FSA Remuneration Code: emphasis on share incentives
At long last the FSA has come up with a remuneration code designed for fat cat bankers and fund managers. But will this have any effect on their behaviour will it, for example, help to curb their excessive risk-taking or restrict their ability to trouser massive bonuses at the expense of the ordinary public?
The code covers about 2,700 firms in all, including most private equity houses and hedge fund managers. The persons covered by the code are known as Code Staff and include senior management and anyone whose professional activities could have a material impact on a firm's risk profile.
The Code contains a list of principles which sound sensible enough, but on closer examination don't appear to say much. Here are some examples (abridged):
- remuneration policy must not encourage risk taking that exceeds a firm's tolerated level of risk and must be in line with the firm's business strategy and long term corporate strategy;
- there must be measures to avoid conflicts of interest, including those related to customers' interests;
- firms of substantial size must establish Remuneration Committees and the chairmen and members should be non-executive and have sufficient skills and experience for the task; and
- firms must take into account current and future risks when determining variable remuneration and the level of such remuneration should not limit a firm's ability to strengthen its capital base.
The Code then goes on to reflect these in a number of more specific rules. These include the requirement that at least 50% of variable remuneration must be taken in shares, share linked instruments or other equivalent non cash instruments of the firm concerned. These shares must be subject to a minimum retention policy. This seems to indicate that employee share schemes will become almost mandatory for Code Staff in many firms. Share schemes are already widespread in quoted companies regulated by the FSA, but this requirement would seem to extend the stipulation to private financial services companies as well.
Other requirements of the Code include the following
At least 40% of bonuses must be deferred for at least three years for all Code Staff and at least 60% if the bonus is more than £500,000. In relation to LTIPs half of the award must vest after not less than three years and the remainder after five years.
Firms must not offer guaranteed bonuses of more than one year, and they may be given only in exceptional circumstances, to newly recruited staff, in respect of their first year of service.
Severance payments should reflect performance over time and not reward failure.
All very sensible, you might think. But there is a twist in this tale (or more accurately, a damp squib). The Code offers an exemption for those poor souls who (i) earn less than £500,000 and (ii) receive variable remuneration which is no more than 33% of their total remuneration. For these underpaid, downtrodden executives, the FSA will in general drop all the above requirements except the claw-back of unvested remuneration when it is not warranted by performance.
And there's more flexibility to come. The full Code will only apply to the very largest institutions. Banks and building societies with capital resources of less than £1bn, or investment firms with capital resources of less than £750m, may be able to escape the requirement to offer equity. Smaller firms again may escape the need to have a remuneration committee, to operate deferral of awards, to pay a proportion of variable remuneration in shares or alternative instruments, or to operate performance adjustments. Companies which generate income from agency business are exempt from almost everything.
The provisions of the FSA Remuneration Code are very lengthy and technical. Those who struggle through the end of the documentation may be forgiven for wondering whether the effort was worth it.
Links to the Code and related documentation can be found on the FSA website at http://www.fsa.gov.uk/
If you would like to discuss any of the issues raised in this article please contact us on 020 8949 5522 and ask to speak to any one of our advisers.