On 1 January 2011, the Financial Services Authority's revised Remuneration Code (the "Code") came into force and now applies to approximately 2,500 FSA registered firms. For a detailed analysis of the Code and UK and European Remuneration Reform please click here.
- The Code applies equally to branches and subsidiaries of non-EEA firms which are based in London.
- The Code has extra territorial reach applying to the remuneration of employees of a UK headquartered group worldwide. Where an institution is headquartered outside the EEA the Code also applies to non-UK members of a UK consolidation sub-group.
- The FSA has devised a high-level, four-tier proportionality framework, meaning that not all firms are required to fully comply with each of the principles set out in the Code.
- The Code is based upon twelve Remuneration Principles which apply primarily to Code Staff (as defined by the Code including senior management, risk takers, control functions and other employees in a similar pay bracket) although firms are encouraged to apply the principles on a firm wide basis.
- Code Staff whose remuneration exceeds the de minimis threshold will find that:
- at least 40% of variable remuneration will be deferred over at least three to five years (with awards vesting no faster than on a pro-rata basis and the first vesting no earlier than one year after the award);
- at least 60% of variable remuneration will be deferred where the amount of the variable remuneration is particularly high (generally over £500,000); and
- at least 50% of the total of any variable remuneration (including both deferred and undeferred elements) will be paid in a non-cash form and subject to minimum retention periods.
The deferred components of both cash and share based remuneration will be subject to performance adjustment and run the risk of forfeiture. This means that Code Staff can expect to receive just 20-30% of variable remuneration by way of an "up front" cash payment.
- Guaranteed bonuses are restricted to one year and should not be routine but may be given only to new hires in exceptional circumstances -- for instance where "sign-on" bonuses are justified in order to "buy out" the arrangements offered by the employee's previous employer.
- The Code is backed up a statutory power which renders certain contractual provisions void to the extent that they breach Code provisions regarding: (a) guaranteed bonuses; and (b) deferral. A voiding provision of this nature is without precedent and gives the Code real teeth.
While the Code does not mandate that vesting should be subject to a requirement that the employee be "in employment" at the relevant vesting date, neither does it prevent employers from imposing such requirements. Employers seeking to deter key employees from leaving should consider making continued employment a condition of vesting of deferred awards. Such a requirement could help employers protect themselves against losing high profile teams to competitors. For further guidance on retaining key employees, please click here.