The new year will see widespread changes to bonus and incentive plan structures as the market seeks to address the perception that earlier bonus practices contributed in part to the current financial crisis by encouraging excessive risk taking, according to Mike Eckes, reward partner at professional services firm KPMG in the UK.

These changes will include the implementation of “clawback” and other similar provisions, intended to align the reward timeframe to the underlying trades and activities to which the reward relates, as well as innovation in overall incentive structures, a reshaping of asymmetrical bonus structures and more intrusive regulation.

Mr Eckes said: “The current crisis will inevitably result in financial services firms re-examining their compensation structures and introducing significant changes in response to investor and regulatory pressure.”

Employees will be required to pay back where future performance does not match past reward, Mr Eckes thinks. He said: “In 2009, shareholders and regulators, as well as employers themselves, will push for the introduction of deferred bonus plans with clawback provisions, escrow arrangements or other mechanisms designed to align better risk and reward and to avoid present reward for future failure. Clawback provisions may become the norm for annual bonus plans, as a means of addressing the risk of bonuses being determined solely by reference to performance in a single financial period. We are already starting to see these measures being introduced and the pace of their introduction will increase as incentive arrangements for 2009 are reviewed and new plans launched.”

Financial services firms will have to address the asymmetrical nature of annual bonus arrangements to align better the interests of shareholders and employees. There will be intense scrutiny as to how annual bonus pools are calculated and whether future risks, beyond the current financial year, have been embedded in annual bonus calculations. For highly leveraged short-term incentives (annual) where payouts are a multiple of base salary, investors and regulators will focus on the steps the firm has taken to avoid employees taking excessive risk to achieve maximum payouts.

Employees will be expected to have “skin in the game” more often. In the asset management sector, for example, fund managers and their teams will be required to defer a portion of their annual bonus into the funds they manage. This is already widespread practice in this sub-sector but KPMG expect to see similar steps taken across the financial services sector.

Remuneration faces intensive scrutiny, with the UK regulator, the FSA, already in the process of reviewing current remuneration practices with a view to issuing further guidelines on good and bad practice. It is expected that remuneration will be high on the agenda of future FSA visits and will be taken as a significant indicator of a company’s approach to risk management. Being prepared for these FSA visits – having reviewed, and potentially amended, current remuneration arrangements – will be key for employers.