Different talents and remuneration structures needed in the post-crisis financial services order

The financial services industry is stabilising and companies in this sector need to position themselves for a new financial world order, once the world has been through the current global financial crisis.

Capital requirements and cost of capital will be higher in a more stringent regulatory environment. This means a re-engineering of the business into a low-cost more sustainable model which will require a shake-up in staff deployment, performance objectives and career development.

PricewaterhouseCoopers, in its report Re-engineering the organisation: Managing talent in the day after tomorrow,examines how leading financial services organisations are gearing their talent strategies to the unprecedented market conditions and changing realities facing the sector.

Pam Maharaj, PwC SA Director: People and Change Solutions , says that in preparing for the upturn, the first and most important step is to define a clear strategy for survival and growth, and map out what talents and capabilities are required to deliver it. “This means re-inspiring the remaining workforce in order to sustain productivity in the near-term - as well as ensuring the company is ready to respond swiftly and decisively when the eventual upturn arrives. And for new talent, companies will be looking for people suited to a simpler and more sustainable ‘back to basics’ approach, and not necessarily the leading performers of the pre-crisis market.”

Maharaj says that after ruthless job-shedding, financial services organisations may be left with an anxious and disillusioned workforce. “Experience shows that productivity dips in the aftermath of such upheaval. Staff may be unclear about their roles, especially if they are taking on responsibilities from laid-off former colleagues. To re-connect with their staff and galvanise them for the journey ahead, senior management must be willing to come out onto the ‘shop floor’ and explain the strategy at the business and how retained staff fit into the changes ahead.

“This means a new breed of executive that can re-inspire a potentially demoralised workforce and guide the organisation along an unfamiliar strategic path. We will certainly see the attributes of leaders in this sector changing as growth slows, margins tighten and social and political engagement becomes more crucial.”

Undoubtedly there will be significant changes to industry compensation in order to promote a more sustainable balance between risk and reward. Tom Winterboer, PwC SA Financial Services Lead Partner, says rewards will be restructured to more closely align with the organisation’s changes in strategy and desired behaviour.

“We see quick fixes such as blanket curbs on bonuses which assuage the critics for now, but are not appropriate in the long-term. Organisations must develop a sustainable risk-adjusted basis for compensation that appropriately balances short- and long-term incentives. They also need to start recognising and rewarding risk, regulatory and relationship competencies as core skills. Remuneration decisions must be underpinned by robust governance structures and there should be a clear line of sight between performance, reward and career progression.”

Winterboer also highlights the need for an appropriate balance between financial and non-financial performance indicators to avoid any conflict between what gets paid and what gets done. “The optimum design for a sustainable approach includes risk-adjusted remuneration, deferred compensation, and a balanced scorecard of nonfinancial measures that reward teamwork, risk awareness and other favourable attributes, alongside financial performance.”

In striking the right balance between short- and long-term performance-related pay, Winterboer says companies have to consider that if base salaries are too low, staff could then rely on meeting incentive targets to make up for the shortfall – and this could encourage excessive risk-taking. “Therefore remuneration must always be linked back to risk in both the short and long-term.”

Winterboer says remuneration design needs to be specifically tailored to the various divisions within a financial services company. “For example, within capital market businesses, there is growing recognition of the importance of clear measurement of and personal accountability for the value contribution of trading desks and, where possible, individual traders. Rewards must reflect the cost and risk-adjusted profit attributions of these front office divisions, and the performance of the portfolio or individual trader must be tracked and linked to deferred compensation. Financial reward measures should also be augmented with rewards for teamwork, information sharing and other key aspects of business development and control.”

For back office functions such as risk and compliance, Winterboer says at present, a significant proportion of the rewards for these control teams are geared to the profitability of the frontline business. “This can create an inherent conflict of interest in which control teams may not want to challenge front office personnel as this could have a negative impact on their bonus potential. This highlights the importance of independent appraisal and compensation for these support functions and integrating their reward structures into the enterprise risk management (ERM) framework. Tying compensation to risk-based performance objectives can provide a powerful lever for instilling risk awareness in the enterprise.”

For senior executives, Winterboer says remuneration scorecards must be ever more closely aligned to strategic objectives. “Share options will remain important despite their currently reduced value, though longer time horizons and duration are likely to be a growing feature.”

Besides compensation structures being increasingly aligned to risk management, Winterboer says there also needs to be an environment where staff at all levels of the business are able and indeed encouraged to challenge key decisions, even if this goes against the prevailing strategic grain.

“Control teams must be able to maintain the necessary independence to provide effective scrutiny and oversight and ensure that management takes appropriate account of their concerns. Embedding risk officers within business teams is an invaluable approach, but these personnel must then ultimately report to a centralised risk function – rather than that business team head - which has the final say over their appointment, performance appraisal, remuneration and career progression.”

Maharaj concludes that the new financial order will require different talents and leadership as well as a marked shift in culture, rewards and career progression that will firmly embed the operational and strategic changes presently taking place in organisations.

The PwC ‘Re-engineering the organisation: Managing talent in the day after tomorrow’ report builds on market observations and some of the themes raised in the report ‘The day after tomorrow: A PricewaterhouseCoopers perspective on the global financial crisis’.