The banking job that needs to put up more of a fight

The failings of several major financial institutions in recent times have led to intense scrutiny and discussion of remuneration practices at nearly all banks in the UK and globally. Change is inevitable. What is not clear, though, is who exactly should take ownership of these changes, and how? Now is the time for HR departments to step forward.

There has been general agreement among the regulators that tighter codes and standards must apply to a wider range of banks and financial institutions. A good example of the tougher regime is the UCITS V proposal, where European lawmakers want to cap bonuses for fund staff at 100 per cent of their salary. Fund managers are also concerned about other restrictions within the pay rules that would require them to pay staff half of their bonuses in fund awards.

A new role for HR

Given all that has been said and written, most people have a pretty good grasp of what kinds of changes are expected. What is not clear, though, is who exactly should drive these changes, and how? Is it the board, the risk department, compliance or HR? The answer is that all of these should be involved, although it is perhaps HR’s role in the process that is the least defined.

HR often operates in a sphere of low influence, with no seat on the board and little say over risk, strategy and even overall remuneration. In some banks HR only receives the bonus figures when they are ready to be input into the payroll. In other words HR is often relegated to the status of a ‘number cruncher’, not a major influencer or decision maker in the remuneration planning process.

This in itself clearly breaches the guidelines on remuneration issued by the then Financial Services Authority in the UK. It can only be a matter of time before such guidelines are extended to cover a much broader spectrum of banks and financial services businesses and indeed are enforced more stringently.

HR must play a significant role in managing any regulated firm’s compliance with these stricter regulations governing HR risk, training and competence, corporate governance and, in particular, remuneration. Now is the time for HR professionals to secure influential roles in these areas, if they do not currently have one.

The HR director should sit on the risk committee (HR risk is an increasingly critical area requiring control); the remuneration

committee (a given, some might think, but often not the case); and the highest executive management committees, ideally of course the board. Senior teams within all financial institutions are currently very worried about the remuneration and reward issues they face in attracting and retaining talent and the HR professional is perfectly placed to assist with this.

A how-to guide for greater influence

The question is, how exactly can HR achieve such influence? A number of useful approaches are set out below.

• Understand the organisation’s business better: a critical starting point. HR professionals will simply not gain the necessary respect or attention if they do not actually understand what the various areas of thebusiness do.

• Work with compliance: they wield a big stick in any regulated business and getting on side with them will increase the influence wielded by HR. In addition, compliance will not want to get involved in areas they either do not understand or indeed see as HR territory. Training & competence and remuneration are two perfect examples.

• Start to build a robust performance / reward culture with well-defined and developed appraisal and performance management systems.

• Make sure everyone understands that reward must be linked to long-term performance and that this must be assessed, managed and developed in a meaningful and objective way.

• Invest in an easy-to-use (and ideally online) appraisal and performance management system that works around clearly defined competencies that everyone understands. This should include FCA-compliant competence checks and the logging of continuing professional development and training.

• Get buy-in. Train people to understand the performance management system and why they must use it: give them the ability to manage and control it themselves. This can be achieved by encouraging involvement in goal setting, managing objectives and giving access to software systems so people can monitor and log their own training and development as it happens and assess

their own performance against objectives.

• Ensure that competencies and objectives are both financial and non-financial. The days when front office staff could work to simple financial targets alone are over. In addition, ensure that measurable competencies and objectives are focused on client needs and standards. Treating customers fairly is currently a major focus for the FCA.

• Get management commitment to link bonus and rewards to performance against all competencies and objectives, and ensure staff know this.

• Introduce well-designed, tax efficient, incentive retention and reward deferral plans. Professional advice is essential here. There have been examples of companies whose senior share option schemes yielded vested rewards worth less than the participants’ tax liabilities.

• Professional advice should be sought in any areas with which HR feels less than comfortable. There is no need to try to reinvent the wheel. All this may sound a tall order but now is most certainly the time to get started. While hearts and minds are focused, this is an opportunity that any motivated HR professional should surely welcome and embrace.

Neil Herbert is the director of HRComply.