If nothing else, a job in financial services has typically been a well-paying gig. Those working close to the money supply somehow always seem to come away with their fair share of the spoils, but the financial crisis is putting that key trait to the test.

Financial services industry compensation is under siege on three fronts. First, compensation schemes at financial services firms are being singled out as one of the fundamental causes of the financial crisis, and they must be reformed. Second, the crisis has cut deeply into industry revenue, meaning there is simply a smaller pie to be paid out. Third, the need for capital assistance at some major financial institutions is creating pressure on those firms to scrap lavish pay to executives.

Of the three fronts, the first may alter industry practices down the road, but it’s the other two that are having the most immediate impact.

In Canada, where financial institutions have yet to receive explicit government help, apart from lending guarantees and mortgage securities buyouts that are designed to get credit flowing, it’s the drop in business volumes that is having the clearest effect on compensation.

Bonus pools are under pressure as markets remain weak and volatile, which is deterring underwriting and mergers-and-acquisitions activity and sharply reducing assets under management. Trading has been voluminous, but not necessarily profitable. There are indications that this pain is being transferred directly to industry pay packets.

The two publicly traded brokerage firms that reported results at the beginning of November — Vancouver-based Canaccord Capital Inc. and Toronto-based GMP Capital Trust — both saw sharp declines in compensation expenses. For the quarter ended Sept. 30, Canaccord reported that revenue was down about 30% from the same period last year; incentive compensation was off by approximately 30%.

The firm also announced some job reductions and said senior management would be taking pay cuts of between 10% and 20%.

Over at GMP, quarterly revenue was off 43% from the prior year, and the firm also saw overall employee compensation and benefits expenses decline by almost 30% year-over-year. Virtually all of the pain is being felt in the capital markets segment of its business. Compensation expenses for the wealth-management division were more or less unchanged, and rose in the alternative-investments and corporate areas. The capital markets business, however, saw a drop of about 35%. GMP also reported a 10% reduction in fixed salaries for senior management, along with some job cuts.

The brokerage firms aren’t the only ones feeling this pain. It will likely hit the big banks, too. While the banks will begin reporting their latest quarterly results after Investment Executive goes to press, TD Bank Financial Group announced a trading loss in advance of its quarterly report. In a conference call with analysts, CEO Edward Clark said the loss will affect bonuses, both within its securities unit and at the senior executive level of the bank.

Elsewhere, bonuses aren’t just being trimmed; they are being wiped out, and not just by the weak markets. Financial services firms are also coming under increasing public and shareholder pressure to alter their compensation practices.

Several firms have given in to pressure to scale back executive pay in the face of public bailouts for the financial sector. In mid-November, the venerable Goldman Sachs Group Inc. said that its top executives will not take bonuses this year, nor will the executives at troubled insurance giant American International Group, Inc.

This news was applauded by New York state attorney general Andrew Cuomo, who has been leading the charge against excessive executive pay at firms that have received public money for a couple of months now. He has encouraged other Wall Street firms to follow suit.

In Europe, where banks have also been forced to seek out capital to survive, the compensation issue is high on the agenda, too. Barclays Bank PLC announced that its senior management will not receive any annual bonuses for 2008. This move, however, came not because of government pressure, but after talks with institutional investors amid efforts to raise £7 billion in new capital from those investors.

Another European firm that has had to seek additional capital, Swiss giant UBS AG, has pledged not to pay its senior management any bonuses this year. All other employees will have their variable compensation for 2008 reduced, it said, and the variable component of their pay will be determined in discussions with Swiss banking regulators.

@page_break@However, the UBS decision goes beyond a one-time effort to soothe angry taxpayers or disenchanted shareholders. It is also implementing a new compensation system for 2009 that it hopes will avoid some of the excesses that led to its part in the current crisis. In announcing the move, UBS said its existing compensation system was too focused on short-term results and was too insensitive to the quality and sustainability of the bank’s earnings. Moreover, it didn’t account for the amount of risk being taken to achieve results.

These criticisms aren’t specific to UBS; they apply to the global financial services industry in general. The G20 summit held in Washington, D.C. on Nov. 15 singled out compensation structures as one of the causes of the crisis, and one of the issues for regulators and firms to address immediately.

Following that meeting, the group issued a communiqué that called on finance ministers to review compensation practices and the incentives they create for risk-taking and innovation. It also asked the International Monetary Fund, the Financial Stability Forum and other regulators to develop recommendations on how to mitigate pro-cyclicality, including a review of how executive compensation practices may exacerbate cyclical trends.

It added: “[Financial institutions] should have clear internal incentives to promote stability, and action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking.”

This call is being heard in certain parts of the industry. The Securities & Investment Institute, a London-based trade association, recently issued a policy paper on industry compensation calling for a longer-term focus for industry pay practices and greater transparency.

UBS’s new compensation model represents one of the first efforts to address these issues in practice. Under its new scheme, the firm’s chairman won’t be eligible for any sort of variable compensation. Top management at the firm may earn variable compensation, but a large portion of this component will be held in reserve and paid out only if the bank’s results are good enough.

Its variable compensation system will now be based on what it calls a “bonus/malus” system. A maximum of one-third of annual variable pay will be paid out in the year in which it is earned; the rest will be escrowed and will remain at risk, based on the firm’s future performance. If the firm loses money in a subsequent year, the previously earned bonus won’t be paid out, and the amount in escrow will be reduced by a negative award, which it terms a “malus.”

“This should bring about a cultural shift in the company,” the firm said. “Those who are rewarded will be those who deliver good results over several years without assuming unnecessarily high risk.”

In addition to its new compensation model, UBS said that it is exploring its legal ability to claw back bonuses from directors and top executives that were paid in previous years for results that have since proven illusory; and, a task force has been set up to pursue voluntary recovery of some of those payouts. It will also hold an advisory vote on the new compensation model at its next annual meeting.

The advisory vote issue will also be back on the agenda at the various Canadian banks next year. Cambridge, Ont.-based Meritas Mutual Funds has once again submitted shareholder proposals calling for advisory votes on executive pay at the big five banks, along with Sun Life Financial Inc. and TMX Group Inc.

Last year, these resolutions got unexpectedly strong support from bank shareholders; it remains to be seen whether the events of the past year have changed enough minds to convince the banks to adopt these measures.

Without shareholder-led or industry-led efforts to reform incentive systems, it also remains to be seen if regulators in Canada have any appetite for involving themselves in this area. Despite the G20’s call for increased regulatory action on compensation, Mark Carney, governor of the Bank of Canada, opposes the idea of regulators getting involved with setting compensation.

Speaking to the Canada-UK Chamber of Commerce in London in mid-November, Carney noted that poorly designed compensation structures helped create inappropriate incentives that contributed to the credit crisis. However, he called for caution on regulatory intervention.

“These matters require judgment, not slogans,” he said. “I firmly believe that regulation of compensation is not appropriate, even though it is in vogue.” Instead, he suggested, regulators should consider compensation incentives “within a broader assessment of the robustness of risk-management and internal-control systems.”

Whether the pressure comes from shareholders or at the insistence of regulators, it appears that industry compensation structures are in for a rethink . In the meantime, the wretched market conditions guarantee that pay will shrink. IE