When I first started working in Luxembourg, there were two things that hit me about the city. The first was the stunning view across the Grund, and the second was the stunning architecture, like that of the first ArcelorMittal HQ, opposite the Rose Garden (Rousegäertchen).
In comparison to more traditional industries like steel, Luxembourg’s finance sector is still relatively new. However, the practice of salary indexation, that is applied across all industries, is more than 100 years old. It was originally designed to support factory workers’ purchasing power, using a benchmark of 19 basic items for a typical family of 5. Today, indexation is linked to the consumer price index; comprised of 8,000+ goods and services.
As industries grow and mature, they seek out increasingly efficient ways of working. For the last 30 years, Luxembourg has been the logical answer for many fund managers with clients in Europe. Luxembourg’s niche legal, tax and human ecosystem have all contributed to it becoming the largest domicile of choice outside of the US.
Funds registered in Luxembourg are passported globally, and legal structures like Sicavs, Sicars and Raifs are virtually brand names with investors, signalling transparency, regulation and, ultimately, security. A huge success.
The era of self-regulation
Following the crisis in 2008, a tsunami of regulation followed, most of which put the emphasis squarely onto fund managers. Since finance had become so complex, the general approach of regulators was to say that they should manage themselves more effectively. Asset managers were now responsible for not mis-selling, for not selling to the wrong client or for not communicating clearly enough with their clients. Fund administrators, lawyers and management companies were responsible for additional checks, reporting and transparency requirements.
Companies had to build many additional layers into local teams across compliance, reporting, marketing and a myriad of oversight roles.
At first this led to a huge increase in jobs in Luxembourg. However, hiring for largely cost-generating roles, rather than revenue generating roles, is not where you want firms to be for very long.
Since then, inflation has also been high. The consumer price index rose a total of 3 times within short succession. This triggered the indexation of salaries, at a time when companies couldn’t really afford it, while they were freezing pay in their other offices.
Pay must be linked to productivity
In order for companies to be able to succeed and grow, staff must be doing a larger job, or a more skilled one, for them to receive an increase in pay. Giving blanket raises, irrespective of output, creates two socioeconomic problems.
The first is that poor performers are rewarded equally alongside great performers, thereby enforcing a sense of entitlement among some, who feel they ‘deserve’ salary increases uniformly. Secondly, because managers have to reward across the firm, they miss budget they would normally award to their high performers, thereby impacting culture and losing some of their best people.
In my first years in Luxembourg, I was mainly hiring in mutual funds. Over the last 15 years every major mutual fund manager has reduced their operation here; either by automating, or offshoring their jobs to lower cost locations.
Thankfully, alternative funds, like private equity and real estate, have grown in their place, and the skills to manage their administration are arguably more complex. But how long will it take for Poland, Ireland, Malta or Mauritius to catch up? And do we want to take the risk?
A well-intended system a century ago no longer seems to fit the global financial hub that exists today. It’s time to reconsider indexation, and ensure Luxembourg keeps its international charm.
Rana Hein-Hartmann is managing director of the recruitment firm .
This guest column was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .
Source link : https://delano.lu/article/how-salary-indexation-is-slowi
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Publish date : 2024-02-06 03:00:00
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