The changing face of reward in banking - Hay Group

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.