by Matt Sinnott, Principal 3XO
It’s widely thought that the most significant effects of the bonus cap were largely unintended in nature. The creation of ‘role-based allowances’ and other mechanisms to increase fixed pay meant that all but the highest total compensation packages were significantly less closely linked to performance, effectively insuring poor performers or extreme risk-takers from the consequences of their actions. In addition, the reduced ‘at risk’ proportion of total pay meant that the disincentive effect of malus and clawback, a mechanism to address financial and (increasingly) non-financial misconduct was diluted.
So how can the unintended effects of the bonus cap be reversed in practice? Many organisations will hope to find ways to lower fixed pay levels, for example by converting role-based allowances back into variable pay. That might be difficult to achieve in the short term without some hard actions on the part of the employers, so we might see a very mixed economy in this space for a number of years and a difficult transition period. Among the many questions organisations might ask will be:
- Should we immediately put new joiners and new promotions on a newly shaped package, without role-based allowances and high levels of fixed pay, or does the inequity of a two-tier workforce create too many challenges, not least in allocating bonus pools?
- Do we have the contractual right to remove role-based allowances? The likelihood is there is no unilateral right of variation on the part of the employer, so how do organisations go about getting express consent – and would an extreme measure such as fire/rehire be considered?
- How should executive director remuneration policies reflect this change? Many investors have long wanted a return to more ‘normal’ relationship between fixed and incentive remuneration as compared to other FTSE executives and this might be reflected across bank executive committees, whose pay structure is often aligned.
- In a two-tier pay structure, do we need to change how tariffs for conduct-based malus adjustments get reflected – as a percentage of total pay, variable pay etc?
Organisations that don’t face quickly into the change in pay structure envisaged by the end of the cap might be storing up a myriad of difficulties in performance, conduct, pay equity and other employment issues. Those issues will be messier to fix the longer they are delayed, when the alternative is quickly addressing a change that bank employees will be expecting.
Auditing culture and executing change
As with any significant change that impacts people en masse, the level of difficulty will come down to organisational culture. Are your employees aligned to the organisation and pointing in the same direction, or is it an ‘everyone out for themself’ environment? Will they be willing to go along with a change that they can see is for the greater good, or will only threats and enforcement have any effect? Do your leadership show the way by example, or is the messaging from the top different from the actions people see?
As a first step, we recommend a thorough examination of culture to help anticipate problems and build the vision that any good change management exercise demands. This can take the form of a simple ‘culture audit’ of the key change management issues. Once that is understood, practical steps can be taken towards executing the change, including designing new variable pay approaches, consulting with stakeholders and finally communicating change in a voice that fits with your culture.