A&O Bracken

Compensation has always been a critical issue for banks, and remains a source of public scrutiny. It consumes much management time, but it also determines relative advantage in a competitive market that is increasingly concerned about stability, conduct and purpose. Comment by Brian Jebb, Gilles Dall'Agnol and Kate Pumfrey of law firm Allen & Overy.

In business, compensation is a primary driver of performance and conduct. Stakeholders – including employees, shareholders, customers, and regulators – want to see compensation reward important behaviours they prioritise. HR leaders and boards are now compelled to look at compensation not only through the prism of performance, but also culture, equity, equality, and social responsibility.

Those measures are of primary concern for banks in particular in the post-pandemic environment. Their operational obligations can have a direct correlation with their market performance and future growth. How then do banks identify and benchmark the right activities to track and reward? How can they keep their focus on the bottom line, while enhancing corporate culture and building a better compensation system?

Competing interests 

Employees want their employer to reflect their own values, and for compensation to be set on an equitable platform. Shareholders want certainty that environmental, social and governance (ESG) improvements are more than a line item in the annual report. They want to see them embedded in company culture, and reflected in compensation.

Customers want banks to respond to societal demands and to reflect and serve their communities. Regulators are developing mandatory frameworks to ensure that banks include sustainability and diversity, equity and inclusion (DE&I) measures in their remuneration strategies.

It's critical that banks, large and small, start with a clear sense of their organisational purpose and values

The demands and expectations of each of these groups are changing the way banks compensate their employees and how they structure their remuneration strategies. Raw profit is no longer the only yardstick for compensation. Banks are striving to design, harmonise and deliver remuneration structures that align with ambitious environmental and social standards, as well as measures of diversity and good conduct. They also face the challenge of doing that while delivering on their commitments to corporate transparency, organisational purpose and stakeholder expectations.

Banks need to respond to these demands in a way that delivers on the promise of a compensation system that is ethical, fair and purposeful. At the same time, they need to maintain their competitiveness and profitability. This means meeting the external challenges of regulation and competition, as well as the internal challenges of managing remuneration.

It's critical that banks, large and small, start with a clear sense of their organisational purpose and values, because developing the right non-financial metrics and how they should be weighted builds directly from that point. A values-led compensation structure should not create universal practice, but rather reinforce universal principles. This is where banks need to decide which values are most important to them and which resonate throughout a diverse organisation.

Goodness comes from within

The best sources for remuneration measurements that can be used to build compensation strategies are often found within banks themselves. With the growth in data analytics tools and technologies, such information is readily at hand. Rather than relying on externally mandated measures, banks should analyse their own internal data and set their own metrics.

Banks ought to be able to do a better job than external agencies when it comes to assessing their DE&I performance, employee attrition, employee whistleblowing reports, customer complaints and other risk events. They can use that data to effect change, including making remedial action part of their compensation criteria.

One important channel for gathering such data is an employee feedback board or staff surveys. Banks should use the information they gather to evolve and refine their compensation structures on a continuous basis, having regard to constraints but also employee perspectives. What was appropriate only a short time ago may not be appropriate now, and setting compensation metrics is an iterative process – it is much more than box-ticking.

Banks can respond to these challenges in ways that create opportunities. Risk alignment and ESG and DE&I activities can act as drivers and change agents. Banks can also show they respond to societal and stakeholder demands, make tangible community impacts and reflect those factors in compensation. If they can articulate a corporate culture that resonates with employees, those measures may become a powerful tool to attract and retain key talent.

An inextricable link

In our experience, some banks still struggle with a perceived dichotomy between values and profit. This can inhibit the development of functioning values-led compensation. Yet it can be a false dichotomy. Long-term profitability and prosperity can depend on values as much as anything else. Embedding an organisation’s core values into its compensation structures is a good way to contribute to its success and growth.

Hence, values-led compensation is a path to success. There is a real opportunity for banks to play to their strengths and to position themselves as corporate culture leaders, in part through how they design compensation strategy. That way, they can create organisations where the best people want to work, build long-term careers and make measurable, positive contributions to society.

Brian Jebb is partner in New York, Gilles Dall'Agnol is partner in Luxembourg and Kate Pumfrey is counsel in London at law firm Allen & Overy.


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