies in 2015.
Thirty-two percent of European companies, meanwhile, plan to increase the use of bonus malus, or that part of a deferred bonus that has not been paid out and can be reclaimed because, for example, the recipient didn’t perform enough due diligence on an acquisition. Fourteen percent of North American companies plan to do likewise.
Forty-four percent of companies represented in the survey are North American, while 53 percent are based in Europe and 4 percent in the Asia-Pacific region. Sixty-five percent have more than 15,000 employees, while 40 percent have more than 50,000.
Thirty-five percent of the firms are in insurance, while 55 percent are in banking and the remainder in other financial services industries.
Most of the companies (78 percent) said they plan to make changes to their executive compensation plans, while 58 percent of North American firms do. The most often cited changes are strengthening clawback/malus conditions, strengthening the link between performance management and compensation, and including more non-financial performance measures.
Eighty-six percent of the European companies have bonus deferral mechanisms in place, versus 58 percent of North American companies.
But 88 percent of North American companies have long-term incentive plans, compared to 62 percent of European companies. The plans are more prevalent in the insurance industry (89 percent), but a majority of banks (60 percent) have them also.
The plans—which tend to be linked to more than a company’s share price and take up to five years to pay out—are better at focusing top executives on long-term performance goals, Elliott said.
“For example, in a scenario where there is no annual bonus or a significantly reduced bonus paid, there would be limited ties to longer term performance if only a mandatory deferral was in place,” she said.
While these types of plans aim to prevent “short-termism,” a concern now is how the European Banking Authority proposes to count the value of long-term incentives, which could discourage their use, she added.
Additionally, 42 percent of insurance organizations are increasing “individual differentiation in bonus distribution,” compared to 27 percent of banks.
US firms across the financial-services spectrum continue to adopt deferral mechanisms for variable compensation or bonuses, and to incorporate non-financial performance measures such as risk management in determining their size.
Elliott added that the survey–taken every six months for the past three years in an effort to gauge management responses to regulatory and public pressure following the crisis–shows an enhanced risk management function, in general.
Risk managers are “very involved” in assessments of performance, reviewing incentive program design and giving individual risk ratings, she said.
