Although compensation practices at commercial banks are becoming more like those at investment banks, gaps still persist, according to a study by KPMG Peat Marwick LLP.
"The commercial banks and the foreign-owned universal banks have a whole population within their organizations that are not paid as aggressively" as the rest of Wall Street, said Vicki J. Elliott, a partner with KPMG's performance and compensation consulting practice.
"In their total compensation practice, commercial banks are finding they need to pay people competitively with investment banks," Ms. Elliott added.
The study, authored by Ms. Elliott and expected to be released today, identifies how compensation programs are designed and communicated to encourage behavior that supports banks' business strategies.
KPMG surveyed 16 global investment and commercial banks to assess how they pay people in various capital markets businesses, including fixed income, foreign exchange, equities, derivatives, high yield, corporate finance/mergers and acquisitions, loan syndications, and emerging markets.
One distinction that remains between commercial and investment banks is how they deliver long-term incentive compensation, the survey revealed.
Though 80% of the investment bank respondents said they used mandatory bonus-deferral programs, none of the commercial banks said they did. All the commercial bank respondents said they instead used companywide stock option programs.
Deferral programs require at least part of a banker's bonus to be postponed over a number of years. Often the bonuses are paid in restricted stock.
Stock-option programs grant employees the right to purchase shares of their company at a specified price.
Only 11% of the respondents that use corporate stock-option programs said they were effective in helping to retain their capital markets and investment-banking talent. But 80% of those who use bonus-deferral programs said they were effective talent-keepers.
"Clearly the payment of those bonuses in stock is viewed as tying those people more strongly to the success of the overall organization, and trying to encourage that 'one-firm' view," Ms. Elliott said.
"Although it may deter wholesale buying of talent from one organization to the other, it does not totally prohibit it from happening if there is a star and another bank will buy certain executives out of their packages," she added.
Despite the differences in their long-term incentive plans, for the most part investment and commercial bank compensation programs are becoming increasingly similar, said Joan Zimmerman, a recruiter with GZ Stephens Inc., New York.
Still, "the correlation between performance on a pure profitability standpoint and compensation is still more dominant at the investment banks," Ms. Zimmerman said.
She added that at commercial banks, a large component of pay is still purely discretionary rather than performance driven.
"The commercial banks have newer businesses and, in building them, are focused on indicating rewards based on more subjective factors, such as the ability of the bankers to break into clients, establishing relationships with the rest of the firm effectively, and educating others at the firm on the product they're representing," Ms. Zimmerman said.
The study found a growing tendency toward acknowledging the impact of nonfinancial results in achieving financial success. About 20% of the firms surveyed used formal balanced-scorecard approaches to compensation that stressed quality of results in addition to financial contributions.
The approach takes into account market share, customer satisfaction, risk management and control, productivity, efficiency, teamwork, innovation, and new product development.
Going forward, the balanced-scorecard approach is bound to become even more common, KPMG predicted.
The study also revealed "the desire to put more focus on teamwork and cross-sell efforts between segments or product areas of the firms," Ms. Elliott said. "It's a major challenge that they've had, because historically some of them have focused so much on individual product areas that it tended to build some walls between and across the firm."
Now, financial institutions are trying to promote views throughout the firm that recognize valuable client relationships that could be further leveraged if management encourages individuals in different product areas to share information and try to refer business across lines, Ms. Elliott added.
To that end, banks have made a concerted effort in the past few years to develop systems to give multiple groups credit for business generated.
