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pwc/financialservicesFair dues: Harnessing fairness to win back trust If pay has become a lightning rod for public disillusionment with financial services, fairness could go a long way towards meeting changing stakeholder expectations, shifting perceptions and winning back trust. This demands a clear sense of what fair pay means to your organisation and how it can be applied in practice. Drawing on unique research, our action plan looks at how your business can achieve this.Financial services fair pay survey May 20182 | PwC Financial services fair pay surveyContentsIntroduction: 3 Your approach to pay speaks louder than words Why fair pay is critical to the future of FS 6How the FS industry views fairness 12Creating a fair organisation 18Conclusion: 20 Fairness cant waitContacts 21PwC Financial services fair pay survey | 3Introduction: Your approach to pay speaks louder than words Despite years of effort, financial services (FS) companies continue to face a damaging trust gap that makes it harder to connect with customers and sustain their loyalty. Creating a fairer pay structure would help your organisation to re-engage with customers, employees and society as a whole. The potential benefits include a stronger licence to operate, innovate and pursue profitable opportunities. Flatlining incomes and rising inequality are shining an unwelcome spotlight on industries seen to be exacerbating the problem. FS is one of the sectors in the firing line. The rewards enjoyed by senior executives and high earners within FS have come to epitomise what many people see as an industry thats cut off from everyday life Wall Street versus Main Street. And this spotlight is being intensified by new gender and pay ratio reporting1. Although many FS organisations have been working to reshape their cultures, deliver customer outcomes and publicise their contributions to society, public anger over pay is undermining the industrys efforts to reconnect with society. Yet the focus on pay presents an opportunity for your FS organisation. Putting fairness at the heart of your pay policies would visibly demonstrate that youre conscious of inequality and its impact that youre listening to what stakeholders are saying and youre prepared to align with their values. Ultimately, embracing fair pay would establish that youre prepared to walk the talk in reshaping your culture, organisational purpose and performance objectives2. The risk of inaction is being forced to respond to a fairness agenda set by hostile interest groups. This could include allowing fairness to become synonymous with equality, which in turn could lead to arbitrary caps on salaries or pay ratios. Loaded termThe challenge is that fairness is a subjective, multifaceted and very often loaded term. It can mean different things from different perspectives. Although some people might regard the pay rates for high earners in FS as unjustified, industry insiders may view them as appropriate recompense for what can be gruellingly long hours, exceptional pressure to perform and a bonus structure that is subject to clawbacks. Perceptions of fairness also vary according to what is being rewarded (e.g., financial performance or customer outcomes). 1 The pay ratio is the ratio of CEO pay to median employee pay.2 These key stakeholders include the talent your business needs to attract, retain and motivate. More than half (5nullnull of the null CEOs takinnull part in nullCnulls 2nullnull nullobal CEO nullrvey believe that top talent prefers to nullrk for ornullnisations nullth social values that are alinulled to their onull, makinnull this more important than competitive compensation (nullnull. nulle nullhiftinnull demands, competinnull prioritiesnull nullnullstinnull to the nenull talent realities in nullancial servicesnull nullC, 2nullnull(nullnull.pnull.senullvnulldfnulleportsnullnullhnullnnualnulllobalnulleonullurveynullnancialnullervices.pdfnull4 | PwC Financial services fair pay surveyGroundbreaking research Given the spotlight on pay and different perspectives about whats fair, its important to clearly define and justify what fairness means to your business and how its applied. This report looks at how to tackle this difficult challenge, drawing on a survey of attitudes to fair pay within FS that was carried out by PwC in collaboration with the London School of Economics and Political Science (LSE). The research examines what the various philosophical and psychological principles of fairness mean to the people making key decisions on pay (Exhibit 1 provides an overview of these principles, which are explored in more detail on page 14). We then gauged participants readiness to apply these different principles within their businesses. Building on our work with clients and the Purposeful Company Task Force, this gives us a road map for developing fairness principles through which your organisation can rebuild trust, enhance engagement and differentiate your brand. Exhibit 1: Principles of pay fairness Fair Pay SurveyEntitlementnulll voluntary transactions are nullstEfficiencynullcome distribution should lead to an efnullient allocation of labourJust desert nullople nullo achieve more deserve moreEqual opportunityOutcomes are fair provided the startinnull point isSufficiencynull minimum standard of livinnull is nullaranteed for all Maximinnullcome distribution should make the nullrstnullff in society as nullllnullff as possiblenullurcenull nullE and nullC researchPwC Financial services fair pay survey | 5The initial focus for the analysis in this report was the responses from 1,123 executives from a range of industries. We then carried out more detailed analysis of the 177 FS executives taking part to see where their views conform to and differ from the overall survey sample. Overall, we saw a significant convergence of attitudes towards fair pay. Although our survey confirms the strong free-market sentiments within FS, industry participants sense of fairness is broad, nuanced and socially responsible. This highlights the importance of balancing different priorities and the trade-offs this demands. Moreover, though employee buy-in is important, you cant simply mould your approach to pay around employees wishes, as what they want may be at odds with what society expects. It may also be at odds with the steps needed to reinforce your culture, brand and licence to operate. Fairness in practiceOur action plan for creating a framework to address fairness in an organisation looks at how to turn vague principles into tangible policies by balancing the different perspectives and expectations surrounding pay. This includes helping you determine what aspects of fairness are most relevant to your organisation, how you can apply them in practice and how to get your employees to support them. The key steps draw on the survey findings, along with earlier PwC research into the psychology of incentives3, human capital trends within FS4and the workforce of the future5.Taking the initiative on pay allows you to promote fairness on your own terms and ensure your brand and talent appeal stand out. Thats why a number of companies are already using these ideas to build fair pay frameworks to strengthen trust and engagement and to gain a competitive advantage.Some people may be paid less as fairness principles are applied. However, many others may earn more for example, through steps to raise minimum salary levels or close gender pay gaps. Overall, the benefits of rebuilding trust should enable your business to engage more closely with customers, strengthen loyalty and deliver higher and more sustainable returns. There should therefore be more in the pot to go around. By contrast, ignoring fairness would allow the agenda to be set for you and could result in damaging risks, including arbitrary regulatory pay curbs and threats to your brand.We would like to thank all the executives who gave their valuable time and insights to this study. If you would like to discuss the findings or any aspect of fairness within your business, please feel free to get in touch. null nullakinnull enullcutive pay nullrknull The psycholonull of incentivesnull nullC, 2null2 (nullnull.pnullnullnullennullrnullananullmentnullervicesnullublicationsnullssetsnullakinnullenullcutivenullaynullnullrk.pdfnullnull nullhe ponullr to performnull nullman capital 2nullnull and beyondnull nullC, 2nullnull (nullnull.pnullnullnullennullndustriesnullnancialnullervicesnullublicationsnullcnullnullnullhtmlnull5 null nullorkforce of the futurenull The competinnull forces shapinnull 2nullnull, nullC, 2nullnull (nullnull.pnullnullnullennullervicesnulleoplenullrnullnisationnullorkforcenullfnullhenulluturenullorkforcenullfnullthenulluturenullhenullompetinnullforcesnullhapinnull2nullnullpnull.pdfnullIn this report we set out: The six principles of fairness The four fairness tribes Five ways to apply fairness principles in practice 6 | PwC Financial services fair pay surveyWhy fair pay is critical to the future of FSFair pay and trust are inexorably linked. This is both a threat and an opportunity.Trust is crucial to your ability to engage with customers and employees and sustain your licence to operate. It remains elusive, however. Despite some improvement on the back of efforts to change culture and get closer to customers, FS is still the least trusted sector in the 2018 Edelman Trust Barometer6. The challenge of rebuilding trust is especially pressing for banks, which have struggled to overcome the public disillusionment that followed the financial crisis7. Yet the trust gap isnt just confined to banks; the latest PwC Global CEO Survey shows that 73% of insurance CEOs and 56% of asset and wealth management CEOs see lack of trust as a threat to their growth prospects (for banking and capital markets, the proportion is 60%)8. The much-publicised rewards for high earners in FS are contributing to this distrust. Yet, given the spotlight on pay, if you can reshape your approach to reward and communicate transparently about this process, you could shift these perceptions and start to win back trust in FS. Lightning rod for public sentimentWhy is pay in the spotlight? Since the 1980s, Main Street has seen its share of income fall, which is fuelling a backlash. In the US, for example, the proportion of national income going to top earners has risen sharply, while the share of global income of the bottom 50% of earners worldwide remains stuck below 10% (see Exhibit 2).null 2nullnull Edelman Trust nullrometernull nullobal nullport, Edelman, 2nullnull (httpnullnullms.edelmannullitesnullefaultnulllesnullnullnullnullnullnullnull2nulldelmannullnullrustnullnullarometernullnullnullobalnullnulleport.pdfnull null null the null, for enullmple, less than a third (nullnull of people takinnull part in the annual nullllup Connullence in nullstitutions survey had either a nullreat dealnull or nulluite a lotnull of connullence in banks in 2nullnull compared to nearly half of respondents in the leadnullp to the nullancial crisis (httpnullnullenull.nullllupnullollnull5nullnullonnullencenullnstitutions.aspnull. null nullobal poll carried out by nullounullv found that less than nullnull of consumers in nullaly, nullance, nullrmany, nullpan and the null trust banks to nullrk in their customersnull best interests (nullounullv nullternational Omnibus, 2nullnull httpnullnullounullv.co.uknullenullnullnullnullnullnullnullmostnullritsnullrustnullanksnullontnullhinknullheynullorknullustomnullnull nullC 21st CEO nullrvey (nullnull.pnullnullnullennulleonullurveynullnullnullpnullnulleonullurveynulleportnullnullnullpdfnull1PwC Financial services fair pay survey | 7Exhibit 2: Gulf in pay The rise of the top 1% in the US and globallyTop 1null versus bottom 5null national income shares in the null, 1nullnull2nullnull nullvernullnnull income inenullality tranullctoriesThe rise of the nullobal top 1null versus the stanullation of the nullobal bottom 5null, 1nullnull2nullnullnullurcenull nullorld inenullality report 2nullnull nullorld nullenullality nullb, 2nullnullnullareofnationalincomeUS1nullnull 1null5 1nullnull 1null5 2nullnull 2null5 2nullnull 2null51null12null1null1null1null2null22nullBottonullnull% USTop 1% USnullareofnullobalincomeGlobal1nullnull 1null5 1nullnull 1null5 2nullnull 2null5 2nullnull 2null55null1null15null2null25nullGlobal bottonullnull%Global top 1%8 | PwC Financial services fair pay surveyAlthough prevailing approaches to executive and performance-related pay may be economically justifiable in a competitive market economy, the income gap theyre creating is fuelling widespread anger and eroding public trust9. The hostility has been exacerbated by the stagnation and even decline in real incomes faced by many people in low- and middle-income employment. Policymakers are responding (see Exhibit 3). The outcry over executive pay affects all sectors, but the perception that disparities are especially wide within FS has made it a particular target for public hostility. In the wake of the financial crisis, policymakers moved to eliminate incentive arrangements they believed could encourage mis-selling or excessive risk taking. In some markets, notably the European Union, regulators have gone further by imposing hard caps on bonuses. More recently, FS executives have come under fire for protecting high pay for themselves in the midst of widespread job losses within their organisations. These issues are especially sensitive for businesses that received significant taxpayer-funded bailouts.Investment banking has come under particular scrutiny as a result of the crisis. Although pay per head dipped sharply as returns fell after the crisis, it has since started to rebound as headcount reductions leave fewer people to share the bonus pool. Exhibit null Global increase in fair pay regulationnullurcenull nullE and nullC analysisProductivity commission report on executive paynullstraliaDirectors remuneration reportingnullRemuneration policy to take into account CEO pay rationulltherlandsPay capnulltherlandsMinimum wage introducednullrmanyPay cap (public and semi-public)nullalyEqual pay for equal worknulluth nullricaBasic income referendumnullitnullrlandGender pay reportingnullSay on payEnullCEO pay ratio disclosure?nullEU regulation bonus capEnullnull The impact of the null industrynulls nulloor reputation nullth renullrds to fair paynull on public trust in the null is enulllored in nullind the nullpnull nullstorinnull consumer trust in nullancial services, nullcision Technolonull and the nullnancial nullrvices Compensation nullhemenull 2null5 (nullnull.fscs.ornulluknulllobalassetsnullressnulleleasesnullnull51111nullscsnullrustnullhitenullapernullnal.pdfnull2009 2010 2011 2012 2013
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