The FSA’s Remuneration Code took effect on 1 January 2011, with a final deadline for compliance of 1 July 2011. The FSA have published their first written guidance, in particular in relation to retention periods, guaranteed variable remuneration and the format of a Remuneration Policy Statements (RPS). The guidance notes, templates and FAQs can be found on the remuneration pages of the FSA’s website.
The guidance confirms that a retention period of six months from the date of vesting will normally be considered sufficient, provided that other risk management techniques within the firm are operating to secure sound and effective risk management.
The guidance further states that where all the tax due on an award is deducted at source (e.g. under PAYE) the rule on retention may be applied on a “net of tax” basis, that is to say, the 50% retention requirement will only apply to the portion remaining after tax has been paid, alleviating the risk that the employee is left with nothing upfront.
The retention requirement applies to both deferred and non-deferred remuneration, so this principle will apply in the same manner when a tax liability arises on the vesting of a deferred portion of shares. In this instance, it will be permissible to sell shares and use the proceeds to fund the tax liability. Many firms already use this approach to fund tax liabilities and so this is not likely to involve a change to existing practice.
In jurisdictions where the tax rate on shares is lower than on cash, the FSA will not consider it acceptable to sell shares that are subject to retention in order to meet tax liabilities due in respect of the cash amount. In other words, it would not be acceptable to calculate the separate amounts of tax owed on the share portion and the cash portion, but then use the sale of shares to fund the entire tax liability, which would have the effect of leaving the employee with a greater sum of cash upfront.
Guaranteed Variable Remuneration
The Remuneration Code provides that the principles on guaranteed variable remuneration (i.e. sign-on awards or retention awards) should be applied on a firm-wide basis, to all firms within the scope of the Code. The guidance sets out how the firm-wide requirement is to be applied. There are two distinctions to be made in categorising the person to whom the award is proposed to be made, which are: (i) whether the individual is Code staff; and (ii) whether the individual satisfies both Condition 1 and 2, where Condition 1 is that the individual’s variable remuneration is no more than 33% of total remuneration, and Condition 2 is that the individual’s total remuneration is no more than £500,000.
Based on these categories of staff, and the two types of guaranteed variable remuneration, the guidance specifies (a) when such an award may be made; (b) whether there is a requirement to notify the FSA or simply to keep a record in the event of an award, and (c) what action will be taken if numbers are excessive.
For sign-on awards, prior notification to the FSA is not required, but the awards must either be included in the RPS (for Code staff) or documented appropriately (for non-Code staff).
For retention awards, firms must seek individual guidance where the awards are to be made to Code staff who do not satisfy both Conditions 1 and 2. Prior notification to the FSA (as opposed to seeking guidance) is required whenever awards are made to Code staff (regardless of whether or not they satisfy both Conditions 1 and 2), but the FSA does not need to be notified in advance of retention awards made to non-Code staff.
Remuneration Policy Statements
The FSA has published two templates which may be used by firms in proportionality tiers two, three and four when completing their RPS. All firms must have completed an RPS by 1 September 2011. Use of the templates is not mandatory but the FSA guidance states that it would be considered good practice.
The FSA has also published “frequently asked questions” which provide further guidance on:
- Code staff and the requirement to keep a Code staff list;
- the application of the proportionality framework to different types and sizes of firms, groups and EU parent companies, as well as the process for changing proportionality tier;
- the rule on retained shares and its application to Code staff only, unlisted firms and the scope of the transitional guidance;
- use of alternative instruments;
- the scope of the deferral requirement;
- application of the voiding provisions; and
- disclosure requirements and caveats