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10 Years On – The Legacy of The Financial Crisis

by Peter Devlin

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Peter Devlin

We are ten years on from the Financial Crisis and I’m sure many readers of this article will think of the television pictures of the Lehman Brothers‘ bankers clearing their desks into cardboard boxes and leaving their building on 14 September 2008. That was one of the immediate physical manifestations of the crisis that had started in 2007 and whose root cause were the losses in the US sub-prime crisis (see “The Big Short” movie for a full explanation of it). But what exactly is the legacy of the Financial Crisis? It is tempting to answer, like others have done to past revolutions, that it’s too early to tell…

So I believe I need to call this article an ‘interim’ report on its effects on the world of compensation & benefits. But before I even go that far I think what we sometimes forget is that the crisis could have been much, much worse if central banks hadn’t taken the actions that they did, and we are really living with the side effects of their actions.

The official response consisted of monetary easing by the ECB, Federal Reserve, Bank of England etc. that dramatically lowered nominal and real interest rates that are only now being (sort of, maybe) normalized. In addition, regulators introduced a vast set of new regulations that directly impacted both the level and the type of compensation that financial institutions could pay their employees.

The political effects, I believe, have been significant: the financial crisis itself left most people poorer than they expected to be via lower growth in real pay but the monetary response to it left a minority that owned financial assets, much richer. The growth in inequalities has driven much of the fragmentation in the political world that we have seen lately (although by no means all of it).

In addition and of particular importance, the last ten years have seen the vast disruption caused by new technology. Today the capitalization of the FANGS (Facebook, Amazon, Apple, Netflix, Alphabet) stocks is around 3.0 trillion USD up from next to nothing in 2008. The disruption caused to the employment market as new technology sweeps through the economy has been tremendous.

It’s very difficult to disentangle these two effects and interaction of these vast changes has not necessarily been a benign one for all.

Collective versus Individual

Deloitte’s 2018 Global Human Capital Trends report shows there is a clear desire from employees for individualized compensation and benefit packages. Leading companies understand that a personalized, agile and holistic rewards system is essential to attracting, motivating and developing talent. While we have seen a shift in performance management (PM) over the past decade, with 76% of companies reinventing and adjusting their PM to be personalized and continuous, 91% of companies still follow the conventional practice of conducting salary reviews no more than annually. Additionally most remuneration (benefits and compensation) programs are inflexible and narrowly focused on experience and tenure. This however is contradicting with employees’ increased expectation for transparency and flexibility around rewards. The study emphasizes, that talent wants a custom rewards experience that reflects how they live, work and communicate. Which would result in a wider range of compensation and benefits tailored to a more diverse workforce.

I think this trend has always been there (remember the excitement over cafeteria plans in the 1990’s?) but new cloud-based systems now make the technological issues easier. And the zeitgeist of our times is individual (lower private sector union membership, “bowling alone”, social media, the gig and networked economy) rather than collective. Employees want more choice, although they may not want nor fully understand the risks entailed in the choices that can be made.

The great developments in cloud based technological solutions in the last ten years are, I think, a two-edged sword. While allowing greater individualization the introduction of such systems usually leads to, firstly a harmonization of compensation and benefit plans prior to the new system going live and secondly, far greater control from headquarters of the compensation and benefit packages being offered resulting in greater standardization.

My view is that the next ten years will see the development of Total Reward packages around a set of larger but still limited set of benefit choices as the tension between the collective (via harmonization from the corporate HQ or pressure from employee representative or from governmental regulations) and individual plays out.

Global versus Local

We should not forget that while there are some global trends (away for defined benefit pensions for instance, of which more see below) that are probably irresistible there are still huge differences in the geographical prevalence of certain benefits provided by the private rather than by the public sector (medical for instance in the USA and France).

Benefits in developing economies also have very different designs. For instance in Kenya and Nigeria there has been a big growth in private medical care and companies have responded by providing such benefits based on their collective purchasing power. An interesting benefit design issue that we sometimes forget is the need for the appropriate infrastructure to pay certain benefits rather than others: for example lump sums are more prevalent in African countries rather than annuities as insurance companies don’t have the experienced staff to judge and monitor the latter.

Often such benefits change as the economies mature: for instance club memberships, housing subsidies, power generation, mobile phones that are common in African countries may reduce as they become richer but these will be replaced by other benefits.

And the great local drive of differentiation, especially in allowances, of tax incentives for one type of benefit versus another will never disappear.

But let us be a little more concrete on where the changes have actually taken place and my prognoses for the next ten years.

Corporate Defined Benefit Pension Plans R.I.P.

If you still have an accruing defined benefit pension plan then you’re a lucky employee (and most likely in the public sector or part of a large German corporate). The move to defined contribution (or very often no contribution!) has been inexorable in most private sector companies around the world. While governments were doing their best to kill off defined benefit pension plans before the crisis (over regulation, retrospective benefit increases etc.) low real bond yields have made the risks and costs of such plans too great for any private sector company to accept. The UK experience has shown that the political economy of pensions can be lethal. To avoid having any failures stemming from a corporate DB pension plan, successive governments have over regulated them. This plus the additional costs due to very low real bond yields have meant that companies have moved to defined contribution plans. Governments have subsequently moved in the direction of forcing companies and employees to make contributions as the new DC plans have often been at the “minimum viable pension level”.

Above is a graph showing the development in real bond yields over the last ten years. With US Treasury bond yields moving higher have we turned the corner back towards more “normal” rates?

Medical plans

The importance of medical care in people’s lives cannot be overestimated. In the USA the access to such plans is one of the key retention drivers for employees. And if there is one lesson of the last ten years of government budgetary cuts it is that nearly everything that the state provides can be cut (defense, police, art budgets etc.) but not medical care. Even Obamacare has survived and is unlikely to be abolished now. What does this mean for medical plan as a corporate benefit? I think it will stay much the same as it is now: there will always be a need for additional medical cover as an employee benefit on top of what is provided by the state. But it will always be self-limited in the sense that all such plans will have clear caps and the state will always be the insurer of last resort for all large claims.

Stock Plans:

Outside of the USA, stock plans probably reached their zenith in the early noughties and have since retreated. Much of this retreat was caused by the introduction of IFRS2 and changes in US GAAP that put the costs of such plans through the P&L statement. Employee Share Ownership Plans remain common and are likely to remain that way especially where they are supported via (sometimes limited) tax incentives (in the USA stock plans have better tax incentives than 401k savings plans). We will see how such plans survive the next bear stock market. (In an interesting development, Amazon just recently increased its basic pay for warehouse staff while abolishing their stock award plan.)

Work Hard, Play Hard: The Rise of Wellness

The rise of wellness has been remarkable. Wellness covers the provision of gyms, health clinics, eye tests, ergonomic seats etc. In addition there is now greater focus on mental wellness (a good example of this are the new regulations in Germany on “Gefährdungsbeurteilung” where employers are required to assess the hazards of workload exposure on both physical and psychological health and take appropriate action, under pain of being sued by employees for their own risk assessment). Much the provision of wellness benefits has been justified by trying to measure the Return on Investment (ROI) of such programs in terms of lower absenteeism and lower presenteeism (this is definitely the ugliest word in the English language but it is the attendance at work while not actually working or working way below par). While I think it can be shown that the ROI is positive for such benefits (how could it not be as more motivated, fitter employees must be more productive?) I believe that companies need to provide such plans as a “minimum viable benefit package” to aid retention of their best talent in that these are precisely the employees who are most likely to value it (google “running and leadership” and you get a sense of this connection).

Company Cars

Even while I worked in London in the 1990s car benefits that were previously tax effective were being quickly eroded. In addition what was the point of having a car in London where there is no space to park it and it was quicker to take the Tube anyway? The UK experience is not unique. As the world has become more urbanized the idea of owning a car seems less important: in all the talk of differences in generations this is one area where the twenty somethings are really different – they don’t own cars and often don’t have a driving license even. The rise of car renting (in all its various forms) means that without serious tax incentives for company cars this benefit is likely to lose its importance (the new policy is called “Buy your own”). And most countries that have tax incentives for car policies are seeing them reduced or abolished (from a mix of ecological worries and the need to raise tax revenue). The big exception is Germany where it remains a key benefit. The future of car policies is likely to be in companies having group policies for car sharing etc. None of this is really due to the financial crisis but technology driven.


Perquisites (smaller non-cash benefits) cover all sorts of things depending of the industry (e.g. electricity allowances in generating companies), country tax regime (e.g. the large array of allowances in India) and job level (e.g. club memberships for management employees). I haven’t seen a discernable trend in the last 10 years except in terms of technology enabling corporate HQs to actually know what is going on in greater detail at the local level.

But in terms of technology of the future, we will see more large corporates using internal platforms (or providers) that replicate the AirBnB and ebays of this world at the corporate only level.

The platforms already exist to provide such services and there are already internal corporate driven sites to “flat swap” or rent for employees only. The biggest danger to such benefits is that they remain used by a relatively small number of employees so the average employee spend for such platforms would not be reflected in a corresponding recognition in average total reward recognition by employees.

Flexible working

The one great change in the last ten years has been the rise of various forms of flexible working. Corporations are trying to balance the need for certainty in staffing with the desire of employees to have more variable working times. Such benefits include part-time working, job-sharing, old-age part-time plans, home offices. The rise of the sabbatical is for me one of the great retention tools for employers: how many employees simply left your company in the past because they wanted a change?

Global Insurance Policies

In the provision of insured employee benefits (life, disability, pension etc) the last ten years has seen some significant changes. They have been driven by technology and globalization rather than the financial crisis itself. Firstly there has been strong trend toward global providers: brokers that seek to provide a global one-stop shop for insurance broking and global actuaries for corporate pension accounting work. Secondly, global insurance providers and networks: there has been a marked development of global underwriting policies being written for global corporates but the “traditional” concept of pooling has not died and will continue, as it provides a sensible solution for many companies.

Regulating Cash Compensation

One of the direct consequences of the crisis was a clamp down on risk taking by financial institutions: the flip-side of being saved by the public purse. Those readers who work in the finance industry whether banking or insurance, will know of the extensive changes in compensation regulations. The following is a selection from the alphabet soup of key regulations.

In 2008, the Financial Stability Forum and its successor, the Financial Stability Board (FSB) initially provided new guidelines for executive compensation within the financial industry. The FSB’s “Principles and Standards of Sound Compensation” mainly concerned the design of executive compensation, and in general the remuneration of all Material Risk Takers in banks. Additionally, the FSB called for executive compensation to be increasingly linked to the risks identified in the banking core business.


Published in 2013, CRD IV included restrictions on bonus payments by credit institutions and investment firms. It applies to employees, whose professional activities have a material impact on the risk profile of the relevant financial institution, including senior management, risk takers, employees engaged in control functions and employees whose total pay puts them into the same bracket as senior risk management and risk takers.

The directive requires that variable pay must to be capped at 100% of total fixed pay or, with shareholder approval, 200% of total fixed pay. At least 50% of any variable pay must consist of shares or equivalent ownership interests. Additionally, at least 40% of any variable pay must be deferred over a period of at least three to five years. (Sounds bad but if one thinks of pensions being simply deferred pay then it is not that long.) Up to 100% of variable pay will be subject to “clawback” or “malus” arrangements. Banks are now required to set specific criteria for such arrangements.

AIFMD, UCITS V, MIFID and ever more

The European Securities and Markets Authority adopted the Guidelines on sound remuneration policies under the AIFMD and then set out the framework for the remuneration of identified staff at managers of alternative investment funds. In 2016 the requirements became even more strict. Under UCITS V, which was introduced in 2013, the fixed and variable component of identified staff’s remuneration must be “appropriately balanced” with the fixed component representing “a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable remuneration component.” There is no prescribed maximum or minimum percentage figure.

The ultimate result of this alphabet soup of regulation has been to increase fixed pay and reduce variable pay combined with having variable pay paid out over successive years that is then subject to various forms of clawback.

In terms of non-Financial services compensation, the main changes have been in respect of executive pay arrangements and the idea that disclosure of pay is the appropriate method to regulate it.


So what has changed over the ten years since the financial crisis? To quote Tancredi, the prince’s nephew in the novel The Leopard: “everything needs to change, so everything can stay the same”. Lots of things have changed but there is still a familiarity to all the issues. Despite this, for the private sector, open defined benefit pension plans are near extinct except where legally required. And other benefits such as flexible working that reflects the new ways of working, are very much to the fore. The next ten years will continue the everlasting battle between the desire for individual compensation and benefits versus the forces of the collective (state regulation, employee representatives, corporate harmonization). The struggle is actually healthy but needs to be appropriately managed by all stakeholders.

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