Internal Audit - Compensation and Market Trends - Mid-Year report 2016
Living with Brexit uncertainty
We wrote at the start of the year about the value of stability and the way it lifts demand for internal auditors. Like many others in the recruitment industry, we were anticipating that any demand suppressed by the uncertainty of Brexit would result in an uptick in demand as the vote was settled in favour of the status quo. Clearly this did not come to pass and the result has only increased the level of uncertainty. For both clients potentially looking to recruit and candidates looking to change job the result increases the value option, at least in the immediate aftermath, of doing nothing.
Banks more exposed?
Our expectation, provided a serious economic reversal can be avoided, is that after a period of uncertainty, the broader recruitment market will live with Brexit. Ultimately, even in periods of uncertainty, recruitment decisions need to be taken by both candidates and clients. However, some sectors are likely to be hit harder than others. The Tier 1 banks based in London, for example, may well become victims of strategic decisions which are likely, in turn, to reduce the number of internal auditors employed. There may be some comfort that many of these banks were already rationalising before Brexit and a potential positive for the internal audit recruitment market is that it will be less dominated by these banks.
The consequences of Brexit will no doubt have become clearer by the time we produce our annual market report at the start of 2017. In the meantime, as usual, this report focuses on compensation and the results of our annual survey.
Our survey was conducted before Brexit and it is possible that some of the sentiments expressed may subsequently have changed. The compensation data will not.
Earnings still up
At the start of 2016, real earnings and overall employment numbers were still growing strongly. In spite of this, our survey found a modest slowdown in the number of internal auditors changing jobs and, in common with some other areas of corporate governance, an uptick in the percentage of internal auditors reporting they were not working. However, given the value companies place on retaining high quality internal auditors, even in more subdued recruitment market conditions, average salary increases in internal auditing, have exceeded those in the wider economy.
Salaries have risen from 5.5% in 2015 to 5.7% in 2016. In a low inflation environment this is a good result and one acknowledged in our survey as more internal auditors reported they felt adequately compensated.
What is important to internal auditors?
In this year’s survey we included some questions about how internal auditors feel. Whilst there was a strong sentiment that their skills are becoming more valuable, which is certainly reflected in salary increases, there is not a universal belief that their employment is becoming more secure; something Brexit will have done little to enhance. Whilst salary is important to internal auditors, so is career development and work / life balance. These are sentiments that Heads of Audit looking to retain their staff should recognise.
Vacancy generation falls back
Vacancy generation increased during the second half of 2015 and, when asked at the start of the year, 85% of Heads of Audit anticipated a need to recruit externally during the course of 2016. In terms of vacancy generation this confidence has followed through with one notable exception which has affected the total number of vacancies generated. We have previously reported the scale of many Tier 1 bank internal audit departments and their ability, when they continuously have multiple vacancies, to distort the recruitment market. Many of the banks driving this weight of demand are now looking to rationalise. This has changed, possibly for the better, the composition of demand in the recruitment market.
Outside of these major banks, the financial services industry has continued to recruit and the number of internal audit vacancies across commerce and industry has increased. Whilst there was already strong demand from the consultancy sector, which remains determined to recruit and retain internal auditors, there has also been a notable uptick in demand from the public sector, albeit from low levels. Given this, whilst the absolute number of vacancies has fallen, overall, internal auditors are facing a more representative range of vacancies and a market that will be less distorted by the influence of a relatively small number of Tier 1 banks.
Rate of placements declining
To provide a better insight into the dynamics of the recruitment market, this graph plots the rate at which placements have been made across the last four years. It reflects the rate at which vacancies are actually being filled. At the start of 2016, 73% of Heads of Audit reported they were finding it difficult to recruit. This was little different from 2015. However, during the first six months of 2016 the rate of placements slowed further. The response from our survey indicates that the percentage of internal auditors reporting to have changed job in the last 12 months has fallen from 32% in 2014, to 29% in 2015 and down to 28% in 2016.
This year there has been a significant fall in the number of internal auditors in banking changing jobs and a compensating rise in commerce. Internal audit departments however, remain highly selective. Getting internal auditors with in demand skills who often have multiple opportunities to accept and start new positions is frequently problematic. This is not news, but, notwithstanding the experience and skill sets required which can often be quite specialist, attracting internal auditors with the necessary interpersonal skills remains a key challenge. Internal audit departments are keen to retain their expertise, resulting in frequent counter offers which can include both salary increases and promotions. It is ironic that internal auditors in the recruitment market often find themselves with either multiple offers or none at all.
More pay, less security
Earnings in the wider economy have been increasing at the fastest rate for some years. These rises are certainly reflected in the internal audit recruitment market, where they are being driven by the chronic shortage of internal auditors with the skills required. The increase in salaries for both internal auditors who have stayed with their existing employer or moved are both up. For those who stay, salary increases are often wrapped in promotions that in the short term are more likely to encourage internal auditors to remain with their current employer.
Internal auditors are more satisfied
Given these increases, it is not surprising that a higher percentage of internal auditors report they feel adequately compensated. Up from 58% in 2014, to 63% in 2015 and now 66% in 2016. Whilst salary remains a key issue, in this year’s survey, for the first time we invited internal auditors to report on what they would most like to change about their job. 28% chose salary, another 28% career development and 20% work / life balance. Clearly work satisfaction is not simply about salary.
No simple message
In this year’s survey we also gave internal auditors the opportunity to share what they might like to say to their employer. If we were hoping for a clear simple message, this was not forthcoming. Responses focused on the issues above, with subsidiary messages objecting to the amount their internal audit departments spent on external consultants and the lack of recognition some internal auditors felt for the work they undertook. There was, however no seething hotbed of resentment and many were grateful to their employers, enjoyed their job and were satisfied with their employment relationship. Given many Heads of Audit are limited in what they can spend in terms of a strategy to retain their internal auditors, career development, recognition and flexible working would be good places to start. In spite of this, there are clearly many occasions when internal auditors simply outgrow a department and for career development reasons need to move.
Rise in internal auditors not working
The surprise of our survey was the rise in the percentage of internal auditors not working. This rise stands out against the recent history of our surveys and our day to day experience of the recruitment market. Whilst not out of line with the results from our other corporate governance surveys, it was still surprising. Explanations are possibly to be found in banking, where a number of larger banks have looked to rationalise, leading to internal audit casualties. There are also comparatively high levels of outsourcing, near sourcing and off shoring as companies in the wider economy have looked to re-organise their internal audit capabilities. Internal auditors who are not working also report they are finding it more difficult to secure a new position than anticipated. The majority report they have been looking for over three months. Unemployment is proportionately higher in internal audit than IT audit and outside of London than in it. By way of explanation, there is frequently little between an internal auditor having a background that is in demand and one who has not. As ever, IT auditors are proportionately in higher demand and, whilst there is a drift in audit departments away from London by some of the larger banks and financial services groups, the lower number of vacancies outside of London and the commuting distances involved can make it difficult for internal auditors in the regions to find alternative opportunities.
Two new questions in this year’s survey asked internal auditors if they felt more or less secure than a year ago and if they perceived their skills had become more or less valuable. Surprisingly, 23% of respondents felt they had become less secure, which was broadly consistent across sectors and between internal and IT audit. Against that, 61% believed their skills had become more valuable, with only 9% reporting less so. Again the responses were consistent across sectors and between internal and IT audit. It seems a little at odds that whilst internal auditors believe their skills are becoming more valuable, a significant minority feel less secure. Whereas 45% of internal auditors who have not changed job in the last year feel less secure, this figure falls to only 21% for those who have changed job. As might be expected, changing jobs should usually allow internal auditors to feel more secure.
Banking and Financial Services
Possibly one of the most eye catching results of our survey was the slowdown in the number of internal auditors working in the sector who reported to have changed job in the last year. This figure was down from 35% in 2015 to 23% in 2016, with most of the slowdown concentrated in banking. Whilst salary remains a key driver for internal auditors working in banking and financial services, the increase achieved through changing jobs has fallen from an average of 19.6% in 2015 to 15.8% and, for the first time, fallen below the overall average.
Demand from the traditional London banking market has fallen back, with far fewer Tier 1 banks having the multiple vacancies that were common last year. These banks are recruiting to replace, rather than to increase the number of internal auditors they employ. However, on the positive side there as been strong demand from challenger banks and larger regional banks including those looking to establish support functions away from London. It is perhaps too early to predict the effect Brexit will have on the sector, although in the short term it is unlikely to be positive for more internationally focused banks.
Delivery level roles, as ever, are in high demand and the number of manager level roles are increasing. Specific expertise in demand includes large change and transformation projects, regulation and subject matter experts in areas such as credit risk, financial crime, finance and treasury. Applicants with subject matter expertise but no audit experience are also being actively considered by a number of banks. Internal auditors with capital markets and investment banking products experience remain difficult to recruit, with smaller banks and asset managers frequently in a better position to offer the type of flexibility in the offers they make to secure such candidates.
The introduction of the new approved person requirements for senior level audit staff is slowing offer / acceptance processes and making the appointment of Heads of Audits more protracted.
Demand for internal auditors within the asset and wealth management sectors remains strong and the number of internal auditors employed in the sector and their caliber continues to grow. This is substantially regulatory driven, as UK, European and even global legislation comes into effect. However in response to increasing costs there has been consolidation in the sector with groups merging or being taken over. Demand is notably strong from smaller companies in the sector as they look to build out what are sometimes only recently established internal audit departments.
Co-sourcing remains popular and the Big 4 are increasing salaries in their search to recruit experienced asset management auditors.
Mergers in the insurance sector have resulted in redundancies, although most recently new roles have been generated from the resulting combined groups. The impact of the Senior Manager Regime is having an effect with some Heads of Audit strengthening departments to help protect themselves.
As usual, the main weight of recruitment remains at senior auditor level and applicants from practice with say 1-2 years’ relevant experience are in significant demand. Candidates with this type of background are invariably in short supply.
Commerce and Multinational Groups
The average salary increase achieved by internal auditors who have changed job in the sector is 16.1%, beaten only by the consultancy sector. Gratifyingly, a particularly high 79% of internal auditors working in the sector report they are satisfied with their remuneration and only 17% report that salary was the most important aspect they would like to change about their job. Closer analysis reveals that salary increases were larger from companies outside of the FTSE 100. This is surprising, as usually we would expect bigger companies to pay higher salaries. By way of an explanation, smaller UK centric groups may be benefiting from greater flexibility to vary the salaries they are able to offer. How that will develop post Brexit remains to be seen.
Notwithstanding the high level of internal reorganisations already highlighted, there has been comparatively strong demand within manufacturing, TMT and, perhaps surprisingly, the retail sector. Commerce is benefiting from the slowdown in demand in the banking sector which so often diverts candidates away from it. There has been an interesting reversal, with internal auditors in commerce reporting that they are far more likely to have moved than those in banking and financial services. Lead or senior internal auditor roles with highly competitive salaries are currently common, with an uptick in demand for Head of Internal Audit roles. Good financial / operational audit experience together with any exposure to IT audit is in demand. There is also a common requirement for prospective recruits to be qualified accountants and follow the two year passage through internal audit and into a line role. Given the shortage of Big 4 qualified accountants, companies in the sector have been prepared to consider mid-tier candidates as well as European internal auditors willing to relocate to the UK. There is currently increasing evidence that a number of companies, particularly in the TMT sector, are prepared to pay above average sector salaries to attract the candidates they require.
Demand is rising and internal auditors in the sector are feeling more secure. In fact, no public sector internal auditor reported entering the recruitment market because of job insecurity. Recruitment freezes are being lifted and both the salary increases enjoyed by internal auditors either staying with their existing employer or moving are rising. A curious finding in our survey was that, when asked what they would most like to change about their job, 17%, a much higher percentage than any other sector, reported their manager. Public sector internal auditors appear less concerned about career development than in other sectors.
Notwithstanding the general recovery in the sector, it remains at risk of losing staff to internal audit providers, particularly those auditors who are qualified or approaching qualification. Whilst there is still no consistency in demand from the public sector, key vacancies are now more likely to go out to external recruitment. Within Central Government, the GIAA has become dominant as they build out capacity from the current 400 internal auditors up to 600. Their recruitment is not just attracting public sector auditors, but, with a new agency style of working, also those from the private sector.
According to our survey, 71% of IT auditors believe their skills are becoming more valuable and, at 18.1%, they continue to benefit from higher salary increases when changing job than their colleagues in general audit. A higher salary is also what they would most like to change about their job. Surprisingly, they do not feel any more secure than their colleagues in general audit.
Cyber security, data and IT outsourcing are high on the regulatory agenda and are therefore on many internal audit department’s priority lists. Application auditors with specific product knowledge are still in demand, as are more junior infrastructure specialists. Both are also in short supply. The Big 4 and consultancies are using a combination of salary increases, promotions, secondments and training opportunities to retain staff.
Internal audit departments are generally more keen to recruit cyber security professionals into audit, although this can be problematic given the already high demand in security. Auditors with IT and change audit experience are also in demand. These roles are often appealing due to their variety and are also less sector specific. Given the scale of demand, there has been an increase in candidates from the EU filling these vacancies, although tier 2 visa sponsorships are still unlikely to be offered to those outside the EU.
There is still strong demand from the Big 4 and they continue to use retention strategies that include accelerated promotions and highly competitive salaries. Mid-tier consultancies are currently engaged in comprehensive recruitment campaigns and remain constantly at risk of losing staff to inhouse recruitment departments. At 9.2%, which is far higher than any other sector, the average salary increase achieved by internal auditors staying with their employer reflects this.
In spite of this, only 37% of internal auditors working in the sector are satisfied with their salary and 34% list salary as the thing they would most like to change about their job. These percentages are far higher than other sectors and, given that internal auditors in the sector believe that their skills are becoming more valuable, it indicates that if consultancies wish to retain their internal auditors, salary pressures within the sector are likely to continue. This is borne out by the fact that, according to our survey, as in the public sector, no internal auditor entered the recruitment market as a result of job insecurity.
The Contract Market
Demand for internal audit contractors slowed in the first half of 2016 and our survey confirms that contractors are more likely to believe the market for their skills has deteriorated. They do, however, report slightly higher satisfaction with their current contracts. The run up to Brexit caused uncertainty and given the decision to leave this is likely to continue. However, this uncertainty may ultimately benefit the contract market, as many companies choose to hold off permanent recruitment and decide in favour of the contract opinion.
Currently, demand is weighed towards the financial services sector, with particular demand for contractors with investment and retail banking and insurance industry experience. Demand from commerce and industry is relatively flat with lower demand from the consultancy and public sectors. Regional demand is currently stronger, most of which appears to be back-filling permanent vacancies given the extended time it can take to fill these roles.
Regulatory pressure within financial services is leading to more sustained demand for specialist day rate internal auditor contractors. In fact, the trend towards fixed term contracts, rewarding contractors on a pro-rata salary basis, has reversed with traditional day-rates now usual. This is the preferred option for ‘career contractors’ and is a positive for the contract recruitment market.
Within IT audit, demand has been focused on auditors with data security, cloud, data loss prevention and systems development experience. Within banking there has been specific demand for IT general controls and applications experience to support trading activities and the trade process lifecycle.
Our Mid-Year Report provides an in depth section on salaries and compensation, designed to give a much fuller picture of overall remuneration packages.
This is a survey of internal auditors registered with Barclay Simpson and was conducted in June 2016.
To read the full report and see more information on the Salary Guide and Compensation Survey, click here.