Bonfire of the bonuses
While recruitment is, understandably, a sore topic in the current economic environment, the equally unpopular topic of salaries has barely scraped by without scrutiny, particularly with respect to executive remuneration.
Ultimately, it seems to come down to a simple fact: broadly speaking, salaries remain fairly static, and discretionary parts of pay packets, such as bonuses, are being pared away until the market bounces back.
Meanwhile, anecdotal evidence suggests a key issue for organisations right now is simply how to retain their best talent amid an unnerving rush of retrenchments throughout the industry.
While it’s hard to pin down exact figures, particularly on the funds management side, insiders point to the large number of mid-tier positions that have been lost, and are going unnoticed amid the higher profile retrenchments.
Further, anecdotally, companies within the industry that have been retrenching employees have, at the same time, been identifying and recruiting talent from elsewhere — candidates who might otherwise not have been available to them.
“Key talent and culture are critical, especially in a services firm, so everyone is really attempting to hold on to that as opposed to release those to the market,” said Phil Butterworth, chief executive of dealer group DKN Financial Group. “And there’s not a lot of employment going on either that I can see.”
But on closer inspection, the issues arising out of an analysis of salaries in the financial services sector are deeper than one might initially anticipate.
The Federal Government’s recently released Budget for the 2009-10 financial year has turned employee share schemes on their head, leaving equity programs in question as a valuable employee retainer.
On another note, there’s argument that an increasing awareness and understanding of risk management will impact governance of remuneration practices.
It is certainly a complex and troubling time in the financial services sector.
Recruitment specialists eJobs reported a 60 per cent drop in job ad numbers on last year, while Robert Half Financial Services Group has indicated a period of cautious hiring, which has led to a significantly slower process of employment.
Meanwhile, human resources firm Mercer reported in its recent Market Issues Survey - an Australian-based survey of 352 companies across all primary industries, including finance — that national salary budgets have rapidly declined from 5 to 4 per cent over the past six months.
Salary sacrificed
While there are various reports of lower salaries being offered — and the general consensus is that pay increase freezes are the norm — there is argument that a significant portion of salaries are similar to what they were last year, before the market meltdown, particularly on the funds management side.
“There’s a big feeling in the marketplace that salaries have come down a lot. We’re not finding that the base salaries have been adjusted that significantly,” said Craig Bernhardt, associate director, Robert Half.
“I think what we’re finding is that it’s more the discretionary part of people’s packages, ie, the bonuses and all the other things that go along with that. Base salaries, we found in the last nine months, haven’t really changed much,” he said.
“If anything, we’re hearing about people getting 1 to 3 per cent pay increases, or talk of that obviously at the end of the year.”
Mercer’s principal, David Abusah, said the firm’s January forecast for salary increases in finance stood at 3.6 per cent, while insurance came in at 3.5 per cent.
“Finance is similar to other industries in the sense that the budgets have been declining,”
he said.
“The decisions, I guess, as to where these budgets are going to end up [are] primarily being driven by companies’ performance. When you look at a model for forecasting, this year more than any other year, of course, it’s become an affordability or a company performance issue.”
Abusah said that anecdotally, some organisations are holding up fairly well in terms of their salary budgets, even in financial services, while there are others that have been harder hit.
“Insurance was certainly hit harder than banking, so that was a key trend,” he noted.
James Nicholson, managing director, Australia, of recruitment firm Robert Walters, agreed that while base salaries haven’t moved much in the past nine months, bonuses are significantly down on the year before.
“There are some organisations, based in financial services and outside, that have put in place well-publicised pay freezes, and are looking at potential pay cuts depending on the way the markets pan out over a period of time,” he said.
“I should think people have to be prepared for a year where their total compensation in financial services is probably notably less for the vast majority of people than it was a year ago.”
However, according to Patrick Farrell, head of investment solutions at BT Financial Group, on the funds management side, while salaries have generally been put on hold, bonuses haven’t necessarily been sidelined.
“Certainly for some of the smaller boutique-type, there’s going to be a potential impact coming through here,” he said.
“I think obviously with more people on the marketplace, and the consolidation that’s sort of going on … they’re not having to pay up for talented people. Talented people will always get good jobs. And they do need to be paid accordingly.”
Farrell said that for a funds management business, it was important to have appropriate incentive programs.
“You can’t just take them away when overall returns are bad. If they’ve done their job and they’ve actually helped to protect people’s capital then that should be rewarded,” he said.
“It is much harder to do at that boutique level, but when you’re backed by a big organisation … when we’re going in to assess a manager in particular, we do look at that ‘parent arrangement’, such that a parent will support the manager in good times and in bad times.”
Financial planners fighting fit?
Even so, while the argument that the discretionary costs are going to suffer the most holds some weight, and certainly there is evidence that various financial services salaries remain relatively intact, salary figures in some job ads have declined noticeably.
EJobs’ Trevor Punnett, managing director and head of financial planning recruitment, said that while financial planners’ salaries are faring reasonably well, in the client services officers administration space, salaries seem to have gone down, and paraplanners have also seen pay cuts.
“In the paraplanning space, I’d say it’s an even greater drop. A couple of years ago, the benchmark $65,000 for two years advanced diploma holder was pretty strong. It then got up to 75, and even a year ago, you were seeing 85K.
“And now I think it’s gone back down to $65-70,000. So you can say there’s been a $10,000 or $15,000 drop even on paraplanners,” he said.
However, this is unlikely to produce the desired result.
“Clients have tried to hire people where they’ve dropped salaries by up to 10 or 15 per cent, and what they’ve found is it’s exceptionally difficult obviously to attract people,” Bernhardt noted.
“[All] they are going to get is the talent pool that is available immediately in the marketplace and often those aren’t the right people that they’re trying to attract.
“The good ones, who are earning good money, aren’t going to leave a stable job to take a 10 or 15 per cent pay cut. So [it’s really about] paying people the same money, I think it’s the discretionary part that’s going to be different.”
However, Punnett said that on the adviser side, they are still seeing jobs being advertised with very high salaries attached to them — and large promises.
“Often these come in the form of OTEs (on target earnings of) and you can see $130,000 to $250,000 on target earnings. They are primarily for senior advisers who’ve been in the industry a while, who’ve got their own clients, who can bring in 10, 20, 30, 40 million of [funds under management] straight into the business,”
Punnett said.
“So obviously they’re going to be given a higher salary because they’re covering a lot of their costs the moment they walk in the door.”
Punnett also distinguished between two types of financial planners: the servicing or review financial planners, who are not bringing in new business (even if they might be trying to increase existing business), and who would expect to see less than a business development financial planner who is bringing in new business.
“I see junior financial advisers — so that’s somebody who’s come up probably and has done some paraplanning, but certainly has the behavioural attributes of promoter drivers, ie, they’re sort of ‘salesy’ people who want to progress into advising — they’re coming in at $50-$70K base plus super, plus bonus, plus commission.”
Punnett said with experience of about three to five years, candidates would be looking at $80,000-plus, while you can expect $90,000-plus if you’re a Certified Financial Planner.
“I’m not seeing it going down. Probably on the review side, there might be an argument for it to go down,” he added, pointing out that it’s really about what a financial planner is going to generate, rather than a question of how much they should earn.
“You see, there’s a rule of thumb that says three times. It works in recruitment, it works in financial planning, it works in a lot of sales industries, where a third of your company revenue goes to the person bringing it in, a third will go to costs and a third will go to profit. People tinker with that model,” he said.
“If there’s a financial planner who says, ‘Well, I will accept a job for $100,000’, what they’re really saying is, ‘I’m going to be bringing in $300,000’.”
As for executives, perhaps the most examined in relation to their pay packages, salary figures are scarce.
“Having discussions with executives across the board, I would say they’re feeling a greater deal of pressure than the normal man on the street,” Bernhardt said.
“Obviously, they are being scrutinised. You only have to look in the newspaper and it’s every day, this one’s taking a pay cut, or that one’s decided to take a bonus reduction.
“I would say it’s definitely happening, but as to the numbers that it’s happening to and how much they’ve been cut, you know, your guess is probably as good as mine.”
Similarly, Punnett had no solid figures to share, but said if their salaries were based on funds under management, they would have taken a big hit.
“The question then is, well, have they reduced their costs, which may be staff, which may be a smaller office. If they haven’t, they’re either earning less or they’re making a loss,” he said.
Executive remuneration has come under the microscope a lot,” Farrell agreed. “I don’t think we get paid in lofty levels for anything — we’re here to do a job, and if we do that job accordingly, then obviously the incentives need to match.”
In terms of the criticism aimed at executive remuneration packages, Farrell said the situation in Australia is not as bad as it is in the US.
“In the US it got to ridiculous levels. There probably are isolated cases (in Australia), but I don’t think it’s a widespread phenomenon like it was in the US, where chief executives were getting paid exorbitant amounts, and that was starting to flow down through to their executive teams.”
A fair share
DKN’s Butterworth was similarly forthright about what we can expect on the remuneration front — like most, he does not anticipate great increases in pay around most dealer groups or financial services groups, nor that bonuses will be anywhere near where they have been historically.
The greater point of interest at the moment though, Butterworth pointed out, is what the Government’s Budget plans have done for schemes, options and equity plans for staff.
Changes to employee share schemes will see staff unable to defer tax payment on shares or options received as part of the scheme, a move that will, it seems, make them unsustainable and leave them bereft of benefits.
Butterworth believes the share scheme changes will have fairly broad ramifications as businesses will be unable to align their key talent with the success of the group in the long term because they are not aligned to the equity through options or performance rights. Issues of employee retention also come into play.
“Really the cash and the bonus components are around short-term recognition and reward. But a lot of financial services groups lock in their staff and their key talent through equity plans,” Butterworth said. “And what the Government has done in the last Budget has basically made these equity plans and options plans obsolete in Australia.”
Paul Quinn, executive partner, corporate, at law firm Allens Arthur Robinson, agreed there was a real risk such schemes would effectively become obsolete if the Government’s changes go ahead.
He also said that the main way in which businesses can incorporate risk elements into performance models is through these schemes, which would be very limited if there was a return to a system of deferred cash bonuses.
“That costs the company cash as opposed to shares or options, which don’t have the immediate cash impact on the company. So it does limit a company’s ability to set up the structure it wants to set up to get the right people, so you’ve got to incentivise the right people but incentivise them the right way," Quinn said.
Butterworth expressed similar concern.
“Increasing pay is a pure expense to the business, where an equity plan is an expense to the business but the rewards to the individual are so much greater than the cash increase we could give them in pay.
“To get long-term success and loyalty from your people, we’ve traditionally used, and a lot of other organisations such as Macquarie have used, staff equity plans. And this Budget has really damaged our ability to do that, and I think it’s a real shame.”
Macquarie’s share option plan has indeed reportedly been thrown into doubt, with its new bonus scheme affected by the Government’s plans.
A further potential consequence, according to Butterworth, is that key talent will move overseas where they’re going to be able to participate in the equity outcome or equity growth of a company, as opposed to remaining in Australia where all they will be entitled to is their package and a bonus.
BT’s Farrell agreed the changes will have a negative impact on how employers remunerate their staff.
“Taking away that equity stake does take away a big chunk of people’s remuneration,” he said, adding that employers will need to provide some form of long-term incentive.
“You don’t want a huge amount of executive turnover because that’s not good for a business either.
“It’s not necessarily how people get incentivised, it’s what they get incentivised for. I think that’s a big issue. You look at some of the French bigger banks — apart from Societe Generale — they’re risk management capability has really shone them through in these sorts of conditions," Farrell said.
According to Lesley Maclou, partner and principal, Harmers Workplace Lawyers, clients are consulting them about the impacts, but she indicated that it’s early days yet.
“I think everything’s quite new. The Budget was handed down only a short time ago, so the knee-jerk reaction tends to be internally some companies suspending schemes or putting notifications out that they’re reviewing it,” Maclou said.
“So as part of that process, yes, we are being consulted and will be consulted about reviewing remuneration structures and the like.”
Butterworth, whose firm has had successful equity plans in place for the past five years, remains somewhat optimistic that the Government will respond to the feedback it is getting on the changes to equity plans and make appropriate changes.
“Now we have to go back and rethink what we’re doing about pays, what we’re doing about bonus structures, because of the current policy that they’ve released around staff equity written plans,” he said.
“At the same time we’re not jumping at it too much at the moment because we’re just going to probably see how the Government reacts to the feedback they’re getting.
“So we’re not making any significant changes or putting a lot of thought into it just yet, because we’ve got some anticipation that the Government will fold to pressure.”
Recommended for you
As the year draws to a close, a new report has explored the key trends and areas of focus for financial advisers over the last 12 months.
Assured Support explores five tips to help financial advisers embed compliance into the heart of their business, with 2025 set to see further regulatory change.
David Sipina has been sentenced to three years under an intensive correction order for his role in the unlicensed Courtenay House financial services.
As AFSLs endeavour to meet their breach reporting obligations, a legal expert has emphasised why robust documentation will prove fruitful, particularly in the face of potential regulatory investigations.