FSA letter to Chief Executives of financial institutions
13th October 2008
This is a letter that the FSA wrote to Chief Executives of financial institutions on Monday 13 October expressing concerns about inappropriate remuneration schemes, and providing an illustration of its current thinking about good and bad practices.
Whilst the FSA plans to communicate more detailed recommendations early in 2009, the following points out their initial statement:
- The letter highlights four main areas: performance measurement; composition of remuneration; deferred compensation and governance.
- In performance measurement, it urges use of risk-adjusted metrics, measurement of performance over periods of longer than one year, and complementing financial performance metrics with assessment of other aspects of performance such as adherence to company values.
- It states that the fixed component of compensation should be large enough to meet essential financial commitments, and that there should be an appropriate mix of cash and equity. A major portion of bonus should be deferred to reflect longer term financial performance and the outcomes on business written in earlier years.
- Remuneration Committees should have control of remuneration policies across the firm and all individual compensation above a threshold. The HR & Risk functions should have strong, independent roles. Compensation for Risk and Compliance staff should be outside the control of business areas. Valuations and risk reporting should be independently verified, and there should be a clear separation of front and back office functions.
- The FSA makes no comment at this stage about levels of compensation.