The Financial Services Authority (FSA) has published guidelines on reforming bonus structures in the City in a bid to curb excessive risk taking.
Hector Sants, chief executive of the FSA, has issued an open letter to 28 bank chairmen, which states that he shares the view that inappropriate remuneration schemes may have contributed to the market crash.
In the letter, he offered guidelines on good remuneration policies. “It would appear that in many cases the remuneration structures of firms may have been inconsistent with sound risk management. It is possible that they frequently gave incentives to staff to pursue risky policies, undermining the impact of systems designed to control risk, to the detriment of shareholders and other stakeholders, including depositors, creditors and ultimately taxpayers,” said Sants.
He added that the FSA has no wish to become involved in setting remuneration levels, however, it wanted to ensure firms follow remuneration policies which are aligned with sound risk management systems and controls, and with the firm’s stated risk appetite.
The FSA has also issued a table of guidance, which banks are not obliged to follow, which called on employers to immediately review their policies in light of market developments to actively consider introducing a deferred compensation scheme, based on profit and performance rather than revenue. Rather than paying bonuses entirely in cash, the guidance advised a mix, such as share options, to encourage corporate citizenship and to hold a portion in trust or escrow account governed by strict rules.
The FSA also stressed that banking bonuses should be dealt with internationally and said it has been in contact with the International Institute of Finance, which has issued its own Principles of Conduct.