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Top Ten Challenges for Investment Banks 2015: Regulation: Challenge 3



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Top Ten Challenges for Investment Banks 2015: Regulation: Challenge 3

  1. 1. Forced Compensation: Attracting new talent and retaining experience Top Ten Challenges for Investment Banks 2015 03 ForcedCompensation: Attractingnewtalentand retainingexperience
  2. 2. 03 Forced Compensation: Attracting new talent and retaining experience A convergence of high regulatory and public scrutiny, reputational damage and increasing pressure on operating costs presents investment banks with a significant challenge to retain the best people in their organisation. Addressing this challenge calls for significant changes to human capital programs and the re-organisation of operating models. It also requires banks to think more innovatively about overall incentives if they are to acquire and retain the top talent. Converging to the average Since the financial crisis a swathe of regulation has been introduced aimed at reducing and controlling the financial rewards available to employees in the banking industry. Europe is leading the way, implementing a bonus cap as part of CRD IV regulation that limits bonuses to the level of fixed compensation. In addition to the bonus cap, a number of rules have been put forward by, among others, the Financial Stability Board (FSB), the UK Financial Conduct Authority (FCA), the Bank of England and the Committee of European Banking Supervisors (CEBS), to better align compensation practices with the long-term profitability of institutions. These guidelines are at least partly attributable to public outrage at the perceived largesse of the industry since the financial crisis. The overall impact of these measures is being felt: since 2008, the average starting package for MBA graduates in finance or investment banking has been converging to the average for other industries (see Fig.1). 2
  3. 3. The emergence of competition At the same time, investment banks are facing increasing competition, not only from the buy-side but from a budding technology sector, touted by many as the “go-to” industry for the best and brightest. Figure 3 illustrates the increasing diversity of career interests among graduates of the top business schools. Technology giants such as Amazon and Google are continuing to increase their graduate intake, as the 3 Figure 2: Staff costs as a % of operating expenditure • Goldman Sachs • Morgan Stanley • JP Morgan • Citi • BarCap • HSBC • RBS • UBS • Credit Suisse • Deutsche • Santander • AVERAGE Source: Accenture Research Figure 1: Ratio of average starting package in Finance or an investment bank to average salary in all industries Source: Accenture Research, London Business School, Harvard Business School, INSEAD • HBS - package in ib / package in All industries • LBS - package in Finance / package in All industries • INSEAD - package in ib / package in All industries 2008 2009 2010 2011 2012 2013 140% 120% 100% 80% 60% 40% 20% 0% Investment banks have responded with measures to mitigate the impacts of these new rules, for example by utilising role-based “allowances” in addition to base salaries. However, in the context of higher amounts of equity-based remuneration and the increasing presence of claw-back provisions, regulation continues to force change in compensation models. Pressure on operating costs Staff costs continue to represent approximately 60% of operating expenditure across the investment banking industry, a figure broadly unchanged since the financial crisis (see Fig.2). As revenues, and RoE for shareholders, continue to be suppressed across core businesses, there is increased pressure to reduce these costs. 2008 2009 2010 2011 2012 2013 80% 70% 60% 50% 40% 30%
  4. 4. Optimise operating costs Accenture has long argued that in order to reduce fixed operating costs in a sustainable way, banks must make bold decisions about their operating model and human capital programmes. While most banks have made strategic decisions about which markets and services they wish to focus on, few have yet been able to execute on this strategy. As part of a clearly-defined strategy, banks should look to outsource entrenched areas of operational cost in non-core areas, or in parts of the value chain where processes are commoditised and deliver no differentiating value to the business – for example in post-trade processing. Banks should also explore the use of lower-cost locations for staff: in the UK, Deutsche Bank has recently moved many of its smaller client service teams out of London to Birmingham, while US banks continue to build out their presence in New Jersey. Reducing operating costs allows resources to be re-focused on areas which deliver the most value for the business, for example in specialised areas of sales or research. These roles are specialist, revenue-generating and require the most highly-skilled people, with compensation packages to match if banks are to compete. Learn from the competition…and innovate like them Banks must also examine their workplace cultures and organisation “trendy” industry image, created by a perceived relaxed corporate culture, amplifies the appeal of technology as a career choice. To address this challenge, investment banks must re-examine their operating models and make bold decisions, while finding the right combination of both financial and non-financial incentives to ensure they continue to attract the best talent to grow their businesses. 4 2010 2011 2012 2013 25 20 15 10 5 Source: London Business School • Tech, media telecoms • Investment Banking Figure 3: Employment destination of London Business School MBA Graduates, (%) 60% Staff costs continue to represent approximately of operating expenditure across the investment banking industry
  5. 5. 5 structures, and in this respect they should look to their new competitors. “Googlization” is a neologism increasingly used in discussions of workplace culture to encapsulate a dynamic environment supporting collaboration and ideas generation. Other industries – including investment banking – should strive to emulate their horizontal organisation structure, which fosters a more open and collaborative culture. Indeed, banks are increasingly recognising the power of fintech firms as incubators of talent. Banks are now supporting or participating in programmes aimed at seeking out the next generation, providing seed funding and mentorship opportunities for new start-ups, and generally working much more aggressively with third-party innovators to attract and retain the best talent. The more they participate in this space, the more ideas and working practices are drawn, osmosis- like, into their own organisations. In an industry where attrition is low and the prospect of reaching senior management is deteriorating, banks will also need to find additional, innovative ways to incentivise ambitious employees. For example, as large multinational institutions, banks have the ability to utilise their size and incentivise talent by offering opportunities in faster-growing markets, for example in Asia or Latin America. Apprenticeship schemes, by giving junior staff the experience of working closely with senior members of the business, also serve to flatten the organisation structure and allow high-performers to learn and advance more quickly. Banks also need to consider the type of work undertaken by their more junior staff. The best graduates will always be motivated far more by challenging, strategic tasks, but even where this is not always possible, banks should consider changes that make their employees’ time more impactful. New platforms are emerging, such as Thinknum – which enables analyst collaboration on cloud-based financial models. This is one example of how new ideas, supported by innovations in technology, are helping to change working practices in the industry. Ensuring competitive compensation for employees is vital for banks to attract and retain top talent. Yet with regulation and cost pressures weighing on potential future income and the emergence of competing sectors such as technology, banks must explore bold solutions and find more innovative ways to recruit and retain the best and brightest people. The more they participate in this space, the more ideas and working practices are drawn, osmosis-like, into their own organisations. Ensuring competitive compensation for employees is vital for banks to attract and retain top talent.
  6. 6. About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 305,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is Accenture Experts To discuss any of the ideas presented in this paper please contact: Diane Nolan Managing Director Capital Markets, Brussels +32 2 2267 574 Michael Griffiths Capital Markets New York +1 917 880 6354 Catherine Gutierrez Capital Markets New York +1 917 452 5368 Disclaimer This report has been prepared by and is distributed by Accenture. This document is for information purposes. No part of this document may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice. Copyright © 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.