In the 2008 / 2009 bonus process, we have seen significant changes to deferral plans, most notably, substantially more compensation deferred.
Taxpayers, beneficiaries and politicians are up in arms about paying bonuses to public fund investment staff during this economic crisis.
Virtually every regulatory body has come out with some pronouncement or other admonishing financial institutions to curtail compensation programs that “encourage the taking of unreasonable risk.” Two parts of that statement are problematic.
In this Alert, we provide a framework to take a more holistic view of incentive plan design that moves beyond performance metrics and award opportunities into considering the overall risk and competitiveness of a firm’s compensation program.
Mandatory deferral plans were never particularly interesting. Firms were preoccupied with being “competitive with the street”. There wasn’t a great deal of variety and innovation. Employees griped about having some portion of their bonuses deferred, and then often sat back and watched the value of their awards escalate. Of course, that hasn’t always been the case in the last couple of years.
Prior to the financial crisis, most people outside of the sector likely never gave compensation and incentive plan design a second thought. As the crisis unfolded and the government set out to identify the contributing factors, however, evaluating compensation practices became an important exercise for regulators and banks.
While there will always be a differential between Front Office and Infrastructure (Back Office) pay, at some banks we may be seeing some early indications of change in giving greater attention to getting Infrastructure pay “right” for the current market.
As banks begin to make their year-end pay decisions, it is clear that incentive pay for employees across investment banking, equities and fixed income will decrease at most firms, particularly the largest ones.
