New compensation regulations adopted in the United States, United Kingdom and other countries following the financial crisis are causing global financial services companies to focus on talent management, and on rewards beyond pay to help them attract, retain and engage top talent in today's environment, according to a poll of financial services executives conducted by Towers Watson (NYSE, NASDAQ: TW), a global professional services company. The poll also found that companies are evenly divided on the impact that the current regulatory environment is having on risk taking in the industry.
In the wake of the financial crisis, several countries have enacted legislation aimed at curbing risk taking by large financial companies. In the U.S., for example, both the Troubled Asset Relief Program (TARP) and the Dodd-Frank Wall Street Reform and Consumer Protection Act require financial institutions to review and disclose whether their compensation programs encourage executives, traders and other employees to take "excessive" risks.
Similar rules were adopted in many European companies following guidelines issued by the Financial Stability Board in 2009.
Dodd-Frank also imposes clawback rules that require companies to recoup compensation following financial misstatements and in some other circumstances. The European Union's Compensation Review Directive III goes even further in regulating financial industry compensation. Those regulations are being expanded from banks to other industry sectors.
According to the poll, half of the respondents see little or no impact on risk taking in their organizations resulting from the recent regulations, while the other half said pay structure regulations have had at least a moderate impact. Seven percent said the new regulatory structure has had a significant impact, while another 7% indicated that pay structure regulation has fundamentally changed the industry's approach to risk taking. The poll of almost 90 senior human resource executives at leading financial services companies was conducted on May 18 at a Towers Watson conference in New York.
"Traditionally, the financial services industry has differentiated itself in the market for talent by its ability to offer above-average incentive compensation opportunities," said Mark Shelton, global co-leader of Towers Watson's Talent and Rewards financial services practice. "With the new regulatory restrictions limiting their flexibility in that regard, global companies are focusing more on talent management and redefining the 'deal' with their people."
Indeed, when asked what issues concerned them the most, nearly one-third (31%) said redesigning the employee deal or value proposition. Concerns about employee engagement ranked second (25%), followed by compensation issues (22%). When asked about their primary areas of emphasis over the next few years, almost half (47%) pointed to improving leadership effectiveness in their organizations, while 29% said focusing on redesigning key programs, including performance management and career development.
"Clearly, the current regulatory climate is creating new challenges around talent and rewards in the financial services industry globally," added Chris Fabro, the other global co-leader of Towers Watson's Talent and Rewards financial services practice. "The leading companies are struggling to adapt and redefine their programs for a markedly different environment from what preceded the financial crisis."