Guest Comment: be warned, compensation negotiations in HK could get trickier

Andrea Williams, managing director of Ambition in Hong Kong, gives her assessment on how the new HKMA guideline might affect the employment market.

Hong Kong's banking industry has remained somewhat immune to the global furore about compensation packages in financial services, but the sector's employment market has certainly experienced its fair share of turbulence during the financial crisis. Fortunately the job market has bounced back and so it would seem has pay.

However, the Hong Kong Monetary Authority (HKMA) has recently taken steps to ensure that the adverse publicity surrounding compensation does not get out of control. It has issued recommendations on regulating compensation, which fall in line with those proposed by the G20 and international financial centres.

The "Guideline on a Sound Remuneration System" - which applies to both local and foreign financial institutions - aims to ensure that remuneration is consistent with and promotes effective risk management, in recognition of the fact that inappropriate risk taking could threaten the stability of the local banking system.

Key areas covered include: the establishment and role of remuneration committees; the balance of the constituent elements in a remuneration package; the measurement of employees' performance; and the alignment of remuneration payouts to the time horizon of risks.

Firms are expected to bring their remuneration systems into line by the end of 2010. If appropriate, they should begin refining existing remuneration systems, including changing the terms of employment contracts.

Who will be specifically affected?

The remuneration policy impacts the following categories of employee: 1) executive directors, the chief executive and other executives; 2) propriety traders and dealers who are in a position to take on material exposures; 3) employees in marketing, sales and distribution functions and loan officers who are incentivised to meet certain quotas; and 4) employees within risk control functions.

Deferred remuneration

In the past, bonuses were usually paid out fully at the end of each fiscal quarter or financial year. For some banks it was common that no bonus was paid, if employees quit their jobs prior to the payment date.

However, under the new guideline, deferral of a portion of variable remuneration is being recommended, subject to a minimum vesting period.

Banks can then observe and validate the employee's performance - including the associated risks over a period of time before the payment is actually made - and the adjustment of the amount will more accurately reflect the risks and risk outcomes.

Banks may also need to consider the use of claw-back arrangements, which means incentives can be taken back at a later date if certain conditions are not met.

How might this affect the job market?

The guideline is likely to lead to some employees seeking better remuneration packages. It will also make some firms more appealing than others, depending on the strategies they use for attracting the best talent.

Negotiating remuneration at the time of job offers will become far more complex and this will make the recruitment process even longer.

Banks and financial institutions will continue to experiment with compensation models to find the best way to attract talent, whereas candidates will demand a higher portion on their income in guaranteed base salaries.

The effort to limit and/or regulate compensation packages will therefore pose some challenges in the near term.

But in the longer term, it may be a boon for banking and financial services professionals who are considering working in Hong Kong because the job market here will become more regulated and therefore more stable and predictable.