Internal Audit - Compensation and Market Trends - Mid-Year report 2017
Economy and wages under pressure
Following a steady performance by the UK economy in 2016, growth rates at the beginning of 2017 have slowed. Whilst the post Brexit recession didn’t materialise, the vast majority of economists expect the decision to leave the EU will hit growth. Overall unemployment levels continue to fall. Productivity growth, however, remains elusive and exchange rate depreciation has led to inflation exceeding the Bank of England’s 2% target. Real wages are once again coming under pressure. This is causing an increased number of auditors to report dissatisfaction with their salary and there has been an increase in those who would consider entering the recruitment market to improve their earnings.
Stability and growth tend to raise demand for internal auditors. Unfortunately, we are still living through a period of uncertainty and, as we write this report, the UK government has begun a set of negotiations that will have far reaching implications, not just for employees and employers in internal audit and other areas of corporate governance, but for the country as a whole.
We had hoped that by the time of this report the consequences of Brexit would have become a little clearer. This does not appear to be the case. The situation has been further complicated by the outcome of the recent general election and it remains to be seen what impact this has on the negotiations of the UK government with EU counterparts.
Brexit is a potential minefield
Whilst the response to our survey about the impact of Brexit is still speculative, our survey demonstrates that Brexit is a potential minefield for internal audit departments, with many internal auditors prepared to make significant changes to their lives, including relocating, to protect their jobs and career prospects. This situation is exacerbated by the fact that internal audit departments are heavily dependent on EU migration for their successful operation and ongoing recruitment needs.
Threat to Financial Services
Some sectors may suffer a greater impact than others. For example, in Banking and Financial Services, if the EU changes the current rules governing the euro-denominated derivatives market and forces "systematically important" clearing houses to operate within the EU, this will have a significant impact on employment numbers in London, which could, in turn, have a negative impact on internal audit departments that face off to these businesses.
It is believed by some that the outcome of the general election could lead to what commentators describe as a "Soft Brexit", where access to the single market, customs union and a more relaxed approach to immigration is prioritised. As this report will demonstrate, and this will come as no surprise to many reading this, a Soft Brexit approach is preferable for the continued viability and success of many internal audit departments.
In the short term, we anticipate the internal audit market will remain relatively active, as even during times of uncertainty, companies still need to recruit. Instances of recruitment freezes or job losses due to departmental restructuring and role relocation are balanced by the creation of new roles across all sectors, regions and specialisms. We expect demand to hold up well with a good supply of candidates in all but the most specialist areas.
This is reflected in our survey which reveals that the number of internal auditors who believe their skills have become more valuable has increased. In the longer term, it is difficult to predict what may happen due to the uncertainty surrounding Brexit. In similar periods of uncertainty in the past it has been notable that there has been an increased use of contract and interim auditors to ensure the delivery of short term plans.
The overall picture in internal audit is one of relative calm, but with increasing pressures due to Brexit and remuneration. Here are the key issues coming out of our survey of internal auditors:
WATERS CURRENTLY CALM
Job market currently improving for internal auditors
Although the number of internal auditors reporting that they are not currently in work has risen slightly from 4% to 5%, no auditors reported being out of work for over 12 months; compared to 16% last year. This is clearly good news and may, in part, be explained by an improving job market, as well as auditors moving away from audit into other areas of corporate governance and also developing their own businesses.
We have seen a steady flow of positions over the course of the year. Some major banking institutions have made multiple hires and notably Asset Managers have been increasing the scope of their audit plans. This has had the knock-on effect of requiring additional headcount. The number of vacancies registered per month in 2017 year-to-date across the Internal Audit market has held up compared to last year. The same is true across the financial services sector, where the consolidated number of vacancies per month is almost identical this year when compared to the average for last year.
Contractor confidence rising
Contractor confidence is currently rising as 53% of auditors currently working in the interim market believe that the market for their skills is improving (up from 38% in 2016) with a further 30% reporting no change.
This is also reflected in remuneration, as 56% of auditors saw an increase in their daily rate compared to their previous contract, whilst a further 19% saw no change.
Satisfaction with remuneration (69%) is also significantly higher for contractors than for non-contractors (51%), though slightly down on 2016 (72%).
REMUNERATION STARTING TO FUEL DISCONTENT
Big drop in satisfaction with remuneration
Overall, salaries are becoming an issue for auditors in permanent employment. The number who feel adequately compensated has dropped significantly from 66% to 51%. This could well be having an impact on motivation and may encourage stronger candidates to think about what options may be available to them in the recruitment market.
Salary an increasing motivation to change job
The number of auditors who cited a salary increase as a motivator to change jobs rose from 34% in 2016 to 40% this year. This is now almost as important as career development (43%) which typically is by far the most important motivator. In the public sector, 48% of auditors reported salary could motivate them to look for another job.
It is interesting how different the answers to this question are from people who have actually changed job. Those who have moved seem reluctant to admit the importance of salary in their decision, with most citing career development as the most important factor. It may be that having made their move, salary is less of an issue and they would like to be seen as more professional than mercenary, whereas those who haven’t moved but are frustrated with their remuneration are happier to flag it as an issue.
Salary top frustration with current job
38% of auditors said salary is what they would most like to change about their current job, a big increase from 28% in 2016. Frustration related to career prospects dropped from 28% in 2016 to 22% this year.
Average salary increase for non-movers down to 5%
According to our survey, the average increase for internal auditors who stayed with their existing employer fell from 6% in 2016 to 5% in 2017. Given inflation levels are rising, this represents a material decrease in earnings. However, averages can be misleading as many of the internal auditors who stayed with their employer will have benefited from promotions.
As our comparatives demonstrate, there has been a significant increase in the number of auditors who only achieved a 0-2.5% increase, up from 26% to 35%.
The figure of 15% of internal auditors reporting they received no increase has remained consistent with 2016. This is still a high percentage and, given the recent increase in inflation due to the impact of both Brexit and the uncertain outcome of the general election on sterling, will be of some concern.
The answer lies partly in the public sector and partly in financial services. The number of auditors reporting no increase in each sector was 18%. The sustained period of austerity over the past 7 years provides an explanation in the public sector. In financial services, the answer is a little more complex. Investment Banks in particular have had to adapt their business models. They have restructured their business models to improve return on equity and to reduce cost to income ratios. In practice firms, the number was 14% and in Commerce & Industry, only 8% reported no salary increase.
The average salary increase remained broadly consistent across the various sectors, ranging from 6.1% in Banking and 5.8% in Commerce and Consulting, to 2.9% in the Public Sector. There was little difference between men at 5.3% and women (4.9%). In previous years, consultancies have offered the highest average increases. The emphasis on hiring candidates and then training them may have reduced the impact of loss of auditors to other sectors, which in turn may have led to a reduced need to offer above market salary increases.
Average salary increase for job movers down to 17%
Our survey shows a drop in the average increase achieved by auditors who have changed employers from 18% in 2016 to 17%. This figure is in line with previous years and last year may have represented a high-water mark for salary increases achieved by those changing jobs.
This drop off may be explained by the reduction in the number of external hires made by Investment Banks in the past 12 months. This is in part driven by the number of auditors in the sector peaking, coupled with an increased appetite for redeploying displaced technical specialists from other parts of the business.
There is a significant difference between the 17% average increase in salary achieved by changing job and the 5% average achieved by staying with an existing employer. However, analysing the average, as we do every year, reveals a wide range of increases. It is worth highlighting that whilst 17% may be taken as the average, only 21% (down from 37% last year) of internal auditors actually accepted a salary increase between 10% and 20% and, significantly, 22% of auditors moved for the same money or less, up from 13% in 2016.
The number of auditors who received a bonus is down from 83% in 2016 to 73% this year: a considerable drop and reversing an upwards trend for the previous three years. In addition, the average bonus level has fallen from 17% in 2016 to 15%.
The average of 15% is significantly below the average paid to risk managers at 28% and marginally below the average bonus paid to compliance professionals at 18%. The average bonus is not, however, the typical bonus an internal auditor might expect. 31% of auditors reported receiving a bonus of less than 10%, with 9% receiving no bonus at all. Only 12% of auditors reported a bonus of over 30%. The most common bonus level reported by 21% of auditors was between 5-10%.
Bonus levels are more common in Banking & Financial Services, where 92% of auditors reported receiving a bonus, with an average of 20%. Only 34% of auditors in the Public Sector reported receiving a bonus, which averaged at 4%. Commerce and Industry bonuses were received by 81% of auditors and averaged 15%. Only 50% of auditors working for a consultancy reported receiving a bonus, with the average being 9%.
There is also a big discrepancy between bonuses for managers and non-managers. Managers achieved an average of 19% in their bonus, whereas non-managers averaged 10%. There also appears to be a discrepancy between men and women, with average bonuses of 17% and 12% respectively.
Whilst bonuses are a good way for employers to retain staff, they are not an efficient way of attracting them. This is shown in our survey where the average bonus for those who changed jobs was 10% compared to 17.9% for those who did not. Employers have been reluctant to compensate for loss of bonus when changing jobs for all but the most senior members of staff. If an auditor chooses to change employer, it is likely that any accrued bonus will be foregone, with at best just a pro-rata bonus from the new employer. Bonuses are non-contractual, discretionary and subject to all the usual caveats around performance. In some cases, bonuses may begin accruing from the time employment starts, in others there is a qualifying period. Some employers have a cut-off point in the year after which new joiners will not qualify for a bonus in that year’s cycle.
Pensions and other benefits stable
Pensions make a significant contribution to total income and, at 10% of base salary, have remained in line with 2016. 83% of auditors receive additional pension contributions, a fractional increase on 2016 (82%).
Other benefits (which include private health, travel or car allowances, memberships, etc.) remain at an average of £4,300.
Breakdown of total remuneration
The typical relative importance of the different elements of remuneration in audit is as follows:
DON’T ROCK THE BOAT
Recruitment activity calm but steady
The number of auditors who changed jobs in the past 12 months fell slightly, from 28% in 2016 to 25%.
Focus on improving current position
Flexible working (i.e. the opportunity to vary your hours of work or to work from home on either an ad hoc or regular basis) is something that is as easily negotiated with an existing employer as a new employer and is an increasing motivation for internal auditors.
This year 69% of auditors reported that they benefited from flexible working, continuing a rising trend on the past 3 years. Furthermore, 72% of auditors reported they would like the opportunity to work more flexibly. The increased desire to work flexibly is matched by the increase in auditors who have reported an increased work/life balance as a motivator for changing employers at 23%, up from 18% a year ago. For those with a long commute, an opportunity to work from home on a weekly basis or even for a couple of days a month represents a better work/life balance even if the same total number of hours are worked.
Training is another good motivator for auditors, for those moving job or those staying put. In particular, the Big 4 and smaller consultancies have adopted a policy of recruiting and training candidates without much risk and control experience. This has helped the market as they subsequently become targets for in-house audit departments. Financial Services companies have also increasingly offered training and development for internal applicants as well as being more flexible on hiring candidates with potential rather than necessarily holding out for the finished article.
Holidays are another key factor in quality of life, but tend not to be used as a means of securing or retaining staff as much as other incentives. In 2017, the average number of days holiday has increased from 26 to 27 days, but this only brings it back into line with the 2015 figure and our feeling is that the movement could be more to do with the sample of respondents than a real move in the audit market.
BREXIT A POTENTIAL MINEFIELD
Brexit is affecting the work of internal auditors
Brexit is already impacting the work being performed by internal auditors, with 17% reporting a moderate change and a further 2% a significant change, although as yet the majority have experienced no change.
These figures increase in the public sector, with 23% of public sector auditors reporting a moderate change and a further 10% a significant change. The figure for moderate change is comparable to other areas of corporate governance, such as risk management and compliance, with 23% and 24% respectively. It is, however, considerably lower than in legal where 41% of lawyers have reported moderate change to their work and a further 8% of lawyers a significant change to the work they are performing.
Brexit reducing job security
Brexit is also affecting job security with 14% of internal auditors feeling less secure as a result of Brexit. This is, however, less than in other areas of corporate governance.
Brexit compressing earnings
One clear impact of both Brexit and the recent election result has been a fall in the value of Sterling. This has led to an increase in inflation which currently stands above the Bank of England’s target of 2% and has impacted real earnings. In addition to this, our survey reveals that overall salary increases achieved by auditors who have both changed jobs and those who haven’t have fallen slightly. When compared to national averages, the figures for auditors still exceed those in the wider economy, however, wage compression as a result of inflation has led to an increase in the number of auditors who reported feeling under compensated.
GETTING READY TO JUMP
Large number of EU Citizens employed in audit
29% of the candidates who responded to our survey are EU Citizens (Non-UK). This figure is high and the importance of EU Citizens to the UK internal audit recruitment market is supported by the fact that, in 2016, 38% of our revenue generated by audit placements came from placing EU Citizens. In 2017, the figure to date is 44%. It is clear that internal audit departments are heavily reliant on EU Citizens for their day to day functioning and future resourcing plans. Post Brexit, if the rights of EU Citizens already working here are not guaranteed and we fail to adopt some form of free movement or an efficient visa application system, employers may be faced with no choice other than to relocate roles to the continent to attract and retain staff.
Auditors prepared to relocate
Our survey has revealed a potential brain drain, depending on the outcome of the Brexit negotiations, as 45% of auditors have indicated they are ready to relocate if their current role or job prospects are significantly affected by Brexit. Madrid is the most popular destination given, with Paris, Frankfurt, Dublin and Amsterdam all popular choices.
This figure rises to 100% of EU Citizens that responded to our survey and given the heavy reliance on EU Citizens for the successful functioning of Internal Audit departments, this represents a ticking time bomb for employers.
Auditors feeling confident in skills
When the time is right to move, auditors are feeling increasingly confident in their skills, with 68% believing that their skills have become more valuable (up from 61% in 2016).
Brexit less of an issue for audit than other areas of corporate governance
Our survey found that only 14% of auditors feel their role has become less secure as a result of Brexit. This is lower than in other areas. By comparison, 27% of lawyers and 25% of risk managers believe their roles have become less secure.
Financial Services auditors feel less secure than their counterparts in Commerce and Industry. Whilst audit is a transferrable skillset between geographic locations, for Financial Services in particular, the depth of the candidate pool in London often dictates where roles are based. London attracts people from around the world so employers, bound by the need to attract the highest quality staff, resist the temptation to hire in cheaper locations and retain roles in London.
The insecurity in FS Audit may be due to some restructuring of audit departments for cost reasons which has been underway for some time. A number of organisations in Banking and Asset Management have already moved back office or operations audit teams to lower cost locations in the UK and Europe. Dublin, Edinburgh and Belfast, along with centres in Eastern Europe have been popular destinations for some time.
Only a small minority of auditors believe their role may be relocated
Public Sector workers understandably feel the most secure with regard to Brexit, as it is highly unlikely that a Public Sector body will relocate staff overseas. Within the remainder of the Audit community, only 8% believe their role may be relocated. This compares favourably to other areas of corporate governance: 17% of Risk Managers, for example, fear their role may be relocated.
Audit is increasingly a profession that can be performed remotely and those areas of financial services that need to have departments within the EU for their business to function internationally don’t necessarily need an audit presence. The UK is likely to retain equivalence with the EU in rules and regulations for the foreseeable future. The UK also has a good track record of ‘Gold Plating’ regulatory standards, meaning there shouldn’t be any great divergence of rules and regulations between the UK and the EU. It is therefore unlikely that roles will be relocated due to regulatory pressure in the short to medium term.
Language skills could be a problem
- 54% of auditors do not speak another European language
- 78% of auditors who are also British Citizens do not speak another European language
- French is the most widely spoken European language amongst auditors at 21%, followed by German at 13%
Whilst the international business language is English in many multinational businesses, particularly Financial Services, language skills may prevent the 78% of British auditors who don’t speak a second European language from moving to another EU country. Much of this is dependent on the outcome of the UK Government’s negotiations with the EU and, for the time being at least, London remains the main ecosystem and European centre for financial services. For the better candidates, the perception remains that career opportunities and salaries are better here than in other EU cities.
Following several years of sustained earnings growth, the recent rise in inflation, coupled with a fall in the average salary increase achieved by internal auditors, has led to the number of auditors who are satisfied with their salary falling from 66% to 51%.
Salary increases for both internal auditors who have stayed with their employers as well as for those who have moved are down. Higher than average increases for those who have stayed are often linked to promotion or to a counter offer. Promotions are a good way of motivating and retaining staff, whereas counter offers are much less successful. Many auditors who are persuaded to stay purely by a salary increase, with no material change to their conditions or the nature of their job, will choose to re-enter the recruitment market in the following 12 months.
In 2016, when we asked auditors what they would most like to change about their job, salary and career development were equal top at 28%. This year, in light of compressed earnings, salary has risen to 38% against career progression at 22%; and a better work/life balance at 17%. Salary is clearly becoming a more important issue in audit.