Compensation in Financial Services: Industry Progress and the Agenda for Change
This Institute of International Finance study, produced with assistance from Oliver Wyman, aims to answer three fundamental questions:
- What are the structural weaknesses (and the strengths on which to build) in current industry compensation models?
- What changes are needed to ensure that future compensation structures support the agenda of shareholder value creation and sound risk-management?
- To what extent has the industry already started to implement these changes and what are the challenges in moving from today’s status to full implementation?
The report presents a thorough picture of current industry compensation approaches, highlights industry-wide challenges, identifies existing leading practices, reviews in-flight changes made by firms in light of the current crisis up to March 2009, and then proposes next steps. The report’s intention is to provide a fact base which will help the industry to overcome the fears that first movers on compensation reform will lose talent.
The report is based on the results of a survey of compensation practices and a series of interactions with IIF member institutions between December 2008 and March 2009. 70 IIF member firms with significant wholesale banking businesses (including corporate and institutional banking, capital markets sales and trading, and investment banking) were invited to participate in the survey. Responses were received from 37 banks, representing a total of 57% of wholesale banking activity. The survey and subsequent interactions were designed to assess current and intended future industry alignment to the Institute of International Finance’s Principles of Conduct for financial services compensation: principles that are intended to guide firms in the re-alignment of compensation incentives with shareholder interests and the realization of risk adjusted returns. The IIF was supported by Oliver Wyman in designing, executing, and analyzing the survey.
The main findings of the report are:
- Financial services firms are responding to the compensation challenge; significant shortcomings exist which the industry is working to resolve
- Closing these gaps requires the resolution of multiple performance measurement issues – and significant time and effort is needed
- Effective implementation will require new governance structures and strong leadership
Oliver Wyman Partners, Nick Studer based in London, and Bruno de Saint Florent, based in Paris, contributed to this study.
