BONUSES
City of London banks agree to support G20 bonus reforms
The UK subsidiaries and branches of leading overseas banks have agreed to support the implementation of reforms to bank pay agreed by the G20 in Pittsburgh, the Financial Services Secretary, Lord Myners, has announced.
Bank of America Merrill Lynch, Citigroup, Credit Suisse, Goldman Sachs International, JP Morgan Securities Ltd, Morgan Stanley, Nomura and UBS have confirmed their commitment to the FSA Rule and supporting Code on remuneration practices, and their full support for the G20 agreement, which sets global standards for the implementation of the Financial Stability Board’s (FSB) remuneration principles.
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EU banks with major London branches, BNP Paribas, Deutsche Bank and Société Générale confirmed that they will implement the G20 agreement in accordance with their home regulator and would seek to voluntarily comply with the FSA Rule on Remuneration for their UK-based employees.
FSA Remuneration Code
UK regulated banks will continue to work with the FSA in implementing the G20 principles. The FSA Rule on remuneration is already broadly in line with the G20 Implementation Standards and will be updated in 2010 to reflect the remaining differences, developments within the EU, and experience in implementing this Rule.
The FSA will apply the same standards to all entities covered by the Rule on remuneration in the UK (and as it does already, including foreign owned subsidiaries), and will work with overseas banking regulators to ensure a consistent and timely global application of these reforms.
The FSA Remuneration Code comes into force on 1 January 2010. This would include payments made for performance year 2009.
G20 reforms
Key elements of the G20 reforms include:
Significant financial institutions should have an independent board remuneration committee which is constituted in a way that enables it to exercise competent judgment on compensation policies and the incentives for managing risk, capital and liquidity. It should ensure that the bank’s policy complies with FSB principles and standards and with the FSA’s code, and undertake an annual compensation review which should be submitted to the FSA for them to assess compliance.
Remuneration for employees in the risk function should be determined independently of other business areas.
Firms must ensure that total variable pay is consistent with ensuring that they have the ability to maintain a sound capital base over the long term, while managing the risks that arise if an organisation cannot pay competitively to retain the right people.
Failure by firms to implement sound policies in line with the FSB implementation standards will result in appropriate corrective measures by the FSA to offset the extra risk of this, including requiring additional capital to be held.
Bonus pools must take into account the full range of current and potential risks, including capital, liquidity and timing of potential future revenues.
For senior executives, as well as other employees whose actions have a material impact on the risk exposure of the firm, 40% to 60% of variable compensation will be deferred over three years, with at least 50% in shares/share-linked instruments.
Multi-year guaranteed bonuses should not be part of future arrangements – any minimum bonus agreements should be limited to one year.
Poor performance will lead to a considerable contraction of bonus payments, including through malus or clawback arrangements.
These are the FSB’s global implementation standards aimed at preventing global arbitrage. The FSA can increase these requirements to prevent excessive risk taking or to ensure consistency with a sound capital base.
Firms will be required to publish an annual report on compensation, providing information to help shareholders hold boards accountable, such as the remuneration committee mandate, performance criteria and information on the linkage between pay and performance.
This will include disclosure of aggregate information on the pay of senior executives and all employees whose actions have a material impact on the risk exposure of the bank.
The measures will cover all senior executive officers and employees whose actions have a material impact on the risk exposure of the firm, including, but not limited to all PDMRs (Persons Discharging Managerial Responsibility).
A final word
In a joint statement, the banks said:
"In a competitive and global business, banking remuneration must be consistent with effective risk management and there must be national and international consistency on this issue. We welcome the global nature of the G20 remuneration reforms and will work with the FSA and regulators in our home countries in adopting the reforms, recognising that all G20 nations have also committed to their implementation to ensure a level playing field.”
The Financial Services Secretary, Lord Myners, said:
"The financial services industry must take a responsible and long-term approach to remuneration if it is to retain its competitiveness and regain public trust. I am pleased that the most significant banking institutions operating in the UK have moved quickly and are supporting our implementation of the agreement reached on bank remuneration at the G20, and this reinforces the standard we have set for other financial institutions and countries to follow. I will be writing to the chairs of their parent companies’ Remuneration Committees to share with them the outcome of this meeting."
Want to know more?
The G20 reforms (in PDF format) are available on the Pittsburgh Summit web site at www.pittsburghsummit.gov/documents/organization/129870.pdf.
--> E-reward has published a detailed analysis of the regulatory developments for pay in financial services firms. For more details email paul@e-reward.co.uk. Or visit www.e-reward.co.uk/reports.asp?report=73.