New rules on bankers' bonuses

12 August 2009

Bankers' bonuses could be linked to the long-term performance of banks, under a new code of practice that aims to stamp out excessive risk taking.

A new report from the City watchdog, the Financial Services Authority (FSA), outlines new rules on how large banks, building societies and other financial firms should determine remuneration for their staff.

The code of practice states that bonuses should not be guaranteed for more than one year, and that senior employees should have their bonuses spread over a three-year period. 
The FSA says banking boards must also make sure total bonus amounts are consistent with "good risk management and sustainability". It wants to ensure that reunmeration provides the "right incentives" with a greater relationship between bankers' bonuses and the long-term performance of banks.
The past 18 months have seen much furore over bankers' bonuses in light of the near-collapse of the banking sector. Although the FSA admits it can't change bonus culture overnight, its chief executive Hector Sants says the new guidelines will be put in place at the start of 2010.

"The FSA is determined that banks' remuneration policies should be consistent with, and promote, effective risk management," says Sants. "The new rules and code of practice, which will take effect from January next year, are aimed at achieving this."
The FSA will this month write to the remuneration committees of the approximate 26 companies that fall under the remit of the report to request a completed remuneration policy statement. It expects to receive responses by the end of October.
The transitional arrangements for any amendments to permitted employment contracts will end on 31 March 2010, with transitional arrangements for the amendment or termination of other contracts ending on 31 December 2010.

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