The Financial Services Authority (FSA) has today introduced a new code setting out how employers should mitigate risk when rewarding staff with pay and bonuses.
The code states that firms should not enter into contracts with employees which provide guaranteed bonuses for more than one year. It is also expected that for senior employees two-thirds of bonuses will be spread over three years.
Large banks, building societies and broker dealers in the UK will have to establish, implement and maintain remuneration policies which are consistent with effective risk management. Firms are also expected to provide the FSA with a remuneration policy statement by the end of October.
The new code is designed to make sure that boards focus more closely on ensuring that the total amount distributed by a firm is consistent with good risk management and sustainability, as well as ensure that individual compensation practices provide the right incentives.
Non-compliant firms could face enforcement action or ultimately be forced to hold additional capital should they pursue risky processes.
Hector Sants, FSA chief executive, said: “The FSA is determined that banks’ remuneration policies should be consistent with, and promote, effective risk management. The new rules and code of practice, which will take effect from January, next year, are aimed at achieving this.
“Whilst there is general international agreement on the need for supervisory action on remuneration policies and practices we will be the first major financial regulator to take this step. We think that it is important to have rules in place for 2010.”
Nicholas Stretch, partner at law firm CMS Cameron McKenna, said: “There is still much work to do on forming an international consensus as to the minimum requirements of pay in this sector. Also, much of the work undertaken by reviews was conducted in far leaner times- and with the banks now starting to make money again and needing to recruit, it is essential that the new FSA Code addresses this new environment rather than trying to shut the stable door after the horse has bolted.”
Jon Terry, partner and head of reward, PricewaterhouseCoopers, commented: “The Code represents a welcome step forward in the process of reforming the areas of financial services employee reward that are in need of change. The FSA has sought and developed a regulatory framework that links the reward structures of employees with the long-term sustainable returns generated in the businesses where they work. It also aims to create a strong link between employee reward and business risk.”