The changing face of reward in banking - Hay Group

The changing face of reward in banking
New SAMA guidelines – how should you respond?
April 2010
At the end of January, the Vice Governor of Saudi Arabian Monetary Agency
(SAMA) wrote to all locally incorporated banks in the Kingdom with draft
guidelines on how remuneration should be managed in regulated institutions.
The document requires
incentive plans to “take
into consideration risk,
capital, liquidity and the
likelihood and timeliness
of earnings”.
The paper is a direct result of the global financial
crisis and the desire of G20 governments and
the financial regulators to prevent a recurrence.
As a member of the G20, Saudi Arabia signed up
to an accord agreed at the Pittsburgh summit in
November 2009 that all governments would act
to regulate remuneration in banks in a manner
that reflected the recommendations of the
Financial Stability Board issued in August 2009.
The situation in Saudi Arabia, however, is
somewhat different than in many other
G20 countries and the guidelines will raise
a number of new issues for banks in the
Kingdom. In this paper, we have outlined
the key points raised in the draft guidelines
and highlight some of the challenges that
Hay Group believes will need to be addressed
by banks in the coming months.

The changing face of reward in banking
Interestingly, SAMA
introduce a new concept
to the Kingdom in
suggesting that any
share-based plan should
include a clause requiring
employees to hold the
shares after vesting
Key Points in the Draft Guidelines
There are 5 key areas that will cause Saudi
banks to think carefully about their reward
arrangements:
1 | Compensation Policy: written pay policy
for all levels
The guidelines call for banks to have a written
comprehensive compensation policy for all
levels of staff that is approved by the Board of
Directors and which ensures that risks related
to compensation are being prudently managed.
The document specifies what the policy must
cover and , specifically, requires incentive plans
to “take into consideration risk, capital, liquidity
and the likelihood and timeliness of earnings”.
The guidelines also state that a bank’s policy
must not blindly follow market practice but
should reflect the business model, financial
condition, operating performance and business
prospects of the bank.
2 | Compensation Structure: looking at fixed
and variable pay
The guidelines are quite detailed about how
they wish to see compensation programs
designed in the future. In Section 4 they
outline how compensation should be aligned
to risk taking (including difficult to measure
risks such as reputation and liquidity risk)
and that compensation should be “sensitive
to the time horizon” of risks. Every bank must
develop an appropriate approach to adjusting
profit to reflect the risks being incurred and
the bank needs to incorporate an assessment
of how compensation reflects risk in its risk
management framework.
In Section 5 the guidelines detail how the
mix of compensation (the balance between
fixed and variable compensation) should
vary between different roles and levels of
employee. SAMA picks out how employees
in compliance and control functions should
be paid before discussing the possibility of
deferring some element of the annual bonus
and how share-based compensation plans
could operate. Interestingly, SAMA introduce
a new concept to the Kingdom in suggesting
that any share-based plan should include a
clause requiring employees to hold the shares
after vesting, rather than selling them and
realizing the gain.
3 | Performance Management: objectively
assessing all aspects of performance over
the long term
Section 3 of the guidelines specify how
each bank needs to have a process in place
to objectively evaluate and measure the
performance of each employee and that
the process must be free of undue influence
and conflicts of interest. The guidelines go
on to specify that financial measures should
not be the sole dimension but that due
consideration should be given to “other
factors” such as quality of business, customer
satisfaction, adherence to risk management
frameworks and compliance.
For senior executives, SAMA wishes to see
performance measured over the longer term
(i.e. more than one year) and their reward
also related to the longer term performance
of the bank.
In our opinion, banks in the Kingdom need to be
developing an action plan that looks at 3 dimensions
of compensation management: Governance, Policy
and Performance Management.

4 | Governance: establishing a
Compensation Committee in all banks
Section 2.1 and 2.3 specify very clear
requirements on the Board of Directors and
the Compensation Committee. SAMA wishes
to see the Board to take ultimate responsibility
for the compensation programs in each bank
and it lays down very specific requirements for
the Board to review and approve compensation
policy. There must be a formally constituted
Compensation Committee and SAMA lays
out the requirements for membership of that
Committee (Section 2.3.i) as well as the terms
of reference for the Committee.
The members of the bank’s Compensation
Committee must be drawn from the
Non-Executive Directors and be independent.
Members must also possess sufficient knowledge,
skills and expertise to take independent and
impartial decisions.
Finally, the Committee must review
implementation of the Compensation
Policy at least every 6 months.
5 | Disclosure: what needs to be included in
Annual Financial Statements
SAMA requires all banks to disclose the
aggregate compensation paid to various
categories of employee (although, interestingly,
it does not specify the categories) and the
break down of fixed and variable in the Annual
Financial Statements. In addition, banks will be
required to disclose the “salient” features of its
compensation policies, including the overall
design of the system, manner of risk adjustment,
links between performance and pay and the
policy for deferral of pay and vesting criteria
for receipt of any deferred amounts.
Implications for Saudi Banks
A number of these policy requirements are going
to present tough challenges for the banking
sector in Saudi Arabia. In our experience of
working with banks in other parts of the world,
the changes required will take some years to
become fully effective. However, given the scale
of the crisis and the political energy behind this
global initiative, we do not believe that turning
a blind eye is a sensible or feasible option.
Plan of action
How should you respond?
In our opinion, banks in the Kingdom need to be developing an action plan that looks at 3
dimensions of compensation management:
Governance
Policy
Results
Performance
Management

Checklist list for plan of action
Governance:
• ensure the Board is fully briefed to conduct its review of compensation policy and that the necessary
actions are scheduled
• review the make up and mandate of the Compensation Committee
• ensure members meet the requirements of the guidelines; ensure the terms of reference of the
Compensation Committee are up-to-date and that the appropriate people are working with the Committee
to advise and guide them
• ensure the half-yearly review mechanisms are in place
• prepare for greater disclosure of your plans and your competitors’ plans.
Policy:
• review your compensation policies and programs to ensure that all forms of risk management are
embedded in the design of the policy
• ensure the mix between fixed and variable is appropriate to the bank’s operating model and financial
condition
• review the variable pay components to ensure they contain the correct balance between financial measures
and behaviours, reflect the time horizon of risks and are not just copying what other banks do
• produce written statements of your policy so that employees know what is expected of them and how their
compensation plans will work
• ensure the compensation of employees in control functions is objective and independent
• review the weighting of performance between the indiv idual, their business unit and the whole bank;
consider longer term incentives and deferral plans and decide if these are appropriate for your bank.
Performance Management:
• review the workings of the performance management system to ensure they are compliant with the
guidelines
• look at the performance measures used and ensure they reflect a broad perspective of the organisation’s
performance, including the various risks incurred in the business
• specify the desired behaviours to ensure that staff are rewarded for ‘how’ as well as ‘what
• consider longer term measures of success that are different but complementary to the measures used in
annual performance reviews.
©2010 Hay Group. All rights reserved

Look at the performance measures used
and ensure they reflect a broad perspective
of the organisation’s performance
Hay Group works with banks around the globe to build responsible reward processes that will
balance the role banks play in society with their need to attract, retain and engage highly talented
staff. We have helped many financial institutions in the Middle East and globally, to re-think their
reward programs and develop new approaches that are appropriate for the new age of banking.
If you would like to receive future papers on banking issues, and information on our reward
focused training programmes please email: bhagini_paranawidana@haygroup.com to register.
If you wish to speak to Hay Group on any of the issues raised in this paper, please contact:
Peter Christie
Director of Reward Consulting | Middle East
E: peter_christie@haygroup.com
T: +971 4 232 9555
©2010 Hay Group. All rights reserved

Hay Group is a global consulting firm that works with leaders to turn strategies into reality.
We develop talent, organise people to be more effective, and motivate them to perform at
their best. With 86 offices in 47 countries, we work with over 7000 clients across the world.
With over 20 years experience in the Middle East, our locally based experienced professionals
have a first hand knowledge of the Middle Eastern market and business culture which makes
us uniquely placed to work with organisations in the region. For more information, please visit
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