Salary increases are set to be modest in 2017 as financial services companies worldwide feel the impact of slow economic growth, low inflation as well as continued low interest rates, according to the latest data from Mercer. On average, 2017 base salary increases for all roles are expected to be between 1.9% and 2.4%. Mercer’s research finds that the majority of organisations predict 2017 annual incentive levels to remain similar or unchanged to 2016.
Mercer's Global Financial Services Executive Compensation Snapshot Survey was conducted in October/November 2016. The survey reviews the pay practices of 42 global financial services companies — banks, insurers, and other financial services — based in 14 countries in Europe, North America, Asia, and South America.
Forecasted base salary increases are expected to be lower in Europe (1.4% to 2.0%) than North America (1.6% to 2.6%). Projections for India (6.0% average salary increase) are higher than any other growth market across Latin and South America (3.5%) and Asia (3.8%). Approximately two-thirds of organisations predict that the 2017 actual corporate incentive pools will be similar (within +/- 5% range) or unchanged to 2016 levels. Almost one-quarter of companies surveyed predict the actual 2017 incentive pool to be significantly lower than 2016 levels, while only 11% predict it to be significantly higher. A similar trend was observed last year.
“With compensation remaining relatively flat, firms are challenged to go beyond pay and emphasise their broader employee value proposition to continue to motivate and retain people,” said Vicki Elliott, Senior Partner and Financial Services Leader, Mercer Career. “To protect key talent, companies should also put more focus on recognising and differentiating high performers.”
The most prevalent changes in remuneration policy and practices planned by organisations in the next 12 months are job evaluation/global levelling (63%), parental leave policies company-wide (38%), and flexible benefits (33%). Pay equity policies remain an area for change, particularly in European firms where 40% say they plan to make changes to their formal pay equity policy company-wide in the next 12 months.
According to Mercer’s research, a growing number of organisations are implementing the use of non-financial performance measures as a way of aligning performance with sound risk-taking. Non-financial performance measures of conduct, compliance and risk management are increasingly being allowed to override financial outcomes. Approximately one-third of organisations allow for non-financial measures to override financial measures in their annual incentive plan (38%) and multi-year incentive plan (32%). This is more common in banks (55%) than insurance firms (15%).
Dirk Vink, Mercer Principal and Project Manager for the study, said: “Allowing non-financial measures to override financial performance measures provides greater emphasis on risk management, compliance and conduct, and thus puts a lot more teeth into their effectiveness as performance criteria.”
Compensation for control functions
Organisations continue to respond to regulatory developments and talent shortages by increasing fixed pay in the compensation of control functions. Mercer’s data showed that around half (48%) of companies had increased fixed pay for control functions, one-third had decreased variable pay, and 19% showed an increase in total compensation levels. On a regional level, far more European organisations reported a shift from variable to fixed pay: about half (52%) of European organisations reported an increase in pay linkage to function performance compared to 21% in North America. One-third of both insurers and banks reported that regulatory impact decreased the link between pay and business performance.
Mr Vink said: “Compensation for control functions is usually linked to the performance of their function and overall corporate financial performance rather than line of business performance. This is to ensure there are no conflicts of interest in exercising their oversight role for specific business practices and decisions.”
Mercer’s research showed that less than 30% of banks overall report a linkage of compensation for control functions to line of business performance.