By Roopank Chaudhary, India Head, Financial Institutions, Aon Hewitt (McLagan)

The swagger is still visibly missing in the stride of Indian bankers. However, their demeanor is far more relaxed, self-assured and composed. There is now a welcome respite from the frenzy of activity that engulfed their lives during the last two tumultuous years. The financial debacles were followed by an aftermath of regulators crying themselves hoarse, politicians and statesmen getting into the accusatory act, and the public and media at large making the "devils in pinstripes" the biggest villains in recent times.

The storms have passed (though, as we speak, the clouds seem to be gathering again), but the winds of change still threaten to bring uncertainty and stress. Controversies still rage about the continually rising compensation levels in the banking industry which defy investor logic and free market mechanisms. Common belief would put forth no logic to such year-on-year (YoY) increases, and there is widespread indignation as to why no rationale exists to this phenomenon in the banking industry.

Entering the Banking Battleground

Compensation levels in the banking industry in India have been at the center of debate, and lately at the center of controversy, as this sector opened up after the early 90s to become a hot spot of critical talent. For a long time, banking and strategy consulting have ruled the roost among campus offers. Rising salaries and generous bonuses have been an attracting force, but at the same time, raising eyebrows and concerns.

Many bankers would argue that salary levels, increments, and salary cuts are perfectly in sync with the business and market realities. Hence, when business did well (2005-07), the numbers swelled; but when business dipped (2008-09), the annual salary increments dropped from a generous 15% and 12% in 2007 and 2008, respectively to a mere 3.6% in 2009, accompanied by rampant salary freezes and even pay cuts.

 
While that may be a plausible argument, many have wondered whether it is just free market forces and the need to compete for talent that push up salaries and allocate premiums to some banking jobs, or, is there something more that brings a method to this madness?

Do economic realities, market dynamics, talent issues, and business performance really shape how different functions get compensated? That's the question we set out to answer, as we decided to analyze the data we have collected over the past 14 years from our banking surveys.

The Unsung Heroes – Time for Redemption?

The biggest divide that has existed for a long time in banking was between the front office and support roles. The golf-playing corporate bankers were the epitome of success and ambition as they cracked deal after deal, whereas the roles supporting their business were often said to have gotten a "raw deal" on compensation. Credit, risk, compliance, audit and legal were all supposedly difficult control mechanisms, which many in the front-office business believed slowed down the pace of disbursements.

For a long period before 2008, not surprisingly, salary increases at the senior levels in the wholesale revenue function (comprising all front-end revenue-generating roles in wholesale banking like corporate banking, transaction banking, financial institutions group, etc.) were double-digit, consistent and regular. Increments for similar levels in wholesale non-revenue (comprising middle- and back-office functions like credit and risk) and also for overall support functions like legal, compliance, internal audit, HR, finance and IT were much lesser – single digits. The wholesale non-revenue function hovered around 80-90% of the wholesale revenue function in terms of the salary differential till 2009. Support functions overall remained around 80-85% of the wholesale revenue salary levels.

2008 changed the equation, and brought about some startling results. Organizations that took a conservative approach, which included slow-paced but compliant credit policies, and painful but effective internal audit systems, survived the recession and emerged as proud survivors.

Understandably, post 2008-09, the demand for risk and credit professionals, compliance and legal heads, and auditors shot up and, given the relative scarcity of talent, the salary gaps between these support roles and front-end sales roles should have likewise reduced.
 
Interestingly, the numbers spoke the same language. Post 2008-09, the YoY salary increases for wholesale non-revenue for senior levels went up as high as 15%, whereas wholesale revenue was still around the 8-10% mark. In terms of support functions, the more neutral functions like HR and IT showed modest YoY increases, while the more "premium" senior roles in internal audit, compliance and legal, were moving along at 15-20% YoY.

Even on the differential analysis, the numbers held up. Wholesale non-revenue salaries had come up to 97% of the wholesale revenue salaries by 2010, while among the support roles, legal salaries reached up to 93% of the wholesale revenue salary levels (from 75% in 2008) and internal audit raced from 71% in 2008 to almost 100% of wholesale revenue salaries in 2010. It's evident that the compensation differential between revenue and non-revenue functions is reducing, indicating the banks are rebalancing their focus between revenue generation and associated risk management.
 

Some Things Never Change…but They Did…

While some of the banking businesses (in fact, quite a few of them) took a hit and had to brave it out during the crisis, a few usual suspects saw salary levels and differentials being maintained, or even back to pre-recession levels.

Treasury continued to dole out healthy salary increments throughout 2009-10, as was the case before 2007. 2008 did see a marginal dip in numbers and a flatter increment pattern, though not as stark as  other revenue-generating functions. The salary differentials for treasury, which were very high as compared to wholesale revenue in the period 2005-07, did suffer a bit and came down in 2008 and 2009, but seemed to have recovered substantially in 2010. Owing to the chunk of profitability it contributes to most foreign banks in India, and the technical skills and expertise required, i.e., the talent dimension, treasury, as one would expect, remained consistent in its compensation cycles.

The number of High Net Individuals (HNI) in India seems to be growing at a dramatic pace, and bankers are not too far behind in cashing in on the (private) party. Private banking relationship managers, who manage portfolios and the wealth of these HNIs, have grown in stature, importance and correspondingly, compensation. The skills needed to manage these "high maintenance" clients,  to understand and outperform markets, and to grow these huge sums of money continued to attract a premium in the market for a long time, as more and more banks focused on this seemingly profitable venture.

This party seems to have faded away in the last two years. As private banks have struggled to make money due to intense competition, margin compression and the limited suite of products in the Indian market (which is still largely equity linked), the salaries reflected a downward sentiment. For the middle management levels, 2005 to 2008 were healthy growth years in terms of salary increases. But 2009 saw marginal increases YoY, and this slipped further in 2010, to be almost flat for senior management levels. So clearly, this sector is not as favored as it used to be, and business issues have somewhat applied the brakes on compensation levels.

The Likely Losers – or Were They?

The part of the bank that seemed most affected as an outcome of the global financial crisis and its repercussions, was the retail bank. Post 2008, retail lending came to a standstill; liquidity was a big issue and banks scrambled to rollback all the optimistic business lines that catered to the mass market consumer. As unsecured lending was scaled down drastically, the strict focus on mortgage sales by most foreign banks (Indian banks, too, have a large portfolio in addition to other assets) and improving business performance led to the demand for mortgage specialists. Retail collections and credit have a far more important role to play. Consumer banking needs still exist, and banks need to lend cautiously and collect effectively to justify these retail asset operations. Liabilities have now gained prominence again as consumers have returned to foreign banks, and at the same time, are thronging to secure fixed deposits, given the incessant vagaries of the stock markets and attractive interest rates on offer by most banks.

The numbers showed a mixed validation. At the senior levels, from 2008-10 YoY salary increases have become flatter as compared to the period prior to 2008. Within retail banking, branch banking salaries have remained flat or even dropped YoY post 2008, after having seen reasonably healthy increases from 2005 to 2007. Mortgage sales salaries have witnessed a fairly sharp increase post 2008, after having modest or flat YoY increases. Liability sales salaries have also zoomed up after 2009. On the support side, retail credit and collections showed decent salary increases post 2009, as compared to 2008.

The common belief, even prior to the financial crisis, was that salaries in retail banking were likely to be lower than those in wholesale banking. With the recession having taken its toll, the gap in salaries between retail banking and wholesale revenue should have widened, if anything. On analyzing the data, we see a myth being debunked and, at the same time, a hypothesis being supported. Retail banking for senior-level salaries was pretty much at 100% or slightly more of the wholesale revenue salary levels from 2005 to 2007. They dropped to 80-85% in 2008-09, and subsequently slipped to 75% in 2010.

So to begin with, wholesale revenue salaries were not that far ahead of retail salaries, as we assumed them to be. And after the crisis, the gap has definitely widened.

The Market is Only a Reference Point

We have seen that there is some pattern and logic in how banking salaries move within the system, and also how the differentials and premiums stack up against each function. However, much as we may chide the "war for talent" and how market data becomes a shopping ground to poach and "swap" high profile bankers like a quasi IPL (Indian Premier League) auction, the reality is not so glamorous… and rightly so. There are a lot of factors that go into determining salaries, differentials and premiums.

The bank's internal strategy around both compensation positioning as well as business focus will be a key input. The bank may want to pay at the top of the market or may be happy to pay at a median level and focus more on Total Rewards. Which business it wants to focus on and which part of the bank may be more profitable, might be a second factor.

Some banks pay higher in retail because their strategy is around mass-market customers, whereas, some high-end corporate banks who have little or no retail presence, may not peg their retail bankers very high. Premiums may be attributed to either niche skills that are in demand in the market or roles that are likely to shape the future growth strategy of the bank. Newer and emerging customer segments such as small and medium-sized enterprises, coverage bankers, investment advisory, and project/infrastructure financing are likely to attract some premium due to their role in the current scenario and future potential.

As we have seen, banks will continue to be highly regulated (at least in the aftermath of the crisis) and roles that become critical from a regulatory framework and governance standpoint, may command a premium. The prime examples as we have seen are credit, risk, compliance, audit, finance and even legal. In the same vein, it may not be entirely surprising to see bankers in remote locations or semi-urban areas ending up with a premium in pay.

Hence Proved…at Least Somewhat…

So in effect, while numbers may have many limitations and our analysis may have be based on a few assumptions, the overall trends seem to be largely in line with what we hypothesized. While we started off with the common belief that the salary changes and sizeable functional differentials might not have a logical basis, the paradox that confronts us is that real business decisions, market realities, skills shortages, and bank performances do play a large role in shaping rewards scenarios.

The idea was not to make bankers either villains (a task that the regulators have anyways taken up) or heroes, but to just ascertain how salary levels, trends and differentials stack up against sound business logic. The numbers don't always add up completely and, even here, we can at best validate and support only some points. If numbers and statistics indeed showed the true picture in a high definition mode, we might have predicted and averted the last financial crisis. We also would be able to gauge the next one coming up as well -- as many now believe to be the case, given the recent financial issues in Europe and the impact of another global slowdown. The industry is definitely feeling the impact and remains watchful, cautiously hoping these threatening clouds shall pass…

Contact Us

Roopank Chaudhary heads up Aon Hewitt India's Financial Institutions sector, and can be reached at totalrewards@aonhewitt.com.

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