BONUSES
FSA issues guidelines on City bonuses
The Financial Services Authority has written to the chief executives of the 30 largest banks and building societies saying it shared concerns that "inappropriate" remuneration schemes may have contributed to the market crisis.
Dated 13 October 2008, the letter from Hector Sans, chief executive of the FSA, advises the banking and financial institutions to follow remuneration policies that are “aligned with sound risk management systems and controls.”
%ADVERT%
But the City watchdog ruled out direct involvement in setting remuneration levels: “The FSA has no wish to become involved in setting remuneration levels: that is a matter for Boards, which should ensure that they have effective structures in place to set remuneration policies and monitor remuneration levels throughout the firm.”
Sans added: “It is difficult to be prescriptive about remuneration policies. They will vary widely between firms, and within firms between different levels of staff. They will also need to reflect many factors including the nature of the business undertaken and the culture of each institution. Nevertheless we believe that it is possible to set out some high level criteria against which policies can be assessed."
The letter to CEOs sets out examples of “good” and “bad” bonus practice in an appendix.
Bad bonus practice:
does not take risk or capital cost into account
performance assessed entirely on the results for current financial year
calculated solely on basis of financial performance
paid wholly in cash
no deferral of the bonus element.
Good bonus practice:
uses a measure of risk-adjusted return
bonuses awarded take account of other performance measures – e.g. risk management skills, adherence to company value etc
mix of cash and shares
major proportion of bonus deferred
significant proportion of deferred element held in trust or escrow account.
Want to know more?
The Financial Services Authority (FSA) is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. To find out more visit www.fsa.gov.uk.
Download the FSA letter in PDF format at www.fsa.gov.uk/pubs/ceo/ceo_letter_13oct08.pdf.