SINGAPORE, 4 NOVEMBER 2008 – A re-think of the current rewards and remuneration approach is happening in the financial services industry in Asia. There is overwhelming agreement that the current rewards and remuneration systems in the industry is in need of reform, reveals PricewaterhouseCoopers (PwC) based on a survey involving 119 respondents from the financial services industry in Asia1. Eight-two percent of the respondents moreover favour the industry to take their own initiative for reforms rather than through regulatory intervention.
According to the survey findings, it is expected that over the next year, institutions in Asia initiating these changes are more likely to favour initiatives that tighten the alignment of incentives to risk and a shift towards longer-term reward structures. Sixty-eight percent of the respondents indicate that they will like to see better risk measurement and management techniques within the bank; fifty-nine percent will consider greater use of risk-adjusted measures. Presently, seventy-three percent of all respondents in Asia are already using, are considering or are open to using some form of risk-adjusted profitability measure, such as the risk-adjusted return on capital (RAROC) to determine performance-based compensation.
Although financial institutions are currently wired on a cost-conscious mode of operation, cutting back on investment in talents in that competitive Asian markets is perceived as a bigger risk for many of these institutions. There are concerns that draconian measures may impact the talent strengthening and management process given that sixty-one percent of the survey respondents are concerned that they will find it more difficult to retain good talents and forty-three percent see tougher challenges ahead in terms of talent recruitment. Without an industry-wide impetus, measures such as reducing annual bonuses as a percentage of total compensation or introducing bonus deferrals are unlikely to find favour unless ‘someone else does it first’.
Retaining the good talents that are most critical to generate revenue in Asia is still recognised as a top priority for many of these institutions. Despite the financial crisis, specific sectors within the financial services industry in Asia are still projected for an upward growth trajectory in the medium to long term.
“There has been concerns that cutting back on compensation may reflect a scaling back from investing in people, and result in losing the very people that will be core to the growth of the business” Professor Ron Collard, PwC Partner and Leader for Financial Services Human Resource Services in Singapore. “Retaining talent is critical. But the fundamental question is not whether a bonus payout was too high in absolute terms, but rather, it is about whether the reward given to the individual talent has struck a good balance between performance, risk and profitability.”
For now, financial services companies in Asia are more likely to favour incremental reforms that focus on specific sectors and functions. Fifty percent of the survey respondents are of the view that certain specific sectors are more in need of change than others. According to the survey, the reforms in rewards and remuneration need to consider three basic views: risk and the use of risk-adjusted performance metrics, the need to align with a longer term view of performance, and the need to create a better balance between the performance of the individual, the business unit and the overall group performance.
There is no one-size-fits-all approach in rewards reforms. As introducing greater variability into the way compensation is structured is favoured by financial institutions in Asia, it is expected that within the industry, non-standard remuneration and performance measures between specific business sectors are thought to be more appropriate to manage the allocation of resources required and to drive longer term focus of the workforce.
“Compensation is a core business issue for many firms and as such, it cannot be simply delegated to the human resources department given the complexity of many financial services businesses” says Dominic Nixon, Partner and PwC Asia Financial Services Leader. “It needs the concerted input from finance, risk and treasury so that we are looking at the possibility of a consistent approach across risk management culture, management of performance and the development of talent,” highlights Mr. Nixon.
“Recognising that there is a need for change is a good starting point - within the financial services industry, we find that executive management and shareholders are the ones now exerting the greatest calls within their organisation to change the compensation programme,” concludes Professor Ron Collard.
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1. The PricewaterhouseCoopers (PwC) survey of 119 respondents within the financial institutions in Asia on “Reward: A new paradigm? was executed in May 2008 and involved numerous dialogues with key stakeholders in the industry from regulators, prominent industry executives and commentators, including board members from large financial institutions.
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