PrintEarlier this week, the FSA provided a solid example of rules that address risks created by poorly structured remuneration programs. The FSA rules demonstrate an alternative to pending US legislation and highlight the importance of acting quickly to control 2010 compensation. Under the rules, firms are required to adopt remuneration policies reflecting an included list of principles, have them approved by board compensation committees, file them with the FSA by the end of October, and put them into practice by January 1st. The rules also provide guidance on addressing pre-existing contracts like the questions being raised concerning Andrew Hall’s employment agreement with Citibank.
The FSA focused on risks from badly structured compensation agreements, specifically not attempting to address perceived compensation excesses (which are in any case less prevalent than in the US):
The aim of the Remuneration Code is to ensure that firms have risk focused remuneration policies, which are consistent with and promote effective risk management and do not expose them to excessive risk.
The code specifies that compensation programs should be based on risk-adjusted long-term profits not revenues, reflect adherence to risk and compliance policies, individual, division, business unit, and firm performance, and Include a base component sufficient to allow the firm to choose not to pay a bonus in a given year. It also calls for limiting guaranteed bonuses to the first year of employment, and spreading payment of at least two-thirds of any senior employee bonuses over a three-year period.
Firms with inconsistent contract obligations are called upon to amend such obligations within set time frames.
Our detailed analysis of the FSA rules and a comparison with USA proposals are available here.
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