Q. It’s been 8 years since 2009 and the financial crisis – how has the shape of ‘compensation management’ amongst financial services changed since then? Do you see significant variations in the practices adopted across the globe as opposed to Asia Pacific?
A. Post the financial crisis, there has been a huge focus on regulations and prudent business norms as can be seen with the G20 and the Financial Stability Boards (FSB) Principles for Sound Compensation Practices. The intent of the FSB's Principles was to ensure countries didn't arbitrage against one another through different regulatory regimes. Unfortunately, what has happened is exactly what the G20 was trying to prevent. Europe today, for example, has very prescriptive regulations even in terms of caps on how much individuals can earn.
In emerging markets such as the Middle East and South East Asia and other non-FSB signatories, the key is to learn from the spirit of the FSB Principles to ensure good compensation governance. There is also a need to put together structures that ensure proper ‘pay for performance’, and link rewards for high performing and high potential employees amongst other things.While most would look at larger financial services organizations to ensure that they follow the guidelines, we also provide guidance to small organizations on good practices that should be followed.
Q. Given the impact of stringent regulations imposed by various regulatory authorities, what has been the change in the rewards practices offered by companies to attract and retain top talent? Is there any difference between such practices in the developed and emerging economies?
A. The changes in the regulatory set-up towards a more stringent system, especially in larger banks, has worked as a disadvantage to these global firms. For example, employees are not comfortable being limited by regulations in terms of the caps on what they can earn. This regulatory nature has now permeated through banks and has created an advantage from a work-life balance standpoint as well as from a business standpoint. We have seen a lot of employees leaving large MNC banks to move to local or domestic banks in countries like India, Singapore and in the Middle East. From a compensation standpoint, the compensation levels of local banks have increased while the compensation levels of global banks have declined. The next stage would be the shift of talent from both international and local banks to fintech startups where it is no longer about just the compensation, but also the excitement of being in a startup. Such a shift is most evident in the senior and middle management employees, especially in emerging markets like India and China.
Q. In your global experience, which are some of the early adopters of ‘digitization of financial services’? What could organizations in India learn from the challenges that these global firms have faced?
A. A fairly recent example of digital disruption can be seen in the case of book stores. Stores as global as Barnes & Noble were affected by Amazon. At the time they did not perceive online platforms as a threat. Similar trends can be seen in other retail stores as well primarily because these large organizations have not been responsive enough to technological change. However, what we see in the banking industry is slightly different since banks are the biggest technology adopters in the world. But the challenge for them is the ability to find the right talent and further to retain them by creating an environment like a technology startup, which they are unable to fulfill. Banks are also facing a challenge retaining their technology employees since in a fintech startup they are working with people who have the same focus whereas in a bank technology, it is just a division.
We see that banks in Africa, China, India and other emerging markets are not competing with existing banks but instead going straight for the unbanked population and creating a new market. The larger banks are moving in the right direction, but when you look at the mid-sized or smaller banks, these organizations will continue to grapple unless they are able to scale and meet the security that their clients demand on the system. It is interesting at this time since there are a lot of small finance banks that are very secure and provide minimal risk to the individual. But, if someone had to deposit a million dollars it would still be the bigger banks that clients would likely feel more comfortable dealing with. Therefore, what is keeping a CTO of a bank up at night is making sure that the bank’s platform is as secure as possible and not so much technological disruption from the fintech startups.
Q. While many leading organizations across the globe have adopted ‘Consumerization of Rewards’, are financial services organizations really engineered to adopt and embrace this concept? Can you share some success stories?
A. In US, Canada and par ts of Europe, you have the flexible benefits or what is commonly called the buffet approach which basically means that there are a few components that are a baseline like a medical or life insurance where the employee would not have the choice of not taking these basic benefits. But, where the employees have a choice is to, for example, trade-off very basic medical insurance instead of a very high-end insurance and use that trade-off to get more vacation time. For a lot of employees, there is a feeling that the company is providing what they would otherwise have to buy from the market and almost all the global banks now provide a year-end salary slip to their employees that would not only have their salary, bonus and long term compensation but also the value of the benefits and training provided. This also helps the employees understand what their firm is investing in them.
A lot of banks use employee focus groups to understand what is valuable to them in terms of the components they receive as a part of their total compensation and benefits. What is observed is that it is often very different by level and by line of business. So what firms typically do is that they provide their younger employees with minimal medical insurance packages for example, whereas senior employees would be concerned about their health and would get a medical plan with more comprehensive coverage. This is not prevalent in most markets because insurance providers do not typically provide such flexibility. I think that is the road that organizations need to go down and listen to what their employees want.
Q. Most financial services companies in India had almost cashed out benefits? Do you believe benefits will make a comeback? There is a lot of talk about differentiated benefits for various age groups, levels of management and even gender. Keeping in mind the talent profile of financial services, does differentiated benefits really make sense?
A. I believe that differentiated benefits would make a lot of sense in emerging markets. What typically ends up happening is that the larger global firms end up following what the organizations in the US are doing and this does not necessarily make sense in these markets. I had recently met a company based out of India that helps employees track their health improvement and motivates them with prizes for example, for bringing their blood pressure down amongst other things. For the employee it is a clear indication that the firm wants them to be healthy and is investing in them. From a cost perspective, this could in turn help if the insurance provider is interested in reducing the premiums for a healthier firm.
The employers have the responsibility to provide certain things so that their employees are not distracted and can focus on doing what they do, better. This would include medical coverage for the employee and their family, life insurance, disability benefits, retirement benefits among others. In the older defined benefits plans, the employee knew that the organization would really look after you in the sense that you would have enough to live on.
In the new defined contribution plans, it is now up to the individual which is why we are seeing organizations providing financial well being training, for example, helping employees understand and decide their retirement plans and financial planning for this. In the future, organizations will need to stop being paternalistic and let the employees decide on their own as they focus on keeping their own costs down and focused
Q. Do you see any key changes in the way financial services companies will manage talent in the next 5 years?
A. Organizations in the highly paid sectors like asset management, capital markets, investment banking, wealth management, etc. have always been more focused on compensation rather than talent growth. Their focus has always been to provide their employees with a good bonus and how to get the next promotion. But as the bonuses have come down, especially in capital markets, there has been a shift where employers are now investing in employees to help them understand their career path and the options available for them, rather than having employees focus only on the next bonus payout. But this could go away again with a shift in the economic environment or with deregulation. But when we look at retail banking or insurance firms, the challenge is to manage the millennials and younger people who are not interested in working for the same firm for 30 years. The task is to identify methods of keeping these employees engaged and account for such a transition in the demographics. The firms would also need to identify, within this changing demographic, those employees who would be interested in staying with the firm for a longer period and invest in such talent.
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